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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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
 
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 May 11, 2020 was 51,839,157.
 



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

i


EXPLANATORY NOTE
As previously disclosed in a Current Report on Form 8-K filed by TransEnterix, Inc. with the Securities and Exchange Commission, or SEC, on May 11, 2020, the Company delayed the filing of this Quarterly Report on Form 10-Q for the fiscal year ended March 31, 2020, or this Quarterly Report, due to the impact of the coronavirus (COVID-19) pandemic on the Company’s operations in reliance on an order issued by the SEC (Release No. 34-88465) issued by the SEC on March 25, 2020.
The COVID-19 pandemic caused unexpected disruptions to the Company’s operations and required that the Company conduct further analyses and assessments to determine the impact of such disruptions on the Company’s financial statements for the preparation of this Quarterly Report. Furthermore, the Company has experienced a significant disruption of its personnel. All of the Company’s facilities are in locations that are subject to, or have been subject to, stay-at-home or shelter-in-place orders and the Company’s office-based employees have been primarily working from home. Due to these disruptions, the Company could not timely file this Quarterly Report by the original deadline of May 11, 2020.
FORWARD-LOOKING STATEMENTS
In addition to historical financial information, this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “in the event that,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements, including the impact of the coronavirus (COVID-19) pandemic on our operating results. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Financial Statements,” “Notes to 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, 2019 filed on March 16, 2020, or the Fiscal 2019 Form 10-K, and other filings we make with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law. To the extent that our business is negatively impacted due to a variety of factors, including the impact of COVID-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impact. References in this report to “we,” “our,” “us,” or the “Company” refer to TransEnterix, Inc., including its subsidiaries, TransEnterix Surgical, Inc., SafeStitch LLC, 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.


1




TransEnterix, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands except per share amounts)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2020
 
2019
Revenue
 
 
 
Product
242

 
1,829

Service
358

 
352

Total revenue
$
600

 
$
2,181

Cost of revenue
 
 
 
Product
913

 
1,273

Service
825

 
1,194

Total cost of revenue
1,738

 
2,467

Gross loss
(1,138
)
 
(286
)
Operating Expenses
 
 
 
Research and development
3,934

 
5,655

Sales and marketing
4,253

 
7,674

General and administrative
3,349

 
4,560

Amortization of intangible assets
2,564

 
2,611

Change in fair value of contingent consideration
1,056

 
998

Restructuring and other charges
858

 

Acquisition related costs

 
45

Loss from sale of SurgiBot assets, net

 
97

Total Operating Expenses
16,014

 
21,640

Operating Loss
(17,152
)
 
(21,926
)
Other Income (Expense)

 

Change in fair value of warrant liabilities
(155
)
 
(106
)
Interest income
27

 
318

Interest expense

 
(1,116
)
Other expense
(15
)
 
(305
)
Total Other Income (Expense), net
(143
)
 
(1,209
)
Loss before income taxes
(17,295
)
 
(23,135
)
Income tax benefit
697

 
610

Net loss
$
(16,598
)
 
$
(22,525
)
Deemed dividend related to beneficial conversion feature of preferred stock
(412
)
 

Net loss attributable to common stockholders
(17,010
)
 
(22,525
)
Comprehensive loss
 
 
 
Net loss
(16,598
)
 
(22,525
)
Foreign currency translation loss
(872
)
 
(1,949
)
Comprehensive loss
$
(17,470
)
 
$
(24,474
)
Net loss per common share attributable to common stockholders - basic and diluted
$
(0.59
)
 
$
(1.35
)
Weighted average number of shares used in computing net loss per common share - basic and diluted
28,906

 
16,677

See accompanying notes to consolidated financial statements.

2


TransEnterix, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
 
March 31,
2020
 
December 31,
2019
 
(unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
21,816

 
$
9,598

Accounts receivable, net
951

 
620

Inventories
9,829

 
10,653

Other current assets
7,341

 
7,084

Total Current Assets
39,937

 
27,955

Restricted cash
925

 
969

Inventories, net of current portion
7,201

 
7,594

Property and equipment, net
6,060

 
4,706

Intellectual property, net
27,939

 
28,596

In-process research and development

 
2,470

Other long term assets
2,168

 
2,489

Total Assets
$
84,230

 
$
74,779

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
4,047

 
$
3,579

Accrued expenses
8,026

 
8,553

Deferred revenue – current portion
903

 
818

Contingent consideration – current portion
72

 
73

Total Current Liabilities
13,048

 
13,023

Long Term Liabilities
 
 
 
Deferred revenue – less current portion
13

 
27

Contingent consideration – less current portion
2,068

 
1,011

Warrant liabilities
73

 
2,388

Net deferred tax liabilities
649

 
1,392

Other long term liabilities
1,217

 
1,403

Total Liabilities
17,068

 
19,244

Commitments and Contingencies (Note 18)

 

