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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________________

 

FORM 10-Q

_________________________________________________

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission File Number 0-19437

_________________________________________________

TRANSENTERIX, INC.

 

(Exact name of registrant as specified in its charter)

_________________________________________________

 

Delaware

 

11-2962080

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

635 Davis Drive, Suite 300, Morrisville, NC 27560

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (919) 765-8400

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐.

 

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

 

Large accelerated filer

 

Accelerated Filer

Non-accelerated filer

 

Smaller reporting company

   

Emerging Growth Company

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Common Stock
$0.001 par value per share

 

TRXC

 

NYSE American

 

The number of shares outstanding of the registrant’s common stock, as of July 31, 2020 was 99,876,465.

 

 

 

 

 

TRANSENTERIX, INC.

 

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

 
 

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)

2

 

Condensed Consolidated Balance Sheets (unaudited)

3

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

4

 

Condensed Consolidated Statements of Cash Flows (unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

     

PART II.

OTHER INFORMATION

45

     

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 3.

Defaults Upon Senior Securities

46

Item 4.

Mine Safety Disclosures

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

     
 

SIGNATURES

48

 

 

 

FORWARD-LOOKING STATEMENTS

In addition to historical financial information, this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “in the event that,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements, including the impact of the coronavirus (COVID-19) pandemic on our operating results. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Financial Statements,” “Notes to Consolidated Financial Statements “and “Risk Factors” in this report, as well as the disclosures made in the TransEnterix, Inc. Annual Report on Form 10-K for the year ended December 31, 2019 (the “Fiscal 2019 Form 10-K”), and other filings we make with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law. To the extent that our business is negatively impacted due to a variety of factors, including the impact of COVID-19 on our operating results, we may implement longer-term cost reduction efforts in order to mitigate such impact. References in this report to “we,” “our,” “us,” or the “Company” refer to TransEnterix, Inc., including its subsidiaries, TransEnterix Surgical, Inc., SafeStitch LLC, TransEnterix International Inc.; TransEnterix Italia S.r.l.; TransEnterix Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V.

 

Any disclosure in this report regarding the receipt of CE Mark or Section 510(k) clearance for any of the Company’s products does not mean or infer any endorsement of the Company’s products by any government agency including, without limitation, the U.S. Food and Drug Administration, or FDA.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands except per share amounts)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenue:

                               

Product

  $ 315     $ 3,342     $ 557     $ 5,171  

Service

    340       297       698       649  

Total revenue

    655       3,639       1,255       5,820  
                                 

Cost of revenue:

                               

Product

    720       2,956       1,633       4,229  

Service

    693       980       1,518       2,174  

Total cost of revenue

    1,413       3,936       3,151       6,403  
                                 

Gross loss

    (758 )     (297 )     (1,896 )     (583 )

Operating Expenses:

                               

Research and development

    4,257       6,295       8,191       11,950  

Sales and marketing

    2,901       7,868       7,154       15,542  

General and administrative

    3,619       4,489       6,968       9,049  

Amortization of intangible assets

    2,619       2,585       5,183       5,196  

Change in fair value of contingent consideration

    212       960       1,268       1,958  

Restructuring and other charges

    -       -       858       -  

Acquisition related costs

    -       -       -       45  

Loss from sale of SurgiBot assets, net

    -       -       -       97  

Total Operating Expenses

    13,608       22,197       29,622       43,837  
                                 

Operating Loss

    (14,366 )     (22,494 )     (31,518 )     (44,420 )

Other Income (Expense):

                               

Change in fair value of warrant liabilities

    (114 )     2,528       (269 )     2,422  

Interest income

    4       178       31       496  

Interest expense

    -       (1,061 )     -       (2,177 )

Other expense

    (55 )     (191 )     (70 )     (496 )

Total Other Income (Expense), net

    (165 )     1,454       (308 )     245  
                                 

Loss before income taxes

    (14,531 )     (21,040 )     (31,826 )     (44,175 )

