TransEnterix, Inc.
TRANSENTERIX INC. (Form: 10-Q, Received: 11/09/2016 17:18:44)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

 

FORM 10-Q

 

(Mark One)

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

for the Quarterly Period ended September 30, 2016

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

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

115,058,244 shares of the Company’s common stock, par value $0.001 per share, were outstanding as of November 4, 2016.

 

 

 

 


TRANSENTERIX, INC.

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

 

4

 

 

Consolidated Balance Sheets (unaudited)

 

5

 

 

Consolidated Statements of Stockholders’ Equity (unaudited)

 

6

 

 

Consolidated Statements of Cash Flows (unaudited)

 

7

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

Item 2.

 

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

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Defaults Upon Senior Securities

 

39

Item 4.

 

Mine Safety Disclosures

 

39

Item 5.

 

Other Information

 

39

Item 6.

 

Exhibits

 

40

 

 

 

 

 

 

 

SIGNATURES

 

41

 

 

2


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 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “in the event that,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Financial Statements,”  “Notes to Consolidated Financial Statements “and “Risk Factors” in this report, as well as the disclosures made in the TransEnterix, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 3, 2016, and other filings we make with the Securities and Exchange Commission. 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. and the combined enterprise of SafeStitch Medical, Inc., TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l, TransEnterix Europe S.Á.R.L, TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Lugano and TransEnterix Asia PTE. LTD.

 

 

3


TransEnterix, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

1,466

 

 

$

 

 

$

1,466

 

 

$

 

Cost of revenue

 

 

1,031

 

 

 

 

 

 

1,031

 

 

 

 

Gross profit

 

 

435

 

 

 

 

 

 

435

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,011

 

 

 

7,048

 

 

 

21,760

 

 

 

21,111

 

Sales and marketing

 

 

2,574

 

 

 

413

 

 

 

5,563

 

 

 

1,161

 

General and administrative

 

 

2,793

 

 

 

1,762

 

 

 

7,927

 

 

 

5,607

 

Amortization of intangible assets

 

 

1,709

 

 

 

338

 

 

 

5,312

 

 

 

589

 

Change in fair value of contingent consideration

 

 

(100

)

 

 

 

 

 

1,700

 

 

 

 

Inventory write-down related to restructuring

 

 

 

 

 

 

 

 

2,565

 

 

 

 

Restructuring and other charges

 

 

 

 

 

 

 

 

3,085

 

 

 

 

Goodwill impairment

 

 

 

 

 

 

 

 

61,784

 

 

 

 

Acquisition related costs

 

 

 

 

 

4,003

 

 

 

 

 

 

4,003

 

Total Operating Expenses

 

 

13,987

 

 

 

13,564

 

 

 

109,696

 

 

 

32,471

 

Operating Loss

 

 

(13,552

)

 

 

(13,564

)

 

 

(109,261

)

 

 

(32,471

)

Other Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(432

)

 

 

(436

)

 

 

(1,499

)

 

 

(997

)

Other (expense) income

 

 

(30

)

 

 

 

 

 

65

 

 

 

 

Total Other Expense, net

 

 

(462

)

 

 

(436

)

 

 

(1,434

)

 

 

(997

)

Loss before income taxes

 

$

(14,014

)

 

$

(14,000

)

 

$

(110,695

)

 

$

(33,468

)

Income tax benefit

 

 

1,070

 

 

 

99

 

 

 

4,707

 

 

 

99

 

Net loss

 

$

(12,944

)

 

$

(13,901

)

 

$

(105,988

)

 

$

(33,369

)

Other comprehensive gain (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

689

 

 

 

(429

)

 

 

2,199

 

 

 

(429

)

Comprehensive loss

 

$

(12,255

)

 

$

(14,330

)

 

$

(103,789

)

 

$

(33,798

)

Net loss per share - basic and diluted

 

$

(0.11

)

 

$

(0.16

)

 

$

(0.95

)

 

$

(0.46

)

Weighted average common shares outstanding -

   basic and diluted

 

 

114,946

 

 

 

86,044

 

 

 

111,189

 

 

 

72,713

 

 

See accompanying notes to consolidated financial statements.