Stockholders’ Equity
 
 
 
    Common stock $0.001 par value, 750,000,000 shares authorized at
       March 31, 2020 and December 31, 2019; 47,078,314 and 20,691,301 shares
       issued and outstanding at March 31, 2020 and December 31, 2019, respectively
47

 
21

    Preferred stock, $0.01 par value, 25,000,000 shares authorized, including 7,937,057 and 0
       shares of Series A Convertible Preferred Stock at March 31, 2020 and December 31, 2019,
       and 4,884,117 and 0 shares issued and outstanding at March 31, 2020 and December 31,
       2019, respectively
49

 

Additional paid-in capital
749,506

 
720,484

Accumulated deficit
(680,198
)
 
(663,600
)
Accumulated other comprehensive loss
(2,242
)
 
(1,370
)
Total Stockholders’ Equity
67,162

 
55,535

Total Liabilities and Stockholders’ Equity
$
84,230

 
$
74,779


See accompanying notes to consolidated financial statements.

3


TransEnterix, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
 
Common Stock
 
Preferred Stock
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive
(Loss) Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2019
20,691
 
$
21

 

 

 

 

 
$
720,484

 
$
(663,600
)
 
$
(1,370
)
 
$
55,535

Stock-based compensation

 

 

 

 

 

 
1,923

 

 

 
1,923

Issuance of common stock, preferred stock and warrants under 2020 financing, net of issuance costs
14,122

 
14

 
7,937

 
79

 

 

 
13,432

 

 

 
13,525

Issuance of common stock, net of issuance costs
7,030

 
7

 

 

 

 

 
11,205

 

 

 
11,212

Conversion of preferred stock to common stock
3,053

 
3

 
(3,053
)
 
(30
)
 

 

 
27

 

 

 

Exchange of shares for Series B Warrants
2,041

 
2

 

 

 

 

 
2,468

 

 

 
2,470

Award of restricted stock units
141

 

 

 

 

 

 

 

 

 

Return of common stock to pay withholding taxes on restricted stock

 

 

 

 
28

 

 
(33
)
 

 

 
(33
)
Cancellation of treasury stock

 

 

 

 
(28
)
 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 
(872
)
 
(872
)
Net loss

 

 

 

 

 

 

 
(16,598
)
 

 
(16,598
)
Balance, March 31, 2020
47,078

 
$
47

 
4,884

 
49

 

 

 
$
749,506

 
$
(680,198
)
 
$
(2,242
)
 
$
67,162


 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
16,642
 
$
17

 

 
$

 
$
676,572

 
$
(509,406
)
 
$
1,338

 
$
168,521

Stock-based compensation

 

 

 

 
2,981

 

 

 
2,981

Exercise of stock options and warrants
12

 

 

 

 
236

 

 

 
236

Award of restricted stock units
47

 

 

 

 
1

 

 

 
1

Return of common stock to pay withholding taxes on restricted stock

 

 
15

 

 
(499
)
 

 

 
(499
)
Cancellation of treasury stock

 

 
(15
)
 

 

 

 

 

Cumulative effect of change in accounting principle

 

 

 

 
(7
)
 
7

 

 

Other comprehensive income

 

 

 

 

 

 
(1,949
)
 
(1,949
)
Net loss

 

 

 

 

 
(22,525
)
 

 
(22,525
)
Balance, March 31, 2019
16,701

 
$
17

 

 
$

 
$
679,284

 
$
(531,924
)
 
$
(611
)
 
$
146,766

See accompanying notes to consolidated financial statements.

4


TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Operating Activities
 
 
 
Net loss
$
(16,598
)
 
$
(22,525
)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
 
 
 
Loss from sale of SurgiBot assets, net

 
97

Depreciation
570

 
563

Amortization of intangible assets
2,564

 
2,611

Amortization of debt discount and debt issuance costs

 
330

Amortization of short-term investment discount

 
(220
)
Stock-based compensation
1,923

 
2,981

Interest expense on deferred consideration - MST acquisition

 
204

Deferred tax benefit
(697
)
 
(610
)
Change in fair value of warrant liabilities
155

 
106

Change in fair value of contingent consideration
1,056

 
998

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(340
)
 
(129
)
Inventories
(1,063
)
 
(4,621
)
Other current and long term assets
(76
)
 
(2,663
)
Accounts payable
509

 
286

Accrued expenses
(433
)
 
(2,518
)
Deferred revenue
83

 
(197
)
Other long term liabilities
(130
)
 
1,112

Net cash and cash equivalents used in operating activities
$
(12,477
)
 
$
(24,195
)
Investing Activities
 
 
 
Purchase of short-term investments

 
(10,894
)
Proceeds from maturities of short-term investments

 
40,000

Purchase of property and equipment
(2
)
 
(118
)
Net cash and cash equivalents (used in) provided by investing activities
(2
)
 
28,988

Financing Activities
 
 
 