Income tax benefit

    691       869       1,388       1,479  
                                 

Net loss

    (13,840 )     (20,171 )     (30,438 )     (42,696 )

Deemed dividend related to beneficial conversion feature of preferred stock

    -       -       (412 )     -  

Deemed dividend related to conversion of preferred stock into common stock

    (299 )     -       (299 )     -  

Net loss attributable to common stockholders

    (14,139 )     (20,171 )     (31,149 )     (42,696 )
                                 

Comprehensive loss:

                               

Net loss

    (13,840 )     (20,171 )     (30,438 )     (42,696 )

Foreign currency translation gain (loss)

    962       1,240       90       (709 )
                                 

Comprehensive loss

  $ (12,878 )   $ (18,931 )   $ (30,348 )   $ (43,405 )
                                 

Net loss per common share attributable to common stockholders - basic

  $ (0.27 )   $ (1.21 )   $ (0.77 )   $ (2.56 )

Net loss per common share attributable to common stockholders - diluted

  $ (0.27 )   $ (1.35 )   $ (0.77 )   $ (2.68 )

Weighted average number of shares used in computing net loss per common share - basic

    52,351       16,729       40,628       16,703  

Weighted average number of shares used in computing net loss per common share - diluted

    52,351       16,814       40,628       16,814  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

 

  

June 30, 2020

  

December 31, 2019

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $15,603  $9,598 

Accounts receivable, net

  971   620 

Inventories

  10,857   10,653 

Other current assets

  6,881   7,084 

Total Current Assets

  34,312   27,955 
         

Restricted cash

  627   969 

Inventories, net of current portion

  6,334   7,594 

Property and equipment, net

  6,963   4,706 

Intellectual property, net

  25,802   28,596 

In-process research and development

  -   2,470 

Net deferred tax assets

  40   - 

Other long term assets

  1,896   2,489 

Total Assets

 $75,974  $74,779 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable

 $2,347  $3,579 

Accrued expenses

  6,840   8,553 

Deferred revenue - current portion

  868   818 

Contingent consideration - current portion

  -   73 

Total Current Liabilities

  10,055   13,023 
         

Long Term Liabilities:

        

Deferred revenue - less current portion

  -   27 

Contingent consideration - less current portion

  2,278   1,011 

Notes payable, net of issuance costs

  2,815   - 

Warrant liabilities

  187   2,388 

Net deferred tax liabilities

  -   1,392 

Other long term liabilities

  1,082   1,403 

Total Liabilities

  16,417   19,244 
         

Commitments and Contingencies (Note 13)

          
         

Stockholders' Equity:

        

Common stock $0.001 par value, 750,000,000 shares authorized at June 30, 2020 and December 31, 2019; 56,902,140 and 20,691,301 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

  57   21 

Preferred stock, $0.01 par value, 25,000,000 shares authorized, including 7,937,057 and 0 shares of Series A Convertible Preferred Stock at June 30, 2020 and December 31, 2019, and 0 shares issued and outstanding at June 30, 2020 and December 31, 2019

  -   - 

Additional paid-in capital

  754,818   720,484 

Accumulated deficit

  (694,038)  (663,600)

Accumulated other comprehensive loss

  (1,280)  (1,370)

Total Stockholders' Equity

  59,557   55,535 

Total Liabilities and Stockholders' Equity

 $75,974  $74,779 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

   

Common Stock

   

Preferred Stock

   

Treasury Stock

                                 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Income (Loss)

   

Total Stockholders' Equity

 

Balance, December 31, 2019

    20,691     $ 21       -     $ -       -     $ -     $ 720,484     $ (663,600 )   $ (1,370 )   $ 55,535  

Stock-based compensation

    -       -       -       -       -       -       1,923       -       -       1,923  

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

    14,122       14       7,937       79       -       -       13,432       -       -       13,525  

