TransEnterix, Inc.
TRANSENTERIX INC. (Form: 10-Q, Received: 05/10/2017 16:35:51)

 

 

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 March 31, 2017

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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 of the Exchange Act.

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

148,529,689 shares of the Company’s common stock, par value $0.001 per share, were outstanding as of May 5, 2017.

 

 

 

 


 

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

 

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

40

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

42

Item 5.

 

Other Information

 

42

Item 6.

 

Exhibits

 

43

 

 

 

 

 

 

 

SIGNATURES

 

44

 

 

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, 2016 filed on March 6, 2017 (“Fiscal 2016 Form 10-K), 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., including its subsidiaries, including its subsidiaries, TransEnterix International, TransEnterix Italia, TransEnterix Europe S.Á.R.L and TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Lugano and TransEnterix Asia PTE. LTD. after giving effect to the Senhance Acquisition.

 

 

3


 

TransEnterix, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenue

 

$

1,946

 

 

$

 

Cost of revenue

 

$

1,334

 

 

 

 

Gross profit

 

 

612

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Research and development

 

 

6,855

 

 

 

8,385

 

Sales and marketing

 

 

3,723

 

 

 

1,683

 

General and administrative

 

 

3,049

 

 

 

2,239

 

Amortization of intangible assets

 

 

1,636

 

 

 

1,817

 

Change in fair value of contingent consideration

 

 

1,227

 

 

 

856

 

Total Operating Expenses

 

 

16,490

 

 

 

14,980

 

Operating Loss

 

 

(15,878

)

 

 

(14,980

)

Other Expense

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(334

)

 

 

(578

)

Other income

 

 

(60

)

 

 

 

Total Other Expense, net

 

 

(394

)

 

 

(578

)

Loss before income taxes

 

$

(16,272

)

 

$

(15,558

)

Income tax benefit

 

 

858

 

 

 

2,645

 

Net loss

 

$

(15,414

)

 

$

(12,913

)

Other comprehensive gain

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

1,133

 

 

 

3,796

 

Comprehensive loss

 

$

(14,281

)

 

$

(9,117

)

Net loss per share - basic and diluted

 

$

(0.13

)

 

$

(0.12

)

Weighted average common shares outstanding - basic and diluted

 

 

121,660

 

 

 

104,260

 

 

See accompanying notes to consolidated financial statements.

 

 

4


 

TransEnterix, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,086

 

 

$

24,165

 

Accounts receivable, net

 

 

1,828

 

 

 

621

 

Inventories

 

 

8,321

 

 

 

7,883

 

Interest receivable

 

 

10

 

 

 

12

 

Other current assets

 

 

5,601

 

 

 

5,335

 

Total Current Assets

 

 

28,846

 

 

 

38,016

 

Restricted cash

 

 

10,432

 

 

 

10,425

 

Accounts receivable, net of current portion

 

 

 

 

 

266

 

Property and equipment, net

 

 

5,800

 

 

 

5,772

 

Intellectual property, net

 

 

36,015

 

 

 

37,090

 

In-process research and development

 

 

16,161

 

 

 

15,920

 

Goodwill

 

 

68,984

 

 

 

68,697

 

Other long term assets

 

 

114

 

 

 

63

 

Total Assets

 

$

166,352

 

 

$

176,249

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,269

 

 

$

3,984

 

Accrued expenses

 

 

7,262

 

 

 

8,206

 

Contingent consideration – current portion

 

 

6,250

 

 

 

10,502

 

Notes payable - current portion, net of debt discount

 

 

8,172

 

 

 

7,997

 

Total Current Liabilities

 

 

24,953

 

 

 

30,689

 

Long Term Liabilities

 

 

 

 

 

 

 

 

Contingent consideration – less current portion

 

 

12,550

 

 

 

12,298

 

Notes payable - less current portion, net of debt discount

 

 

2,885

 

 

 

4,995

 

Net deferred tax liabilities

 

 

9,697

 

 

 