Proceeds from issuance of common stock, preferred stock and warrants under 2020 financing, net of issuance costs
13,525

 

Proceeds from issuance of common stock and warrants, net of issuance costs
11,212

 

Taxes paid related to net share settlement of vesting of restricted stock units
(33
)
 
(499
)
Proceeds from exercise of stock options and warrants

 
236

Net cash and cash equivalents provided by (used in) financing activities
24,704

 
(263
)
Effect of exchange rate changes on cash and cash equivalents
(51
)
 
(58
)
Net increase in cash, cash equivalents and restricted cash
12,174

 
4,472

Cash, cash equivalents and restricted cash, beginning of period
10,567

 
21,651

Cash, cash equivalents and restricted cash, end of period
$
22,741

 
$
26,123

 
 
 
 
Supplemental Disclosure for Cash Flow Information
 
 
 
Interest paid
$

 
$
750

Supplemental Schedule of Non-cash Investing and Financing Activities
 
 
 
Transfer of inventories to property and equipment
$
1,958

 
$
86

Exchange of common stock for Series B Warrants
$
2,470

 
$

Transfer of in-process research and development to intellectual property
$
2,425

 
$

Conversion of preferred stock to common stock
$
30

 
$

See accompanying notes to consolidated financial statements.

5


TransEnterix, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1.
Organization and Capitalization
TransEnterix, Inc. 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. It is focused on the market development for and commercialization of the Senhance® Surgical System, which digitizes laparoscopic minimally invasive surgery, or MIS. The Senhance Surgical System is the first and only digital, multi-port laparoscopic platform designed to maintain laparoscopic MIS standards while providing digital benefits such as haptic feedback, robotic precision, comfortable ergonomics, advanced instrumentation including 3 millimeter microlaparoscopic instruments, eye-sensing camera control and fully-reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy.
The Company believes that future outcomes of minimally invasive surgery will be enhanced through its combination of more advanced tools and robotic functionality, which are designed to empower surgeons with improved precision, ergonomics, dexterity and visualization; offer high patient satisfaction and enable a desirable post-operative recovery; and provide a cost-effective robotic system, compared to existing alternatives today, for a wide range of clinical applications and operative sites within the healthcare system.
The Senhance System is commercially available in Europe, the United States, Japan, Taiwan and select other countries.
The Senhance System has a CE Mark in Europe for adult and pediatric laparoscopic abdominal and pelvic surgery, as well as limited thoracic surgeries excluding cardiac and vascular surgery.
In the United States, the Company has received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery in a total of 28 indicated procedures, including benign and oncologic procedures, laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery.
In Japan, the Company has received regulatory approval and reimbursement for 98 laparoscopic procedures.
During 2018 and 2019, the Company successfully obtained FDA clearance and CE Mark for its 3 millimeter diameter instruments, its Senhance ultrasonic system, its 3 millimeter and 5 millimeter hooks, and the Senhance articulating 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 Senhance articulating system was launched in Europe in November 2019 and the Company is evaluating its pathway forward to launch such a system in the United States with a planned submission for U.S. clearance at the end of 2020, although the Company estimates that this timing may shift to the first quarter of 2021 due to delays related to the COVID-19 pandemic.
In January 2020, the Company submitted an application to the FDA seeking clearance of the first machine vision system for its robotic surgery unit named Intelligent Surgical Unit (ISU™). The Intelligent Surgical Unit was developed using the image analytics technology acquired from MST in the fourth quarter of 2018. The Company believes it is the first such FDA submission seeking clearance for machine vision technology in abdominal robotic surgery. On March 13, 2020, the Company announced that it has received FDA clearance for the Intelligent Surgical Unit.
Restructuring and COVID-19 Impact
Despite the number of advances and regulatory clearances received from late 2017 through 2019, Senhance System sales in 2019 were disappointing. Adoption of new technologies, particularly for capital intensive devices such as the Senhance System can be slow and uneven as market development and commercial development is time-consuming and expensive. The Company has determined to refocus its resources and efforts in 2020 on market development activities to increase awareness of: the benefits of the use of the Senhance System in laparoscopic surgery; the digitization of high volume procedures using the Senhance System; the indications for use, including pediatric indications of use in CE Mark territories; and the overall cost efficiency of the Senhance System.