 

 

4


TransEnterix, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,518

 

 

$

38,449

 

Accounts receivable, net

 

 

616

 

 

 

76

 

Inventories

 

 

2,250

 

 

 

3,923

 

Interest receivable

 

 

15

 

 

 

6

 

Other current assets

 

 

8,149

 

 

 

6,689

 

Total Current Assets

 

 

53,548

 

 

 

49,143

 

Restricted cash

 

 

10,353

 

 

 

 

Accounts receivable, net of current portion

 

 

274

 

 

 

 

 

Inventories, net of current portion

 

 

 

 

 

709

 

Property and equipment, net

 

 

4,614

 

 

 

4,408

 

Intellectual property, net

 

 

41,260

 

 

 

46,898

 

In-process research and development

 

 

16,972

 

 

 

16,511

 

Goodwill

 

 

69,948

 

 

 

130,869

 

Other long term assets

 

 

63

 

 

 

64

 

Total Assets

 

$

197,032

 

 

$

248,602

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,596

 

 

$

4,450

 

Accrued expenses

 

 

7,246

 

 

 

7,395

 

Contingent consideration – current portion

 

 

11,325

 

 

 

12,500

 

Notes payable - current portion

 

 

7,826

 

 

 

6,727

 

Total Current Liabilities

 

 

28,993

 

 

 

31,072

 

Long Term Liabilities

 

 

 

 

 

 

 

 

Contingent consideration – less current portion

 

 

13,875

 

 

 

11,000

 

Net deferred tax liabilities

 

 

11,971

 

 

 

16,263

 

Notes payable - less current portion, net of debt discount

 

 

7,059

 

 

 

12,990

 

Total Liabilities

 

 

61,898

 

 

 

71,325

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock $0.001 par value, 750,000,000 shares authorized at September 30, 2016

   and December 31, 2015; 115,086,256 and 100,180,872 shares issued at September 30,

   2016 and December 31, 2015, respectively; and 115,014,711 and 100,149,453

   shares outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

115

 

 

 

100

 

Additional paid-in capital

 

 

425,041

 

 

 

363,280

 

Accumulated deficit

 

 

(288,852

)

 

 

(182,864

)

Treasury stock at cost, 71,545 and 31,419 shares at September 30, 2016 and

   December 31, 2015, respectively

 

 

(203

)

 

 

(73

)

Accumulated other comprehensive loss

 

 

(967

)

 

 

(3,166

)

Total Stockholders’ Equity

 

 

135,134

 

 

 

177,277

 

Total Liabilities and Stockholders’ Equity

 

$

197,032

 

 

$

248,602

 

 

See accompanying notes to consolidated financial statements.

 

 

5


TransEnterix, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance, December 31, 2015

 

 

100,180

 

 

$

100

 

 

 

(31

)

 

$

(73

)

 

$

363,280

 

 

$

(182,864

)

 

$

(3,166

)

 

$

177,277

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,858

 

 

 

 

 

 

 

 

 

3,858

 

Issuance of common stock, net of

   issuance costs

 

 

14,474

 

 

 

15

 

 

 

 

 

 

 

 

 

57,622

 

 

 

 

 

 

 

 

 

57,637

 

Exercise of stock options and restricted

   stock units

 

 

351

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

 

 

 

165

 

Return of common stock to pay

   withholding taxes on restricted stock

 

 

 

 

 

 

 

 

(41

)

 

 

(130

)

 

 

 

 

 

 

 

 

 

 

 

(130

)

Issuance of common stock for services

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

116

 

 

 

 

 

 

 

 

 

116

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,199

 

 

 

2,199

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(105,988

)

 

 

 

 

 

(105,988

)

Balance, September 30, 2016

 

 

115,086

 

 

$

115

 

 

 

(72

)

 

$

(203

)

 

$

425,041

 

 

$

(288,852

)

 

$

(967

)

 

$

135,134

 

 

See accompanying notes to consolidated financial statements.