Issuance of common stock, net of issuance costs

    7,030       7       -       -       -       -       11,205       -       -       11,212  

Conversion of preferred stock to common stock

    3,053       3       (3,053 )     (30 )     -       -       27       -       -       -  

Exchange of shares for Series B Warrants

    2,041       2       -       -       -       -       2,468       -       -       2,470  

Award of restricted stock units

    141       -       -       -       -       -       -       -       -       -  

Return of common stock to pay withholding taxes on restricted stock

    -       -       -       -       28       -       (33 )     -       -       (33 )

Cancellation of treasury stock

    -       -       -       -       (28 )     -       -       -       -       -  

Other comprehensive loss

    -       -       -       -       -       -       -       -       (872 )     (872 )

Net loss

    -       -       -       -       -       -       -       (16,598 )     -       (16,598 )

Balance, March 31, 2020

    47,078       47       4,884       49       -       -       749,506       (680,198 )     (2,242 )   $ 67,162  

Stock-based compensation

    -       -       -       -       -       -       1,933       -       -       1,933  

Exercise of warrants

    4,913       5       -       -       -       -       3,335       -       -       3,340  

Conversion of preferred stock to common stock

    4,884       5       (4,884 )     (49 )     -       -       44       -       -       -  

Award of restricted stock units

    28       -       -       -       -       -       -       -       -       -  

Other comprehensive income

    -       -       -       -       -       -       -       -       962       962  

Net loss

    -       -       -       -       -       -       -       (13,840 )     -       (13,840 )

Balance, June 30,2020

    56,903     $ 57       -     $ -       -     $ -     $ 754,818     $ (694,038 )   $ (1,280 )   $ 59,557  
                                                                                 
                                                                                 

Balance, December 31, 2018

    16,642     $ 17       -     $ -       -     $ -     $ 676,572     $ (509,406 )   $ 1,338     $ 168,521  

Stock-based compensation

    -       -       -       -       -       -       2,981       -       -       2,981  

Exercise of stock options and warrants

    12       -       -       -       -       -       236       -       -       236  

Award of restricted stock units

    47       -       -       -       -       -       1       -       -       1  

Return of common stock to pay withholding taxes on restricted stock

    -       -       -       -       15       -       (499 )     -       -       (499 )

Cancellation of treasury stock

    -       -       -       -       (15 )     -       -       -       -       -  

Cumulative effect of change in accounting principle

    -       -       -       -       -       -       (7 )     7       -       -  

Other comprehensive loss

    -       -       -       -       -       -       -       -       (1,949 )     (1,949 )

Net loss

    -       -       -       -       -       -       -       (22,525 )     -       (22,525 )

Balance, March 31, 2019

    16,701       17       -       -       -       -       679,284       (531,924 )     (611 )   $ 146,766  
                                                                                 

Stock-based compensation

    -       -       -       -       -       -       3,355       -       -       3,355  

Exercise of stock options and warrants

    25       -       -       -       -       -       297       -       -       297  

Award of restricted stock units

    14       -       -       -       -       -       -       -       -       -  

Other comprehensive income

    -       -       -       -       -       -       -       -       1,240       1,240  

Net loss

    -       -       -       -       -       -       -       (20,171 )     -       (20,171 )

Balance, June 30, 2019

    16,740     $ 17       -     $ -       -     $ -     $ 682,936     $ (552,095 )   $ 629     $ 131,487  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2020

   

2019

 

Operating Activities:

               

Net loss

  $ (30,438 )   $ (42,696 )

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

               

Loss from sale of SurgiBot assets, net

    -       97  

Depreciation

    1,162       1,126  

Amortization of intangible assets

    5,183       5,196  

Amortization of debt discount and debt issuance costs

    -       622  

Amortization of short-term investment discount

    -       (300 )

Stock-based compensation

    3,856       6,336  

Interest expense on deferred consideration - MST acquisition

    -       387  

Deferred tax benefit

    (1,388 )     (1,479 )