6


The Company intends to focus on markets with high utilization of laparoscopic techniques, including Japan, Western Europe and the United States. Its focus will be on (1) increasing the number of placements of the Senhance System, not necessarily through sales, but through leasing arrangements, (2) increasing the number of procedures conducted using the Senhance System quarter over quarter, and (3) solidifying key opinion leader support and publications related to the use of the Senhance System in laparoscopic procedures. During this period the Company will not focus on revenue targets.
During the fourth quarter of 2019, the Company announced the implementation of a restructuring plan to reduce operating expenses as it continues the global market development of the Senhance platform. Under the restructuring plan, it reduced headcount primarily in the sales and marketing functions and determined that the carrying value of its inventory exceeded the net realizable value due to a decrease in expected sales. The restructuring charges amounted to $8.8 million, of which $7.4 million was an inventory write down and was included in cost of product revenue and $1.4 million related to employee severance costs and was included as restructuring and other charges in the consolidated statements of operations and comprehensive loss, during the fourth quarter of 2019. During March 2020, the Company continued its restructuring with additional headcount reductions which resulted in $0.9 million related to severance costs which are expected to be paid in 2020.
In addition, in December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The Company has taken steps, and will continue to take further actions, in its approach to minimizing the impact of the COVID-19 pandemic on its business. As a result of the COVID-19 pandemic, in March 2020, to ensure the health and well-being of its employees, the Company implemented work from home at all of its facilities. The Company has also implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel, canceling of trade shows for 2020 and salary reductions for its senior management and certain groups of its field-based employees. Our Senhance Systems are manufactured at a contract manufacturing facility in Milan. With the quarantine in Northern Italy, the assembly of new units has been disrupted. A variety of travel restrictions, have caused a delay in our product installation and training activities in recent weeks, and are expected to continue. Elective surgeries have been halted in the United States and Europe and only limited procedures are being done in Japan. This has significantly impacted our ability to implement our market development activities to place our Senhance Systems, provide training, and increase the use of the Senhance Systems in place. In addition, compliance with “stay-at-home” orders in all of its locations have led to disruptions and delays in the completion of the Company’s financial reporting.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was passed in the United States. In April 2020, the Company received funding under a promissory note dated April 18, 2020 evidencing an unsecured non-recourse loan under the Paycheck Protection Program (“PPP”). See Note 19.
The Company continues to review the CARES Act and other applicable government-related legislation aimed at assisting businesses during the COVID-19 pandemic. Given the dynamic nature of this health emergency, the full impact of the COVID-19 pandemic on the Company’s ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.
Recent Financing Transaction
On March 10, 2020, the Company closed a firm commitment underwritten public offering, or the 2020 Public Offering, pursuant to which it sold an aggregate of 14,121,766 Class A Units at a public offering price of $0.68 per Class A Unit and 7,937,057 Class B Units at a public offering price of $0.68 per Class B Units. Each Class A Unit consists of one share of the Company’s common stock, one warrant to purchase one share of common stock that expires on the first anniversary of the date of issuance, or collectively, the Series C Warrants, and one warrant to purchase one share of common stock that expires on the fifth anniversary of the date of issuance, or collectively, the Series D Warrants. Each Class B Unit consists of one share of Series A Convertible Preferred Stock, par value $0.01 per share, or the Series A Preferred Stock, convertible into one share of common stock, a Series C Warrant to purchase one share of common stock and a Series D Warrant to purchase one share of common stock. The Class A Units and Class B Units have no stand-alone rights and were not certificated or issued as stand-alone securities. The shares of common stock, Series A Preferred Stock, Series C Warrants and Series D Warrants are immediately separable. In addition, the underwriter for the 2020 Public Offering exercised its overallotment option to purchase 3,308,823 Series C Warrants and 3,308,823 Series D Warrants for an aggregate purchase price of $60,000. The net proceeds to the Company were $13.5 million. Issuance costs totaled $1.5 million and consisted of underwriting discounts, commissions, and legal fees.
As used herein, the term “Company” refers to the Company and its subsidiaries TransEnterix Surgical, Inc., SafeStitch LLC, 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.


7


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 2019 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.
On December 11, 2019, following receipt of approval from stockholders at a special meeting of stockholders held on the same day, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of one-for-thirteen, or the Reverse Stock Split. The Company’s common stock began trading on a split-adjusted basis on NYSE American on the morning of December 12, 2019. No fractional shares were issued in connection with the Reverse Stock Split. Instead, the Company rounded up each fractional share resulting from the reverse stock split to the nearest whole share. As a result of the Reverse Stock Split, the Company’s outstanding common stock decreased from approximately 261.9 million shares to approximately 20.2 million shares (without giving effect to the rounding up for each fractional share).
Unless otherwise noted, all share and per share data referenced in the condensed consolidated financial statements and the notes thereto have been retroactively adjusted to reflect the Reverse Stock Split. As a result of the Reverse Stock Split, certain amounts in the consolidated financial statements and the notes thereto may be slightly different than previously reported due to rounding of fractional shares, and certain amounts within the consolidated balance sheets were reclassified between common stock and additional paid-in capital.
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 $680.2 million as of March 31, 2020, and working capital of $26.9 million as of March 31, 2020. 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 Company believes the COVID-19 pandemic will continue to negatively impact its operations and ability to implement its market development efforts, which will have a negative effect on its financial condition. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to meet its existing obligations, 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.