10,397

 

Total Liabilities

 

 

50,085

 

 

 

58,379

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock $0.001 par value, 750,000,000 shares authorized at March 31, 2017,

   and December 31, 2016; 123,629,689 and 115,781,030 shares issued at

   March 31, 2017 and December 31, 2016, respectively; and 123,629,689 and

   115,687,351 shares outstanding at March 31, 2017 and December 31, 2016,

   respectively

 

 

123

 

 

 

115

 

Additional paid-in capital

 

 

439,038

 

 

 

426,609

 

Accumulated deficit

 

 

(318,258

)

 

 

(302,844

)

Treasury stock at cost, 0 and 93,679 shares at March 31, 2017 and

   December 31, 2016, respectively

 

 

 

 

 

(241

)

Accumulated other comprehensive loss

 

 

(4,636

)

 

 

(5,769

)

Total Stockholders’ Equity

 

 

116,267

 

 

 

117,870

 

Total Liabilities and Stockholders’ Equity

 

$

166,352

 

 

$

176,249

 

 

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, 2016

 

 

115,781

 

 

$

115

 

 

 

(94

)

 

$

(241

)

 

$

426,609

 

 

$

(302,844

)

 

$

(5,769

)

 

$

117,870

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,139

 

 

 

 

 

 

 

 

 

2,139

 

Issuance of common stock and treasury

   stock, net of issuance costs

 

 

3,795

 

 

 

4

 

 

 

211

 

 

 

407

 

 

 

5,067

 

 

 

 

 

 

 

 

 

5,478

 

Award of  restricted stock units

 

 

331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return of common stock to pay

   withholding taxes on restricted stock

 

 

 

 

 

 

 

 

(117

)

 

 

(166

)

 

 

 

 

 

 

 

 

 

 

 

(166

)

Issuance of common stock in exchange

   for contingent consideration

 

 

3,723

 

 

 

4

 

 

 

 

 

 

 

 

 

5,223

 

 

 

 

 

 

 

 

 

5,227

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,133

 

 

 

1,133

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,414

)

 

 

 

 

 

(15,414

)

Balance, March 31, 2017

 

 

123,630

 

 

$

123

 

 

 

 

 

$

 

 

$

439,038

 

 

$

(318,258

)

 

$

(4,636

)

 

$

116,267

 

 

See accompanying notes to consolidated financial statements.

 

 

6


 

TransEnterix, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(15,414

)

 

$

(12,913

)

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

532

 

 

 

565

 

Amortization of intangible assets

 

 

1,636

 

 

 

1,817

 

Amortization of debt discount and debt issuance costs

 

 

31

 

 

 

52

 

Stock-based compensation

 

 

2,139

 

 

 

1,428

 

Deferred tax benefit

 

 

(858

)

 

 

(2,645

)

Change in fair value of contingent consideration

 

 

1,227

 

 

 

856

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(753

)

 

 

 

Interest receivable

 

 

2

 

 

 

(6

)

Inventories

 

 

(320

)

 

 

(1,735

)

Other current and long term assets

 

 

(251

)

 

 

(132

)

Accounts payable

 

 

(759

)

 

 

(1,391

)

Accrued expenses

 

 

(1,161

)

 

 

(765

)

Net cash and cash equivalents used in operating activities

 

 

(13,949

)

 

 

(14,869

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(501

)

 

 

(153

)

Net cash and cash equivalents (used in) provided by investing activities

 

 

(501

)

 

 

(153

)

Financing Activities

 

 

 

 

 

 

 

 

Payment of debt

 

 

(1,966

)

 

 

(1,219

)

Proceeds from issuance of common stock, net of issuance costs

 

 

5,304

 

 

 

31,391

 

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

 

 

 

 

 

(130

)

Proceeds from exercise of stock options and warrants

 

 

 

 

 

8

 

Net cash and cash equivalents provided by financing activities

 

 

3,338

 

 

 

30,050

 

Effect of exchange rate changes on cash and cash equivalents

 

 

40

 

 

 

34

 

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(11,072

)

 

 

15,062

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

34,590

 

 

 

38,449

 

Cash, cash equivalents and restricted cash, end of period

 

$

23,518

 

 

$

53,511

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

233

 

 

$

373

 

Supplemental Schedule of Noncash Investing Activities

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

 

 

 

$

1,823

 

Issuance of common stock as contingent consideration

 

$

5,227

 

 

 

 

 

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. In April 2017, the Company submitted a 510(k) application to the Food and Drug Administration, or FDA, for the Senhance System.