 

 

6


TransEnterix, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(105,988

)

 

$

(33,369

)

Adjustments to reconcile net loss to net cash and cash equivalents used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,498

 

 

 

802

 

Amortization of intangible assets

 

 

5,312

 

 

 

589

 

Amortization of debt discount and debt issuance costs

 

 

140

 

 

 

89

 

Stock-based compensation

 

 

3,858

 

 

 

2,388

 

Common stock issued for services

 

 

116

 

 

 

 

Inventory write-down related to restructuring

 

 

2,565

 

 

 

 

Loss on disposal of property

 

 

 

 

 

34

 

Non-cash restructuring and other charges

 

 

2,551

 

 

 

 

Goodwill impairment

 

 

61,784

 

 

 

 

Deferred tax benefit

 

 

(4,725

)

 

 

(99

)

Change in fair value of contingent consideration

 

 

1,700

 

 

 

 

Changes in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(809

)

 

 

133

 

Interest receivable

 

 

(9

)

 

 

(5

)

Inventories

 

 

(1,883

)

 

 

(250

)

Other current and long term assets

 

 

(1,290

)

 

 

(248

)

Accounts payable

 

 

(1,917

)

 

 

984

 

Accrued expenses

 

 

(168

)

 

 

4,127

 

Restricted cash

 

 

(10,353

)

 

 

250

 

Net cash and cash equivalents used in operating activities

 

 

(47,618

)

 

 

(24,575

)

Investing Activities

 

 

 

 

 

 

 

 

Payment for acquisition

 

 

 

 

 

(25,000

)

Purchase of property and equipment

 

 

(878

)

 

 

(728

)

Net cash and cash equivalents used in investing activities

 

 

(878

)

 

 

(25,728

)

Financing Activities

 

 

 

 

 

 

 

 

Payment of debt

 

 

(4,972

)

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

57,637

 

 

 

58,295

 

Proceeds from issuance of debt, net of debt discount

 

 

 

 

 

9,886

 

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

 

 

(130

)

 

 

(3

)

Proceeds from exercise of stock options and warrants

 

 

163

 

 

 

252

 

Net cash and cash equivalents provided by financing activities

 

 

52,698

 

 

 

68,430

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(133

)

 

 

 

Net increase in cash and cash equivalents

 

 

4,069

 

 

 

18,127

 

Cash and cash equivalents, beginning of period

 

 

38,449

 

 

 

34,766

 

Cash and cash equivalents, end of period

 

$

42,518

 

 

$

52,893

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

1,019

 

 

$

598

 

Supplemental Schedule of Noncash Investing Activities

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

$

1,866

 

 

 

 

Issuance of common stock warrants

 

 

 

 

$

96

 

Contingent consideration related to acquisition

 

 

 

 

$

24,300

 

Issuance of common stock related to acquisition

 

 

 

 

$

43,677

 

 

See accompanying notes to consolidated financial statements.

 

 

7


TransEnterix, Inc.

Notes to Consolidated Financial Statements

 

 

1. Organization and Capitalization

TransEnterix, Inc. (the “Company”) is a medical device company that is pioneering the use of robotics to improve minimally invasive surgery by addressing the clinical challenges associated with current laparoscopic and robotic options. The Company is focused on the commercialization and further development of its Senhance™ Surgical Robotic System (formerly known as the ALF-X ® Surgical Robotic System) (the “Senhance System”), a multi-port robotic system that brings the advantages of robotic surgery to patients while enabling surgeons with innovative technology. The Company also developed the SurgiBot™ System, a single-port, robotically enhanced laparoscopic surgical platform. The Senhance System has been granted a CE Mark in Europe for laparoscopic abdominal and pelvic surgery, as well as limited thoracic operations excluding cardiac and vascular surgery, but is not available for sale in the U.S. The SurgiBot System is not available for sale in any market.

The Senhance System is a multi-port robotic surgery system which allows multiple arms to control robotic instruments and a camera. The system features advanced technology to enable surgeons with haptic feedback and the ability to move the camera via eye movement. The system replicates laparoscopic motion that is familiar to experienced surgeons, and features three-dimensional high definition (“3DHD”) vision technology. The Senhance System also offers responsible economics to hospitals by offering robotic technology with reusable instruments with minimal additional costs per surgery.