8



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, inventory classification between current and non-current, and deferred tax asset valuation allowances.
The COVID-19 pandemic has caused significant social and economic restrictions that have been imposed in the United States and abroad, which has resulted in significant volatility in the global economy and led to reduced economic activity. In the preparation of these financial statements and related disclosures, the Company has assessed the impact that COVID-19 has had on its estimates, assumptions, forecasts, and accounting policies. The Company continues to monitor closely the COVID-19 pandemic impact on its estimates, assumptions and forecasts used in the preparation of its financial statements. As the COVID-19 situation is unprecedented and ever evolving, future events and effects related to COVID-19 cannot be determined with precision, and actual results could significantly differ from estimates or forecasts.
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 March 31, 2020 and December 31, 2019 includes $0.9 million and $1.0 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, automobile leases, and a performance guarantee required by the government of a country in which a Senhance System was sold in 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. The Company places cash deposits with a federally insured financial institution. The Company maintains its cash at banks and financial institutions it considers to be of high credit quality; however, the Company’s domestic cash deposits may at times exceed the Federal Deposit Insurance Corporation’s insured limit. Balances in excess of federally insured limitations may not be insured. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks on such accounts.
The Company’s accounts receivable are derived from sales 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 and recorded a bad debt charge totaling $1.6 million during the year ended December 31, 2019. The Company had eight customers who constituted 80% of the Company’s net accounts receivable at March 31, 2020.  The Company had eight customers who constituted 85% of the Company’s net accounts receivable at December 31, 2019. The Company had eleven customers who accounted for 80% of sales for the three months ended March 31, 2020 and five customers who accounted for 81% of sales for the three months ended March 31, 2019.
Accounts Receivable
Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts was determined on a customer specific basis based on deemed collectability.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The Company records reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Any inventory on hand at the measurement date in excess of the Company's current requirements based on anticipated levels of sales is classified as long-term on the Company's consolidated balance sheets. The Company's classification of long-term inventory requires it to estimate the portion of on hand inventory that can be realized over the upcoming twelve months.

9


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.
The Company continues to operate in one segment, which is considered to be the sole reporting unit and therefore, goodwill, prior to being fully impaired during the year ended December 31, 2019, was tested for impairment at the enterprise level. Indefinite-lived intangible assets, such as goodwill, are not amortized.

During the third quarter of 2019, the Company determined that the goodwill associated with the business was impaired, and recorded impairment charges of $79.0 million. The impairment charge resulted from decreased sales and estimated cash flows and a significant decline in the Company's stock price.
The Company also performed a recoverability test on the intellectual property and concluded that there was no impairment as of December 31, 2019.
No impairment of intellectual property existed at March 31, 2020.
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. On March 13, 2020, upon receiving FDA clearance and the ability to commercialize the products associated with the MST IPR&D assets, the assets were deemed definite-lived, reclassified to intellectual property and are now amortized based on their estimated useful lives.

The Company performed an impairment test of its IPR&D at the end of the third quarter 2019 as recent events and changes in market conditions indicated that the asset might be impaired.

The impairment test consisted of a comparison of the fair value of the IPR&D with its carrying amount. If the carrying amount of the IPR&D exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Significant judgment is applied when testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.

During the third quarter of 2019, the Company concluded that the fair value determined by the market value approach was lower than the carrying value. As a result, the Company recognized a $7.9 million impairment charge to its IPR&D. The company performed its annual impairment assessment at December 31, 2019 and no additional impairment was required.

10


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, future Euro-to-USD exchange rates, and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss.
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. 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 predominantly the Euro. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for a subsidiary using a functional currency other than the U.S. dollar is included in accumulated other comprehensive income or loss as a separate component of stockholders’ equity.
The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany receivables from a foreign subsidiary

11


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 three months ended March 31, 2020 and 2019 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, potential negative impacts on the Company's operations caused by the COVID-19 pandemic, the Company's ability to continue as a going concern, 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 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’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 consolidated sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the consolidated package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements 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 has begun entering into lease arrangements with certain qualified customers. Thus far, all leases have been operating lease arrangements. Revenue related to multiple-element arrangements are allocated to lease and non-lease elements based on their relative standalone selling prices as prescribed by the Company’s revenue recognition policy. Lease elements generally include a system, while non-lease elements generally include service, instruments, and accessories. For some lease arrangements, the customers are provided with the right to purchase the leased system at some point during and/or at the end of the lease term. For some leases, lease payments are based on the usage of the system.
In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether title of the system transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased system, (3) whether the lease term is for the major part of the remaining economic life of the leased system, (4) whether the lease grants the lessee an option to purchase the leased system that the lessee is reasonably certain to exercise, and (5) whether the underlying system is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term.
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.

12


Lease arrangements. Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon system usage and is presented as product revenue.
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.
The following table presents revenue disaggregated by type and geography:
 
Three Months Ended
 
March 31,
 
2020
2019
 
(in thousands)
(unaudited)
U.S.
 