Write down of inventory

    -       761  

Change in fair value of warrant liabilities

    269       (2,422 )

Change in fair value of contingent consideration

    1,268       1,958  
                 

Changes in operating assets and liabilities:

               

Accounts receivable

    (350 )     2,808  

Interest receivable

    -       (4 )

Inventories

    (2,332 )     (10,301 )

Other current and long term assets

    827       (3,689 )

Accounts payable

    (1,221 )     2,499  

Accrued expenses

    (1,736 )     (1,454 )

Deferred revenue

    22       (862 )

Other long term liabilities

    (258 )     1,879  

Net cash and cash equivalents used in operating activities

    (25,136 )     (39,538 )
                 

Investing Activities:

               

Purchase of short-term investments

    -       (12,883 )

Proceeds from maturities of short-term investments

    -       55,000  

Purchase of property and equipment

    (3 )     (189 )

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

    (3 )     41,928  
                 

Financing Activities:

               

Proceeds from issuance of common stock, preferred stock and warrants under 2020 financing, net of issuance costs

    13,525       -  

Proceeds from issuance of common stock, net of issuance costs

    11,212       -  

Proceeds from notes payable, net of issuance costs

    2,815       (30 )

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

    (33 )     (499 )

Payment of contingent consideration

    (74 )     -  

Proceeds from exercise of warrants

    3,340       534  

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

    30,785       5  
                 

Effect of exchange rate changes on cash and cash equivalents

    17       (32 )

Net increase in cash, cash equivalents and restricted cash

    5,663       2,363  

Cash, cash equivalents and restricted cash, beginning of period

    10,567       21,651  

Cash, cash equivalents and restricted cash, end of period

  $ 16,230     $ 24,014  
                 

Supplemental Disclosure for Cash Flow Information:

               

Interest paid

  $ -     $ 1,528  
                 

Supplemental Schedule of Non-cash Investing and Financing Activities:

               

Transfer of inventories to property and equipment

  $ 3,403     $ 415  

Exchange of common stock for Series B Warrants

  $ 2,470     $ -  

Transfer of in-process research and development to intellectual property

  $ 2,425     $ -  

Conversion of preferred stock to common stock

  $ 79     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

TransEnterix, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

1.

Business Overview

 

Overview

TransEnterix, Inc. is a medical device company that is digitizing the interface between the surgeon and the patient in laparoscopy to increase control and reduce surgical variability in today’s value-based healthcare environment. It is focused on the market development for and commercialization of the Senhance® Surgical System, which digitizes laparoscopic minimally invasive surgery, or MIS. The Senhance Surgical System is the first and only digital, multi-port laparoscopic platform designed to maintain laparoscopic MIS standards while providing digital benefits such as haptic feedback, robotic precision, comfortable ergonomics, advanced instrumentation including 3 millimeter microlaparoscopic instruments, eye-sensing camera control and fully-reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy.

 

The Company believes that future outcomes of minimally invasive surgery will be enhanced through its combination of more advanced tools and robotic functionality, which are designed to empower surgeons with improved precision, ergonomics, dexterity and visualization; offer high patient satisfaction and enable a desirable post-operative recovery; and provide a cost-effective robotic system, compared to existing alternatives today, for a wide range of clinical applications and operative sites within the healthcare system.

 

The Senhance System is commercially available in Europe, the United States, Japan and select other countries.

 

 

The Senhance System has a CE Mark in Europe for adult and pediatric laparoscopic abdominal and pelvic surgery, as well as limited thoracic surgeries excluding cardiac and vascular surgery.

 

In the United States, the Company has received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery in a total of 28 indicated procedures, including benign and oncologic procedures, laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery.

 

In Japan, the Company has received regulatory approval and reimbursement for 98 laparoscopic procedures.