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. In May 2016, the Company implemented a restructuring plan. See Note 13 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 Company operates in one business segment.

 

 

8


 

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 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 $318.3 million as of March 31, 2017, 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 within one year after these financial statements are issued. 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 and/or cease operations.

 

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

 

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents 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 March 31, 2017 includes $10.0 million in a money market account, held in connection with the Company’s notes payable and $432,000 in cash accounts held as collateral primarily under the terms of an office operating lease and automobile leases.

Fair Value of Financial Instruments

The carrying values of accounts receivable, interest receivable, accounts payable, and certain accrued expenses at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, 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 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 three customers who constituted 100% of the Company’s net accounts receivable at March 31, 2017 and one customer who constituted 100% of the Company’s net accounts receivable at December 31, 2016.

Accounts Receivable

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

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) and 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.

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.  

Developed research and development was acquired as part of a business acquisition. 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. No impairment existed at March 31, 2017 or December 31, 2016.

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 13 for additional information related to goodwill impairment recorded during the second quarter of 2016. No impairment existed at March 31, 2017.

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 March 31, 2017 and December 31, 2016.

Property and Equipment

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

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

 

Machinery, manufacturing and demonstration equipment

 

3-5 years

Computer equipment

 

3 years

Furniture

 

5 years

Leasehold improvements

 

Lesser   of lease term or 3 to 10 years

 

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

Impairment of Long-Lived Assets

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

Contingent Consideration

Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The 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 three months ended March 31, 2017 and 2016 were not significant.

Risk and Uncertainties

The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, the historical lack of profitability; the Company’s ability to raise additional capital; its ability to successfully 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 Systems 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.

 

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, 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.

 

12


 

2. Summary of Significant Accounting Policies (Continued)

 

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. 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 $2,139,000 and $1,428,000 for the three months ended March 31, 2017 and 2016, 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)

 

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 44% of the Company’s total consolidated assets are located within the U.S. as of March 31, 2017. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill, intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable and inventory of $92.6 million at March 31, 2017, associated with the Senhance Acquisition in September 2015. Total assets outside of the U.S. excluding goodwill amounted to 44% and 40% of total consolidated assets at March 31, 2017 and December 31, 2016, respectively.

Impact of Recently Issued Accounting Standards  

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)  2017-04,  Simplifying the Test for Goodwill Impairment . Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective prospectively to annual and interim impairment tests beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU as of the beginning of fiscal year 2017. The adoption of this ASU did not have a material impact on the consolidated financial statements.

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

In February 2016, the FASB issued ASU 2016-02, Leases . 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. The Company currently expects that upon adoption, ROU assets and lease liabilities will be recognized in the balance sheet in amounts that the Company does not expect will have a material impact on the consolidated financial statements based on the Company’s current leases.

 

14


 

2. Summary of Significant Accounting Policies (Continued)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09) , which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The updated guidance is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Due to limited sales, the Company has evaluated its contracts and has concluded that the impact of adopting the standard will have no material impact on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330) . This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Previous guidance required inventory to be measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). This update is effective for annual and interim periods beginning after December 15, 2016. The Company adopted these provisions in the first quarter of fiscal year 2017 with no material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01,  Recognition and Measurement of Financial Assets and Financial Liabilities . ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements or related footnote disclosures.

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 2016 Form 10-K.

 

 

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.