 
Systems
$
30

$

Instruments and accessories
60


Services
69

133

Total U.S. revenue
159

133

Outside of U.S. ("OUS")
 
 
Systems
39

1,283

Instruments and accessories
113

546

Services
289

219

Total OUS revenue
441

2,048

Total
 
 
Systems
69

1,283

Instruments and accessories
173

546

Services
358

352

Total revenue
$
600

$
2,181


The Company recognizes sales by geographic area based on the country in which the customer is based.
Operating lease revenue was approximately $0.1 million for the three months ended March 31, 2020.
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 $3.5 million as of March 31, 2020.
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 $0.2 million as of March 31, 2020 and December 31, 2019, 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

13


revenue is generally recognized ratably over the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented. Revenue recognized for the three months ended March 31, 2020 and 2019, that was included in the deferred revenue balance at the beginning of each reporting period was $0.2 million and $0.3 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”, 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 $1.9 million and $3.0 million for the three months ended March 31, 2020 and 2019, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax basis of the Company’s assets and liabilities, and for tax carryforwards at enacted statutory rates in effect for the years in which the asset or liability is expected to be realized. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amounts expected to be realized.
The 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.
In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. The referendum did not have a material impact on the Company for the quarter ended March 31, 2020 or 2019 tax provision. The Company will continue to evaluate the impact of these provisions in future periods as the enactment process in completed.
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

14


consolidated operating results. Approximately 29% and 19% of the Company’s total consolidated assets are located within the U.S. as of March 31, 2020 and December 31, 2019, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable, other long-term assets and inventory of $59.7 million and $60.5 million at March 31, 2020 and December 31, 2019, respectively. Total assets outside of the U.S. amounted to 71% and 81% of total consolidated assets at March 31, 2020 and December 31, 2019, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the three months ended March 31, 2020 and 2019, 27% and 6%, respectively, of net revenue were generated in the United States; while 48% and 35%, respectively, were generated in Europe; and 25% and 59% were generated 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 adoption of this ASU did not have a material impact on the consolidated financial statements.
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 (“MST”), and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of MST (collectively, the “Buyers”). The closing of the transactions occurred on October 31, 2018, pursuant to which the Company acquired MST’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 MST. 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 approximately 242,310 shares of the Company’s common stock (the "Initial Shares"). A second tranche of $6.6 million in additional consideration was payable in cash, stock or cash and stock, at the discretion of the Company, within one year after the closing date. On August 7, 2019, the Company notified MST that the Company would satisfy the additional consideration payment of $6.6 million by issuing shares of TransEnterix common stock. The number of shares issued to MST was 370,423 (the “Additional Consideration Shares” and, together with the Initial Shares, the “Securities Consideration”).
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 Initial Shares for six months following the Closing Date.  As of the date of this report, all of the Initial Shares are free from the lock-up restrictions. The Additional Consideration Shares were released from the lock-up restrictions on February 7, 2020.  
On July 3, 2019 the Company entered into a System Sale Agreement with GBIL to sell certain assets related to the AutoLap technology. On October 15, 2019, the Company amended the prior AutoLap Sale Agreement with GBIL. Pursuant to the amended agreement the Company sold the AutoLap laparoscopic vision system, or AutoLap, and related assets to GBIL. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap. The purchase price was $17.0 million, all of which was received in 2019 in the form of $16 million in cash and a commitment by GBIL to pay $1.0 million to settle certain Company obligations in China. GBIL subsequently paid the obligation. Under the amended AutoLap Agreement, the Company entered into a cross‑license agreement with GBIL to retain rights to use any AutoLap-related intellectual property sold to GBIL, and to non-exclusively license additional intellectual property to GBIL. The Company recorded a $16.0 million gain on the sale of the AutoLap assets during the year ended December 31, 2019, which represented the proceeds received in excess of the carrying value of the assets, less contract costs.

15


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) 1,195,647 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 286,360 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 March 31, 2020.  The majority of the remaining Cash Consideration to be paid is the third tranche of the Cash Consideration (the “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 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, 2017. As of March 31, 2020, the Company had paid 2.4 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 remaining amounts due to Sofar are included in contingent consideration as of March 31, 2020 and December 31, 2019.
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.
4.
Cash, Cash Equivalents, and Restricted Cash
Restricted cash at March 31, 2020 and December 31, 2019 includes $0.9 million and $1.0 million respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, automobile leases, and a performance guarantee required by the government of a country in which a Senhance System was sold in 2018.
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 three months ended March 31, 2020 and the year ended December 31, 2019.
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.