 

Over the past 24 months, the Company successfully obtained FDA clearance and CE Mark for its 3 millimeter diameter instruments, its Senhance ultrasonic system, its 3 millimeter and 5 millimeter hooks, and the Senhance articulating system. The 3 millimeter instruments enable the Senhance System to be used for microlaparoscopic surgeries, allowing for tiny incisions. The ultrasonic system is an advanced energy device used to deliver controlled energy to ligate and divide tissue, while minimizing thermal injury to surrounding structures. The Senhance articulating system was launched in Europe in November 2019 and the Company is evaluating its pathway forward to launch such a system in the United States with a planned submission for U.S. clearance in the first quarter of 2021.

 

In January 2020, the Company submitted an application to the FDA seeking clearance of the first machine vision system for its robotic surgery unit named Intelligent Surgical Unit (ISU™). The Intelligent Surgical Unit was developed using the image analytics technology acquired from MST in the fourth quarter of 2018. The Company believes it is the first such FDA submission seeking clearance for machine vision technology in abdominal robotic surgery. On March 13, 2020, the Company announced that it had received FDA clearance for the Intelligent Surgical Unit.

 

The Company continues to make additional submissions for clearance or approval for enhancements to the Senhance System and related instruments and accessories, including additional filings and approvals sought in Japan.

 

The Company is implementing its strategy to place Senhance Systems with customers pursuant to leasing arrangements and to work with its customers to increase utilization. As of July 31, 2020, the Company has installed six Senhance Systems, including one in July 2020.

 

6

 

Risks and Uncertainties

The Company is subject to risks similar to other similarly sized companies in the medical device industry. These risks include, without limitation: potential negative impacts on the Company's operations caused by the COVID-19 pandemic; the Company’s ability to continue as a going concern; the historical lack of profitability; the Company’s ability to raise additional capital; the success of its market development efforts, the liquidity and capital resources of its partners; its ability to successfully develop, clinically test and commercialize its products; the timing and outcome of the regulatory review process for its products; changes in the health care and regulatory environments of the United States, the United Kingdom, the European Union, Japan, Taiwan and other countries in which the Company operates or intends to operate; its ability to attract and retain key management, marketing and scientific personnel; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution concern; competition in the market for robotic surgical devices; and its ability to identify and pursue development of additional products.

 

In 2020, the Company is focusing its marketing efforts on markets with high utilization of laparoscopic techniques, including Japan, Western Europe and the United States. Its focus is on (1) increasing the number of placements of the Senhance System, not necessarily through sales, but through leasing arrangements, (2) increasing the number of procedures conducted using the Senhance System quarter over quarter, and (3) solidifying key opinion leader support and publications related to the use of the Senhance System in laparoscopic procedures. During this period the Company is not focusing on revenue targets. As further discussed in this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a significant impact on the Company’s operations, primarily due to the temporary cessation of elective surgical procedures in many markets, and the challenges and restrictions caused by stay-at-home orders, social distancing requirements and travel restrictions.

 

During the fourth quarter of 2019, the Company announced the implementation of a restructuring plan to reduce operating expenses as it continues the global market development of the Senhance platform. Under the restructuring plan, it reduced headcount primarily in the sales and marketing functions and determined that the carrying value of its inventory exceeded the net realizable value due to a decrease in expected sales. The restructuring charges amounted to $8.8 million, of which $7.4 million was an inventory write down and was included in cost of product revenue and $1.4 million related to employee severance costs and was included as restructuring and other charges in the condensed consolidated statements of operations and comprehensive loss during the fourth quarter of 2019. During the first half of 2020, the Company continued its restructuring with additional headcount reductions which resulted in $0.9 million related to severance costs which were or are expected to be paid in 2020. The total amount of accrued and unpaid restructuring costs as of June 30, 2020 is $1.0 million and is included in accrued expense in the accompanying unaudited condensed consolidated balance sheet.