The SurgiBot System is designed to utilize flexible instruments through articulating channels controlled directly by the surgeon, with robotic assistance, while the surgeon remains patient-side within the sterile field. In June 2015, the Company submitted a 510(k) application to the FDA for the SurgiBot System. On April 19, 2016, the FDA notified the Company that the SurgiBot System did not meet the criteria for substantial equivalence based on the data and information submitted by TransEnterix in the 510(k) submission. As a result, the Company has reprioritized its near-term regulatory efforts to focus on the 510(k) submission for the Senhance System. Consequently, in May 2016, the Company implemented a restructuring plan. See Note 14 to the consolidated financial statements for further details regarding the restructuring.

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.

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

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, TransEnterix Italia, TransEnterix Europe S.Á.R.L, TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Lugano and TransEnterix Asia PTE. LTD. after giving effect to the Senhance Acquisition, the term “SafeStitch” refers to the historic business of SafeStitch Medical, Inc. prior to the Merger, and the term “TransEnterix Surgical” refers to the historic business of TransEnterix Surgical, Inc. prior to the Merger.

The Company operates in one business segment.

 

 

8


2. Summary of Signif icant 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 Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  The accompanying Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, SafeStitch LLC, TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l., TransEnterix Europe S.Á.R.L, TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Lugano and TransEnterix Asia PTE. LTD. All inter-company accounts and transactions have been eliminated in consolidation.

 

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has accumulated a deficit of approximately $288.9 million as of September 30, 2016, and has not generated significant revenue or positive cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. If the Company is unable to obtain the necessary capital, it will 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.

 

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, stock compensation expense, excess and obsolete inventory reserves, and deferred tax asset valuation allowances.

 

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents and investments with original maturities of between 91 days and one year to be short-term investments. In order to manage exposure to credit risk, the Company invests in high-quality investments rated at least A2 by Moody’s Investors Service or A by Standard & Poor.

Restricted cash at September 30, 2016 includes $10.0 million in a money market account, held in connection with the Company’s notes payable and $353,000 in cash accounts held as collateral primarily under the terms of an office operating lease.

Fair Value of Financial Instruments

The carrying values of cash equivalents, accounts receivable, interest receivable, accounts payable, and certain accrued expenses at September 30, 2016 and December 31, 2015, approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance approximates fair value as of September 30, 2016 and December 31, 2015 as the interest rates on the notes payable approximate the rates available to the Company as of these dates.

9


2. Summary of Significant Accounting Policies (Continued)

Concentrations and Credit Risk

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

The Company’s accounts receivable are derived from net revenue to customers and distributors 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 one customer who constituted 100% of the Company’s net accounts receivable at September 30, 2016 and December 31, 2015.

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 or market, on a first-in, first-out basis. 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 next 12 months.

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 7 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 research and development 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 research and development is recorded using the straight-line method over the estimated useful life of 7 years. This method approximates the period over which the Company expects to receive the benefit from these assets. See Note 10 for additional information related to the write-off of purchased patents in connection with the restructuring plan executed in May 2016.  No impairment existed at December 31, 2015.

Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis at December 31 or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value based test. The Company continues to operate in one segment, which is considered to be the sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. See Note 10 for additional information related to goodwill impairment recorded during the second quarter of 2016. No impairment existed at December 31, 2015.

10


2. Summary of Significant Accounting Policies (Continued)

In-Process Research and Development

In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired, which at the time of acquisition have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value. The IPR&D was acquired on September 21, 2015. No impairment existed at September 30, 2016 and December 31, 2015.

Property and Equipment

Property and equipment consists primarily of machinery, manufacturing 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 and manufacturing equipment

 

3-5 years

Computer equipment

 

3 years

Furniture

 

5 years

Leasehold improvements

 

Lesser   of lease term or 3 to 10 years

 

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

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the long-lived assets, then such assets are written down to their fair value. The Company’s estimates of anticipated cash flows and the remaining estimated useful lives of long-lived assets could be reduced in the future, resulting in a reduction to the carrying amount of long-lived assets.

Contingent Consideration

Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The fair value of the contingent consideration at each reporting date is updated by reflecting the changes in fair value in our statement of operations and comprehensive loss.