16


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, interest receivable, accounts payable, and certain accrued expenses at March 31, 2020 and December 31, 2019, approximate their fair values due to the short-term nature of these items.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
 
 
March 31, 2020
 
 
(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
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
21,816

 
$

 
$

 
$
21,816

Restricted cash
 
925

 

 

 
925

Total Assets measured at fair value
 
$
22,741

 
$

 
$

 
$
22,741

Liabilities measured at fair value
 
 
 
 
 
 
 
 
Contingent consideration
 

 

 
2,140

 
2,140

Warrant liabilities
 

 

 
73

 
73

Total liabilities measured at fair value
 
$

 
$

 
$
2,213

 
$
2,213

Description
 
December 31, 2019
 
(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Total
Assets measured at fair value
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
9,598

 
$

 
$

 
$
9,598

Restricted cash
 
969

 

 

 
969

Total Assets measured at fair value
 
$
10,567

 
$

 
$

 
$
10,567

Liabilities measured at fair value
 
 
 
 
 
 
 
 
Contingent consideration
 
$

 
$

 
$
1,084

 
$
1,084

Warrant liabilities
 

 

 
2,388

 
2,388

Total liabilities measured at fair value
 

 

 
3,472

 
3,472


The Company’s financial liabilities consisted of contingent consideration potentially payable to Sofar related to the Senhance Acquisition in September 2015 (Note 3). This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome. The increase in fair value of the contingent consideration of $1.1 million for the three months ended March 31, 2020 was primarily due to a change in the Company's long-term forecast. The increase in fair value of the contingent consideration of $1.0 million for the three months ended March 31, 2019 was primarily due to the passage of time.  Adjustments associated with the change in fair value of contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.

17


On April 28, 2017, the Company sold 24.9 million units (the “Units”), each consisting of approximately 0.077 shares of the Company’s common stock, a Series A warrant to purchase approximately 0.077 shares of common stock with an exercise price of $13.00 per share  (the “Series A Warrants”), and a Series B warrant to purchase approximately 0.058 shares of common stock with an exercise price of $13.00 per share (the “Series B Warrants,” together with the Series A Warrants, the “Warrants”), at an offering price of $1.00 per Unit. All of the Series A Warrants were exercised prior to the expiration date of October 31, 2017. Each Series B Warrant may be exercised at any time beginning on the date of issuance and from time to time thereafter through and including the fifth anniversary of the issuance date.
The exercise prices and the number of shares issuable upon exercise of each of the Series B Warrants are subject to adjustment upon the occurrence of certain events, including, but not limited to, stock splits or dividends, business combinations, sale of assets, similar recapitalization transactions, or other similar transactions. The Series B warrants contain provisions, often referred to as “down-round protection,” that leads to adjustment of the exercise price and number of underlying warrant shares if the Company issues securities, including its common stock or convertible securities or debt securities, in the future at sale prices below the then-current exercise price. As a result of this adjustment feature and after giving effect to the Company’s reverse stock split at a ratio of one-for-thirteen shares effective December 11, 2019, or the Reverse Stock Split, the exercise price of all outstanding Series B Warrants has been adjusted to $0.37 per share.
The change in fair value of all outstanding Series B Warrants for the three months ended March 31, 2020 and 2019 was an increase of $0.2 million and $0.1 million, respectively, and is included in the Company’s consolidated statements of operations and comprehensive loss. The following table presents the inputs and valuation methodologies used for the Company’s fair value of the Series B Warrants:
Series B
 
March 31, 2020
 
December 31, 2019
Fair value
 
$0.1 million
 
$2.4 million
Valuation methodology
 
Monte Carlo
 
Monte Carlo
Term
 
2.1 years
 
2.3 years
Risk free rate
 
0.23%
 
1.59%
Dividends
 
 
Volatility
 
85%
 
109.80%
Share price
 
$0.35
 
$1.47
Probability of additional financing
 
100% in 2020
 
100% in 2020
The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements for contingent consideration as of March 31, 2020 and December 31, 2019:
 
Valuation
Methodology
 
Significant
Unobservable Input
 
Weighted Average
(range, if
applicable)
Contingent consideration
Probability weighted
income approach
 
Milestone dates
 
2024 to 2029
 
 
 
Discount rate
 
10.75% to 15.75%

The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the three months ended March 31, 2020:

18


 
Fair Value
Measurement at
Reporting Date
(Level 3)
 
(In thousands)
(unaudited)
 
Common stock
warrants
 
Contingent
consideration
Balance at December 31, 2019
$
2,388

 
$
1,084

Exchange of warrants
(2,470
)
 

Change in fair value
155

 
1,056

Balance at March 31, 2020
$
73

 
$
2,140

Current portion

 
72

Long-term portion
73

 
2,068

Balance at March 31, 2020
$
73

 
$
2,140


6.
Accounts Receivable, Net
The following table presents the components of accounts receivable:
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
 
(unaudited)
 
 
Gross accounts receivable
$
2,575

 
$
2,274

Allowance for uncollectible accounts
(1,624
)
 
(1,654
)
Total accounts receivable, net
$
951

 
$
620



The Company recorded $1.6 million in bad debt expense during the year ended December 31, 2019.
7.    Inventories
The components of inventories are as follows:
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
 