 

With respect to the COVID-19 pandemic, the Company has taken steps, and will continue to take further actions, in its approach to minimizing the impact of the COVID-19 pandemic on its business. In March 2020, to ensure the health and well-being of its employees, the Company implemented work from home at all its facilities, which restrictions were lifted in part in June 2020. The Company has also implemented cost containment strategies across all areas of the organization, including continued curtailment of Company travel, canceling of trade shows for 2020 and temporary salary reductions for its senior management and certain groups of its field-based employees. The Senhance Systems are manufactured at a contract manufacturing facility in Milan. Due to the quarantine in Northern Italy, the assembly of new units was disrupted, but has returned to normal operating levels. A variety of travel restrictions have caused a delay in the Company’s product installation and training activities. During the second quarter of 2020, the Company has seen elective surgical procedures recommence in the United States, Europe and Japan, but not, to date, to the levels seen before the COVID-19 pandemic. This has significantly impacted the Company’s ability to implement our market development activities to place our Senhance Systems, provide training, and increase the use of the Senhance Systems in place. Given the dynamic nature of this health emergency, the full impact of the COVID-19 pandemic on the Company’s ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

 

7

 

 

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments, consisting only of normal recurring adjustments, except as otherwise indicated, necessary for a fair statement of its financial position, results of operations, and cash flows of the Company for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Fiscal 2019 Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) have been condensed or omitted in the accompanying interim condensed consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

 

On December 11, 2019, following receipt of approval from stockholders at a special meeting of stockholders held on the same day, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of one-for-thirteen, or the Reverse Stock Split. The Company’s common stock began trading on a split-adjusted basis on NYSE American on the morning of December 12, 2019. No fractional shares were issued in connection with the Reverse Stock Split. Instead, the Company rounded up each fractional share resulting from the reverse stock split to the nearest whole share. As a result of the Reverse Stock Split, the Company’s outstanding common stock decreased from approximately 261.9 million shares to approximately 20.2 million shares (without giving effect to the rounding up for each fractional share).

 

Unless otherwise noted, all share and per share data referenced in the condensed consolidated financial statements and the notes thereto have been retroactively adjusted to reflect the Reverse Stock Split. As a result of the Reverse Stock Split, certain amounts in the condensed consolidated financial statements and the notes thereto may be slightly different than previously reported due to rounding of fractional shares, and certain amounts within the condensed consolidated balance sheets were reclassified between common stock and additional paid-in capital.

 

Liquidity and Going Concern

The Company's condensed consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $694.0 million as of June 30, 2020 and working capital of $24.3 million as of June 30, 2020. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan.

 

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Traditionally, the Company has raised additional capital through equity offerings, including raising net proceeds of $13.5 million in the March 2020 public offering (see Note 10) and an additional $13.7 million in net proceeds in the July 2020 public offering (see Note 14). Additionally, in April 2020 the Company secured a non-recourse loan in the principal amount of $2.8 million under the Paycheck Protection Program (the “PPP”) provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as amended that may be forgiven under certain circumstances (see Note 8). Management's plan to obtain additional resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into a strategic collaboration, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of our markets. In addition, the Company may consider fundamental business combination transactions. If the Company is unable to obtain additional and adequate capital through one of these methods, or if expected capital from existing agreements is not received when due, or at all, it would need to reduce its sales and marketing and administrative expenses and delay research and development projects, including the purchase of equipment and supplies, until it is able to obtain sufficient funds. If such sufficient funds are not received on a timely basis, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. The Company believes the COVID-19 pandemic will continue to negatively impact its operations and ability to implement its market development efforts, which will have a negative effect on its financial condition.

 

8

 

At June 30, 2020, the Company had cash and cash equivalents, excluding restricted cash, of approximately $15.6 million. The ability of the Company to continue to secure needed financing until it becomes profitable raises substantial doubt about the Company’s ability to continue as a going concern during the one year after the date that these financial statements are issued. The condensed consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include identifiable intangible assets and goodwill, contingent consideration, warrant liabilities, stock compensation expense, revenue recognition, accounts receivable reserves, excess and obsolete inventory reserves, inventory classification between current and non-current, and deferred tax asset valuation allowances.