15


 

3. Acquisition of Senhance Surgical Robotic System (Continued)

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) On December 30, 2016, the Company entered into an Amendment to the Purchase Agreement (the “Amendment”) to restructure the terms of the second tranche of the Cash Consideration (the “Second Tranche”). Under the Amendment, the Second Tranche was restructured to be paid through the (A) the issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of €5.0 million and (B) the payment of €5.0 million in cash upon the occurrence of either (i) receipt of clearance from the FDA for the Senhance System; or (ii) the Company having cash on hand of at least $50.0 million, or (iii) successfully completing a financing, raising at least $50.0 million in gross proceeds after September 2015, exclusive of any financing proceeds related to the December 2016 purchase agreement between the Company and Lincoln Park Capital Fund, LLC.; with payment of simple interest at a rate of 9.0% per annum beginning on December 31, 2016. Prior to December 30, 2016, the second tranche of the Cash Consideration of €10.0 million was 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.

(4) The fourth tranche of the Cash Consideration of €2.5 million shall be payable by December 31 of each year as reimbursement for certain debt payments made by Sofar under an existing Sofar loan agreement in such year, with payments beginning as of December 31, 2016. As of March 31, 2017 and December 31, 2016, the Company had paid €1.1 million of the fourth tranche.

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.

16


 

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. As of March 21, 2017, seventy-five 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 twenty-five percent of the Securities Consideration, it 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 was allocated to the assets acquired and liabilities assumed based on their estimated fair values.

   

 

4. 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, interest receivable, accounts payable, and certain accrued expenses at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, as the interest rates on the notes payable approximate the rates available to the Company as of these dates.

 

17


 

4. Fair Value (Continued)

The following are the major categories of assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, 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, 2017

 

 

 

(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

 

$

13,086

 

 

$

 

 

$

 

 

$

13,086

 

Restricted cash

 

 

10,432

 

 

 

 

 

 

 

 

 

10,432

 

Total Assets measured at fair value

 

$

23,518

 

 

$

 

 

$

 

 

$

23,518

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

18,800

 

 

$

18,800

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

18,800

 

 

$

18,800

 

 

 

 

December 31, 2016

 

 

 

(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

 

$

24,165

 

 

$

 

 

$

 

 

$

24,165

 

Restricted cash

 

 

10,425

 

 

 

 

 

 

 

 

 

10,425

 

Total Assets measured at fair value

 

$

34,590

 

 

$

 

 

$

 

 

$

34,590

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

22,800

 

 

$

22,800

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

22,800

 

 

$

22,800

 

 

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 $1,227,000 and $856,000 for the three months ended March 31, 2017 and 2016, respectively, 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 December 31, 2016 and March 31, 2017:

 

 

 

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


 

4. 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 three months ended March 31, 2017:

 

 

 

Fair Value

Measurement   at

Reporting Date

(Level 3)

 

 

 

(In thousands)

 

 

 

(unaudited)

 

Balance at December 31, 2016

 

$

22,800

 

Conversion of contingent consideration to common stock

 

 

(5,227

)

Change in fair value

 

 

1,227

 

Balance at March 31, 2017

 

$

18,800

 

Current portion

 

 

6,250

 

Long-term portion

 

 

12,550

 

Balance at March 31, 2017

 

$

18,800

 

 

 

5. Accounts Receivable, Net

The following table presents the components of accounts receivable:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Gross accounts receivable

 

$

1,901

 

 

$

960

 

Allowance for uncollectible accounts

 

 

(73

)

 

 

(73

)

Total accounts receivable, net

 

$

1,828

 

 

$

887

 

Short-term portion

 

$

1,828

 

 

$

621

 

Long-term portion

 

 

 

 

 

266

 

Total accounts receivable

 

$

1,828

 

 

$

887

 

 

 

6. Inventories

The components of inventories are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Finished goods

 

$

3,359

 

 

$

4,698

 

Raw materials

 

 

4,962

 

 

 

3,185

 

Total inventories

 