(unaudited)
 
 
Finished goods
$
9,296

 
$
9,737

Raw materials
7,734

 
8,510

Total inventories
$
17,030

 
$
18,247



Current portion
$
9,829

 
$
10,653

Long-term portion
7,201

 
7,594

Total inventories
$
17,030

 
$
18,247


The Company recorded a write-down of obsolete inventory for the year-ended December 31, 2019 totaling $7.4 million as part of a restructuring plan and a $1.5 million charge for inventory obsolescence related to certain system components. There were no such write-downs or charges for the three months ended March 31, 2020 and 2019.
8.
Other Current Assets
The following table presents the components of other current assets:

19


 
March 31,
2020
 
December 31,
2019
 
(In thousands)
 
(unaudited)
 
 
Advances to vendors
$
3,294

 
$
2,534

Prepaid expenses
1,412

 
1,834

VAT receivable
2,635

 
2,716

Total
$
7,341

 
$
7,084


9.    Property and Equipment
Property and equipment consisted of the following:
 
March 31,
2020
 
December 31,
2019
 
(In thousands)
 
(unaudited)
 
 
Machinery, manufacturing and demonstration equipment
$
12,398

 
$
10,421

Computer equipment
2,317

 
2,321

Furniture
632

 
637

Leasehold improvements
2,286

 
2,295

Total property and equipment
17,633

 
15,674

Accumulated depreciation and amortization
(11,573
)
 
(10,968
)
Property and equipment, net
$
6,060

 
$
4,706


Depreciation expense was approximately $0.6 million and $0.6 million, for the three months ended March 31, 2020 and 2019, respectively.
Operating lease assets are included in machinery, manufacturing and demonstration equipment and are depreciated on a straight-line basis over the greater of the lease term or 5 years.
10.
Goodwill, In-Process Research and Development and Intellectual Property
Goodwill
Goodwill of $93.8 million was recorded in connection with a September 2013 merger transaction, goodwill of $38.3 million was recorded in connection with the Senhance Acquisition, as described in Note 3, and goodwill of $9.6 million was recorded in connection with the MST Acquisition, as described in Note 3.

The Company performs an annual impairment test of goodwill at December 31, or more frequently if events or changes in circumstances indicate that the carrying value of the Company’s one reporting unit may not be recoverable. During the third quarter of 2019, the Company's stock price declined significantly as a result of decreased sales.
As of September 30, 2019, goodwill was deemed to be fully impaired, and the Company recorded an impairment charge of $79.0 million.
In-Process Research and Development
As described in Note 3, on October 31, 2018, the Company acquired the MST assets, technology and business from MST and recorded $10.6 million of IPR&D. The estimated fair value of the IPR&D was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 15% and cash flows that have been probability adjusted to reflect the risks of product integration, which the Company believes are appropriate and representative of market participant assumptions.
The Company performed an impairment test of its IPR&D at the end of the third quarter 2019 as recent events and changes in market conditions indicated that the asset might be impaired. The impairment test consisted of a comparison of the fair value of the IPR&D with its carrying amount. If the carrying amount of the IPR&D exceeds its fair value, an impairment loss is recognized in an amount

20


equal to that excess. Significant judgment is applied when testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions. During the third quarter of 2019, the Company concluded that the fair value determined by the market value approach was lower than the carrying value. As a result, the Company recognized a $7.9 million impairment charge to its IPR&D. The company performed its annual impairment assessment at December 31, 2019 and no additional impairment was required. See Note 2.
On March 13, 2020, upon receipt of regulatory clearance to commercialize the products associated with the IPR&D assets in the United States, the assets were deemed definite-lived, transferred to developed technology and are amortized based on their estimated useful lives.
The carrying value of the Company’s IPR&D assets and the change in the balance for the three months ended March 31, 2020 is as follows:
 
In-Process
Research and
Development
 
(In thousands)
(unaudited)
Balance at December 31, 2019
$
2,470

Foreign currency translation impact
(45
)
Transfer to developed technology
(2,425
)
Balance at March 31, 2020
$


Intellectual Property
The components of gross intellectual property, accumulated amortization, and net intellectual property as of March 31, 2020 and December 31, 2019 are as follows:
 
March 31, 2020
 
 
December 31, 2019
 
(In thousands)
(unaudited)
 
 
(In thousands)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
currency
translation
impact
 
Net
Carrying
Amount
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
currency
translation
impact
 
Net
Carrying
Amount
Developed technology
$
68,838

 
$
(38,802
)
 
$
(2,389
)
 
$
27,647

 
 
$
66,413

 
$
(36,918
)
 
$
(1,208
)
 
$
28,287

Technology and patents purchased
400

 
(121
)
 
13

 
292

 
 
400

 
(112
)
 
21

 
309

Total intellectual property
$
69,238