 

The COVID-19 pandemic has caused significant social and economic restrictions that have been imposed in the United States and abroad, which has resulted in significant volatility in the global economy and led to reduced economic activity. In the preparation of these financial statements and related disclosures, the Company has assessed the impact that COVID-19 has had on its estimates, assumptions, forecasts, and accounting policies. The Company continues to monitor closely the COVID-19 pandemic impact on its estimates, assumptions and forecasts used in the preparation of its financial statements. As the COVID-19 situation is unprecedented and ever evolving, future events and effects related to COVID-19 cannot be determined with precision, and actual results could significantly differ from estimates or forecasts.

 

Principles of Consolidation and Foreign Currency Considerations

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

 

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

 

The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany receivables from a foreign subsidiary for which the Company anticipates settlement in the foreseeable future are recorded in the condensed consolidated statements of operations and comprehensive loss. The net gains and losses included in net loss in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019 were not significant.

 

Concentrations and Credit Risk

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

 

9

 

The Company’s accounts receivable are derived from sales to customers located throughout the world. The Company evaluates its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses and recorded no bad debt expense for any of the periods presented. The Company had eight customers who constituted 76% of the Company’s net accounts receivable as of June 30, 2020. The Company had eight customers who constituted 85% of the Company’s net accounts receivable as of December 31, 2019.

 

The Company had seven customers who accounted for 60% of sales for the three months ended June 30, 2020 and five customers who accounted for 91% of sales for the three months ended June 30, 2019. The Company had nine customers who accounted for 65% of sales for the six months ended June 30, 2020 and two customers who accounted for 76% of sales for the six months ended June 30, 2019.

 

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents.

 

Restricted cash at June 30, 2020 and December 31, 2019 included $0.6 million and $1.0 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, automobile leases, and a performance guarantee required by the government of a country in which a Senhance System was sold in 2018.

 

Accounts Receivable

Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts was determined on a customer specific basis based on deemed collectability. The allowance for doubtful accounts was $1.7 million as of June 30, 2020 and December 31, 2019.

 

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The Company records reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

 

Any inventory on hand at the measurement date in excess of the Company's current requirements based on anticipated levels of sales is classified as long-term on the Company's condensed consolidated balance sheets. The Company’s classification of long-term inventory requires it to estimate the portion of on hand inventory that can be realized over the upcoming twelve months.

 

Identifiable Intangible Assets and Goodwill

Definite-Lived Intangible Assets - Intellectual Property

Intellectual property consists of purchased patent rights and developed technology acquired as part of a business acquisition. Developed technology includes reclassified IPR&D assets related to (i) the Senhance System acquired in 2015 and reclassified in 2017 and (ii) MST acquired in 2018 and reclassified in 2020. Amortization of the patent rights is recorded using the straight-line method over the estimated useful life of the patents of 10 years. Amortization of the developed technology is recorded using the straight-line method over the estimated useful life of 5 to 7 years.

 

The Company periodically evaluates intellectual property for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To determine the recoverability, 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 assets, then such assets are written down to their fair value. No impairment of intellectual property was identified during the six months ended June 30, 2020 and 2019.

 

10

 

Indefinite-Lived Intangible Assets – 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. To determine the recoverability, the Company evaluates the probability that future estimated discounted 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 assets, then such assets are written down to their fair value.

 

The Company performed an impairment test of its IPR&D at the end of the third quarter 2019 as recent events and changes in market conditions indicated that the asset might be impaired. During the third quarter of 2019, the Company concluded that the fair value determined by the market value approach was lower than the carrying value and recognized a $7.9 million impairment charge to its IPR&D. The Company performed its annual impairment assessment at December 31, 2019 and no additional impairment was required.