$

8,321

 

 

$

7,883

 

 

 

7. Other Current Assets

The following table presents the components of other current assets:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Prepaid expenses

 

$

1,118

 

 

$

2,186

 

Advances to vendors

 

 

3,967

 

 

 

1,806

 

Other receivables

 

 

516

 

 

 

1,343

 

Total

 

$

5,601

 

 

$

5,335

 

 

 

19


 

8 . Property and Equipment

Property and equipment consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Machinery, manufacturing and demonstration equipment

 

$

8,088

 

 

$

7,579

 

Computer equipment

 

 

2,134

 

 

 

2,124

 

Furniture

 

 

624

 

 

 

614

 

Leasehold improvements

 

 

2,067

 

 

 

2,028

 

Total property and equipment

 

 

12,913

 

 

 

12,345

 

Accumulated depreciation and amortization

 

 

(7,113

)

 

 

(6,573

)

Property and equipment, net

 

$

5,800

 

 

$

5,772

 

 

Depreciation expense was $532,000 and $565,000 for the three months ended March 31, 2017 and 2016, respectively.

 

 

9. Goodwill, In-Process Research and Development and Intellectual Property

Goodwill

Goodwill of $93.8 million was recorded in connection with the Merger, as described in Note 1, and goodwill of $38.3 million was recorded in connection with the Senhance Acquisition, as described in Note 3. The carrying value of goodwill and the change in the balance for the three months ended March 31, 2017 is as follows:

 

 

 

Goodwill

 

 

 

(In   thousands)

 

Balance at December 31, 2016

 

$

68,697

 

Foreign currency translation impact

 

 

287

 

Balance at March 31, 2017

 

$

68,984

 

 

The Company performs an annual impairment test of goodwill at December 31, or more frequently if events or changes in circumstances indicates that the carrying value of the Company’s one reporting unit may not be recoverable. During the second quarter of 2016, the FDA notified the Company that the SurgiBot System did not meet the criteria for substantial equivalency, negatively impacting the Company’s market capitalization, and warranting an interim two-step quantitative impairment test. Prior to adopting ASU 2017-04 as of the beginning of fiscal year 2017, goodwill was tested for impairment using a two-step approach. In the first step, the fair value of the reporting unit was determined and compared to the reporting unit's carrying value, including goodwill. If the fair value of the reporting unit was less than its carrying value, the second step of the goodwill impairment test was performed to measure the amount of impairment, if any. In the second step, the fair value of the reporting unit was allocated to the assets and liabilities of the reporting unit as if it had been acquired in a business combination and the purchase price was equivalent to the fair value of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities was referred to as the implied fair value of goodwill. The implied fair value of the reporting unit's goodwill was then compared to the actual carrying value of goodwill. If the implied fair value of goodwill was less than the carrying value of goodwill, an impairment loss is recognized for the difference. ASU 2017-04 removes Step 2 of the goodwill impairment test.

The Company determined the fair value of the reporting unit using a discounted cash flow analysis derived from the Company’s long-term plans.  The fair value of the reporting unit was corroborated using market prices for TransEnterix, Inc.  The inputs used to determine the fair values were classified as Level 3 in the fair value hierarchy . Based on the impairment test, the Company recorded goodwill impairment of $61.8 million during the second quarter of 2016.

The Company performed a qualitative assessment during the annual impairment review for fiscal 2016 as of December 31, 2016 and concluded that it is not more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount. Therefore, the two-step goodwill impairment test for the reporting unit was not necessary at December 31, 2016.

 

20


 

9. Goodwill, In-Process Research and Development and Intellectual Prop erty (Continued)

In-Process Research and Development

As described in Note 3, on September 21, 2015, the Company acquired all of the assets related to the Senhance System and recorded $17.1 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 45% and cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions.