Translation of Foreign Currencies

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

11


2. Summary of Significant Accounting Policies (Continued)

The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany receivables from a foreign subsidiary for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statement of operations and comprehensive loss. The net gains and losses included in net loss in the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2016 and 2015 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. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. 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; its ability to successfully integrate the Senhance System into its business; its ability to successfully develop, clinically test and commercialize its products; the timing and outcome of the regulatory review process for its products; changes in the health care and regulatory environments of the United States, Italy, other countries in the European Union, and other countries in which the Company intends to operate; its ability to attract and retain key management, marketing and scientific personnel; competition from new entrants; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution concern; competition in the market for robotic surgical devices; and its ability to identify and pursue development of additional products.

 

Revenue Recognition

 

The Company’s revenue consists of product revenue resulting from the sales of systems, instruments and accessories, and service revenue. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue is presented net of taxes collected from customers that are remitted to government authorities. The Company generally recognizes revenue at the following points in time:

System sales.  For systems sold directly to end customers, revenue is recognized when acceptance occurs, which is deemed to have occurred upon customer acknowledgment of delivery or installation, depending on the terms of the arrangement. The Senhance System s are delivered with a software component. However, because the software and non-software elements function together to deliver the system’s essential functionality, the Company's arrangements are excluded from being accounted for under software revenue recognition guidance.

Instruments and accessories.  Revenue from sales of instruments and accessories is generally recognized at the time of shipment.

Service.  Service revenue is recognized ratably over the term of the service period. Revenue related to services performed on a time-and-materials basis is recognized when it is earned and billable.

 

12


2. Summary of Significant Accounting Policies (Continued)

The Company's system sale arrangements contain multiple elements including a system(s), instruments, accessories, and system service. The Company generally delivers all of the elements, other than service, within days of entering into the system sale arrangement. Each of these elements is a separate unit of accounting. System accessories, instruments, accessories and service are also sold on a stand-alone basis.

 

For multiple-element arrangements, revenue is allocated to each unit of accounting based on their relative selling prices. Relative selling prices are based first on vendor specific objective evidence of fair value (“VSOE”), then on third-party evidence of selling price (“TPE”) when VSOE does not exist, and then on management's best estimate of the selling price (“BESP”) when VSOE and TPE do not exist.

 

The Company’s system sale arrangements generally include a one-year period of free service, and the right for the customer to purchase service annually thereafter. The revenue allocated to the free service period is deferred and recognized ratably over the free service period. Deferred revenue was primarily comprised of deferred revenue related to service contracts for the periods presented.

 

Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue is based on BESP for the systems sold. The objective of BESP is to determine the price at which the Company would transact a sale, had the product been sold on a stand-alone basis. The Company determines BESP for its systems by considering multiple factors, including, but not limited to, features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews BESP and maintains internal controls over establishing and updating these estimates.

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 and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. Research and development costs are expensed as incurred.

Stock-Based Compensation

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

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

The Company records as expense the fair value of stock-based compensation awards, including stock options and restricted stock units. Compensation expense for stock-based compensation was approximately $3,858,000 and $2,388,000 for the nine months ended September 30, 2016 and 2015, 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.

13


2. Summary of Significant Accounting Policies (Continued)

Comprehensive Loss

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

Segments

The Company operates in one business segment—the research, development and sale of medical device robotics to improve minimally invasive surgery. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s consolidated operating results. Approximately 53% of the Company’s total consolidated assets are located within the U.S. as of September 30, 2016. 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 and inventory of $93.3 million at September 30, 2016, associated with the Senhance Acquisition in September 2015. Total assets outside of the U.S. excluding goodwill amounted to 37% of total consolidated assets at September 30, 2016.

Impact of Recently Issued Accounting Standards  

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

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Along with other income tax cash flows, excess tax benefits will be classified as operating activities, and cash paid by an employer when directly withholding shares for tax withholding purposes will be classified as financing activities. Entities may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, however, an entity that elects early adoption must adopt all amendments under the new standard in the same period. The Company is currently evaluating the impact of the amended guidance on our consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases . The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an update to defer the effective date of this update by one year. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company to adopt the standard one year earlier if it so chooses. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its Consolidated Financial Statements and related disclosures.