The carrying value of the Company’s IPR&D assets and the change in the balance for the three months ended March 31, 2017 is as follows:

 

 

 

In-Process

Research and

Development

 

 

 

(In thousands)

 

Balance at December 31, 2016

 

$

15,920

 

Foreign currency translation impact

 

 

241

 

Balance at March 31, 2017

 

 

16,161

 

 

Intellectual Property

As described in Note 3, on September 21, 2015, the Company acquired all of the developed technology related to the Senhance System and recorded $48.5 million of intellectual property. The estimated fair value of the intellectual property 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 45% and cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions.

 

 

The components of gross intellectual property, accumulated amortization, and net intellectual property as of March 31, 2017 and December 31, 2016 are as follows:

 

 

 

March 31, 2017

 

 

 

December 31, 2016

 

 

 

(In thousands)

 

 

 

(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

 

$

48,500

 

 

$

(10,092

)

 

$

(2,393

)

 

$

36,015

 

 

 

$

48,500

 

 

$

(8,458

)

 

$

(2,952

)

 

$

37,090

 

 

 

10. Income Taxes

Income taxes have been accounted for using the liability method in accordance with ASC 740 “Income Taxes”. The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate method. The Company estimates an annual effective tax rate of 6.2% for the year ending December 31, 2017. This rate does not include the impact of any discrete items.  The Company incurred losses for the three month periods ended March 31, 2017 and is forecasting additional losses through the year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2017. Due to the Company’s history of losses, there is not sufficient evidence to record a net deferred tax asset associated with the U.S., Luxembourg, and Swiss operations. Accordingly, a full valuation allowance has been recorded related to the net deferred tax asset in that jurisdiction. Deferred tax assets and liabilities related to the TransEnterix Italia subsidiary have been recorded as a component of purchase accounting as of the acquisition date. The deferred tax benefit during the three months ended March 31, 2017 and 2016, was approximately $0.9 million and $2.6 million, respectively.  

There is no net deferred tax asset recorded in relation to TransEnterix Italia and accordingly no valuation allowance has been recorded in that jurisdiction.

21


 

10. Income Taxes (Continued)

The Company’s effective tax rate for each of the three month periods ended March 31, 2017 and 2016 was 5.3% and 17.0%, respectively. At March 31, 2017, the Company had no unrecognized tax benefits that would affect the Company’s effective tax rate.

 

 

11. Accrued Expenses

The following table presents the components of accrued expenses:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Taxes and other assessments

 

$

2,225

 

 

$

2,676

 

Compensation and benefits

 

 

2,291

 

 

 

2,328

 

Interest and final payment fee

 

 

1,100

 

 

 

1,000

 

Deferred rent

 

 

353

 

 

 

323

 

Consulting and other vendors

 

 

593

 

 

 

1,428

 

Legal and professional fees

 

 

142

 

 

 

243

 

Royalties

 

 

162

 

 

 

159

 

Other

 

 

396

 

 

 

49

 

Total

 

$

7,262

 

 

$

8,206

 

 

 

12. Notes Payable

 

On January 17, 2012, TransEnterix Surgical entered into a loan and security agreement with Silicon Valley Bank and Oxford Finance LLC (the “Lenders”), which loan and security agreement, as subsequently amended and restated is referred to as the “SVB Loan Agreement.” In connection with the Merger, the Company assumed and became the borrower under the SVB Loan Agreement.

 

 

On August 14, 2015, the Company entered into the First Amendment to the SVB Loan Agreement (the “First Amendment”) with the Lenders. The first tranche of the First Amendment increased the Company’s borrowings at August 14, 2015 from $10,000,000 to $20,000,000. The First Amendment allowed for interest-only payments at 7.5% per annum through April 30, 2016 and had a maturity date of October 1, 2018.

On September 18, 2015, in connection with entry into the Purchase Agreement with Sofar S.p.A. (see Note 3 for a description of the related transactions), the Company and the Lenders entered into the Consent and Second Amendment (the “Second Amendment”) to the SVB Loan Agreement. The Second Amendment modified the period in which the Company could make interest-only payments at 7.5% per annum on the term l