14


2. Summary of Significant Accounting Polic ies (Continued)

Except as noted above, there have been no significant changes to our assessment of the impact of recently issued accounting standards included in Note 2 of Notes to Consolidated Financial Statements in our Fiscal 2015 Form 10-K.

Reclassifications

As a result of a recent acquisition, certain financial statement captions have been added and we have reclassified certain prior-period amounts on our consolidated statement of operations and comprehensive loss to conform to the presentation for the current period. Such reclassifications have no effect on previously reported total assets, liabilities, stockholders’ equity or net loss.

 

 

3. Acquisition of Senhance Surgical Robotic System

On September 21, 2015, the Company completed the strategic acquisition, through its wholly owned subsidiary TransEnterix International, from SOFAR, of all of the assets, employees and contracts related to the advanced robotic system for minimally invasive laparoscopic surgery now known as the Senhance System and changed the name of the acquired company from Vulcanos S.r.l. to TransEnterix Italia S.r.l.

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

(1) $25.0 million of the Cash Consideration was paid at closing;

(2) The second tranche of the Cash Consideration (the “Second Tranche”) of €10.0 million shall be payable after the achievement of both of the following milestones (i) the earlier of approval from the FDA for the Senhance System or December 31, 2016, and (ii) the Company having cash on hand of at least $50.0 million, or successfully completing a financing, raising at least $50.0 million in gross proceeds; with payment of simple interest at a rate of 9.0% per annum between the achievement of the first milestone event and the payment date;

(3) The third tranche of the Cash Consideration (the “Third Tranche”) of €15.0 million shall be payable upon achievement of trailing revenues from sales or services contracts of the Senhance System of at least €25.0 million over a calendar quarter; and

(4) The fourth tranche of the Cash Consideration of €2.5 million shall be payable by December 31, 2016 as reimbursement for certain debt payments made by SOFAR under an existing SOFAR loan agreement.

The Third Tranche will be payable even if the Second Tranche is not then payable. In addition, the Second Tranche and 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.

Under the Purchase Agreement, 10% of the Securities Consideration was being held in escrow to support SOFAR’s representations and warranties under the Purchase Agreement. In accordance with a related escrow agreement, the escrowed shares were released in September 2016. The Company, a subsidiary and SOFAR also entered into a Security Agreement, which provides that 10% of the membership interests of TransEnterix Italia have a lien placed thereon by and in favor of SOFAR to support the Company’s representations and warranties under the Purchase Agreement. The security interest period is twenty-four months after the closing of the Senhance Acquisition.

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.

In connection with the Senhance Acquisition, the Company also entered into a Registration Rights Agreement, dated as of September 21, 2015, with SOFAR, pursuant to which the Company agreed to register the Securities Consideration shares for resale following the end of the lock-up periods described below. The resale registration statement has been filed and is effective, pending lapse of the lock-up restrictions as described below.

15


3. Acquisition of Senhance Surgical Robotic System (Continued)

In connection with the Senhance Acquisition, SOFAR entered into a Lock-Up Agreement with the Company pursuant to which SOFAR agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the Securities Consideration for one year following the Closing Date. On September 21, 2016, fifty percent of the Securities Consideration was released from the lock-up restrictions and is eligible to be resold under the effective resale registration statement.  With respect to the remaining fifty percent of the Securities Consideration, the Lock-up Agreement provides that an additional twenty-five percent of the Securities Consideration remains locked-up until the eighteen-month anniversary of the Closing Date, and the remaining twenty-five percent of the Securities Consideration remains locked-up until the two-year anniversary of the Closing Date. The restrictions on transfer contained in the Lock-up Agreement cease to apply to all of the Securities Consideration following the second anniversary of the Closing Date, or earlier upon certain other conditions.

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

 

The Senhance Acquisition-date fair value of the consideration is as follows (in thousands, except for per share amounts):

 

Common shares issued

 

 

15,543

 

Closing price per share

 

$

2.81

 

 

 

$

43,677

 

Cash consideration

 

 

25,000

 

Contingent consideration

 

 

23,900

 

Total consideration

 

$

92,577

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on September 21, 2015, the date of acquisition (in thousands):

 

Accounts receivable

 

$

78

 

Inventories

 

 

2,800

 

Current deferred tax asset

 

 

526

 

Other current assets

 

 

4,180

 

Property and equipment

 

 

1,384

 

Intellectual property

 

 

48,500

 

In-process research and development

 

 

17,100

 

Goodwill

 

 

38,348

 

Total assets acquired

 

$

112,916

 

Accounts payable and other liabilities

 

 

1,915

 

Long-term deferred tax liabilities

 

 

18,424

 

Net assets acquired

 

$

92,577

 

 

The Company allocated $48.5 million of the purchase price to identifiable intangible assets of intellectual property that met the separability and contractual legal criterion of ASC 805. The intellectual property is being amortized using the straight-line method over 7 years.

IPR&D is principally the estimated fair value of the Senhance System 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 among the various 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 operations of TransEnterix Italia with the Company’s existing operations. The goodwill is not deductible for income tax purposes.

16


3. Acquisition of Senhance Surgical Robotic System (Continued)

All legal, consulting and other costs related to the acquisition, aggregating approximately $4.2 million, have been expensed as incurred and are included in operating expenses in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2015. The results of operations for TransEnterix Italia are included in the Company’s consolidated statements of operations and comprehensive loss for the period from the September 21, 2015 acquisition date.

 

 

4. Cash, Cash Equivalents and Restricted Cash

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Cash

 

$

2,366

 

 

$

1,666

 

Money market

 

 

40,152

 

 

 

36,783

 

Total cash and cash equivalents

 

$

42,518

 

 

$

38,449

 

Restricted cash

 

$

10,353

 

 

$

 

Total

 

$

52,871

 

 

$

38,449

 

 

 

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 available for sale securities classified as cash and cash equivalents, restricted cash and contingent consideration. 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.

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, inventories, interest receivable, accounts payable, and certain accrued expenses at September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015, as they were modified in the third quarter of 2015.

17


5. Fair Value (Continued)

The following are the major categories of assets measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

 

 

September 30, 2016

 

 

 

(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

 

$

42,518

 

 

$

 

 

$

 

 

$

42,518

 

Restricted cash

 

 

10,353

 

 

 

 

 

 

 

 

 

10,353

 

Total Assets measured at fair value

 

$

52,871

 

 

$

 

 

$

 

 

$

52,871

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

25,200

 

 

$

25,200

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

25,200

 

 

$

25,200

 

 

 

 

December 31, 2015

 

 

 

(In thousands)

 

Description

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

 

Total

 

Assets measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,449

 

 

$

 

 

$

 

 

$

38,449

 

Total Assets measured at fair value

 

$

38,449

 

 

$

 

 

$

 

 

$

38,449

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

23,500

 

 

$

23,500

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

23,500

 

 

$

23,500

 

 

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 change in fair value of the contingent consideration of $1,700,000 for the nine months ended September 30, 2016 was primarily due to the effect of the passage of time on the fair value measurement and the impact of foreign currency exchange rates. Adjustments associated with the change in fair value of contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements classified in Level 3 as of September 21, 2015, December 31, 2015, and September 30, 2016:

 

 

 

Valuation

Methodology

 

Significant

Unobservable Input

 

Weighted   Average

(range, if

applicable)

Contingent  consideration

 

Probability   weighted

income approach

 

Milestone dates

 

2016 to   2017

 

 

 

 

Discount rate

Probability   of   occurrence

 

7.5% to 9.0%

100%

 

18


5. Fair Value (Continued)

The following table summarizes the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the nine months ended September 30, 2016:

 

 

 

Fair Value

Measurement   at

Reporting Date

(Level 3)

 

 

 

(In thousands)

 

 

 

(unaudited)

 

Balance at December 31, 2015

 

$

23,500

 

Change in fair value

 

 

1,700

 

Balance at September 30, 2016

 

$

25,200

 

Current portion

 

 

11,325

 

Long-term portion

 

 

13,875

 

Balance at September 30, 2016

 

$

25,200

 

 

 

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Gross accounts receivable

 

$

968

 

 

$

76

 

Allowance for uncollectible accounts

 

 

(78

)

 

 

 

Total accounts receivable, net