 

The Company reclassifies IPR&D assets to intellectual property when development is complete, which generally occurs upon regulatory approval and the Company is able to commercialize products. The completed IPR&D assets are then classified as definite-lived intangible assets (developed technology) 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 Company did not identify any impairment during the three and six months ended June 30, 2020 and 2019. As of June 30, 2020, all IPR&D assets have been reclassified to intellectual property.

 

Goodwill

Goodwill of $93.8 million was recorded in connection with a September 2013 merger transaction, goodwill of $38.3 million was recorded in connection with the Senhance Acquisition and goodwill of $9.6 million was recorded in connection with the MST Medical Surgical Technologies, Ltd. Acquisition (see Note 3).

 

The Company performs an annual impairment test of goodwill at December 31, or more frequently if events or changes in circumstances indicate that the carrying value of the Company’s one reporting unit may not be recoverable. During the third quarter of 2019, the Company’s stock price declined significantly as a result of decreased sales and goodwill was deemed to be fully impaired, resulting in an impairment charge of $79.0 million.

 

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 (in years)

  3-5 

Computer equipment (in years)

  3   

Furniture (in years)

  5   

Leasehold improvements

  Lesser of lease term or 3 to 10 years 

 

11

 

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.

 

The Company reviews its property and equipment 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, 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 assets, then such assets are written down to their fair value. The Company did not identify any impairment during the three and six months ended June 30, 2020 and 2019.

 

Contingent Consideration

Contingent cash consideration arising from business combinations is recorded as a liability and is the estimate of the fair value of potential milestone payments related to those acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model using significant unobservable inputs including the probability of achieving each of the potential milestones, future Euro-to-USD exchange rates, and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the condensed consolidated statements of operations and comprehensive loss.

 

Warrant Liabilities

The Company’s Series B Warrants (see Note 9) are measured at fair value using a simulation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock, its expected volatility, holding cost and the risk-free interest rate for the term of the warrant (see Note 4). The warrant liability is revalued at each reporting period and changes in fair value are recognized in the condensed consolidated statements of operations and comprehensive loss. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known.

 

Revenue Recognition

The Company’s revenue consists of product revenue resulting from the sale of Systems, System components, instruments and accessories, and service revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and the customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities. The Company’s System sale arrangements generally include a five-year service period; the first year of service is generally free and included in the System sale arrangement and the remaining four years are generally included at a stated service price.

 

The Company’s System sale arrangements generally contain multiple products and services. For these consolidated sale arrangements, the Company accounts for individual products and services as separate performance obligations if they are distinct, which is if a product or service is separately identifiable from other items in the consolidated package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s System sale arrangements may include a combination of the following performance obligations: System(s), System components, instruments, accessories, and System service.

 

For arrangements that contain multiple performance obligations, revenue is allocated to each performance obligation based on its relative estimated standalone selling price. When available, standalone selling prices are based on observable prices at which the Company separately sells the products or services; however due to limited sales to date, standalone selling prices generally are not directly observable. The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. The Company regularly reviews estimated standalone selling prices and updates these estimates if necessary.

 

12

 

The Company enters into lease arrangements with certain qualified customers. Revenue related to arrangements including lease elements are allocated to lease and non-lease elements based on their relative standalone selling prices. Lease elements generally include a Senhance System, while non-lease elements generally include service, instruments, and accessories. For some lease arrangements, the customers are provided with the right to purchase the leased System at some point during and/or at the end of the lease term. In some arrangements lease payments are based on the usage of the System.

 

In determining whether a transaction should be classified as a sales-type or operating lease, the Company considers the following terms at lease commencement: (1) whether title of the Senhance System transfers automatically or for a nominal fee by the end of the lease term, (2) whether the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the leased System, (3) whether the lease term is for the major part of the remaining economic life of the leased System, (4) whether the lease grants the lessee an option to purchase the leased System that the lessee is reasonably certain to exercise, and (5) whether the underlying System is of such a specialized nature that it is expected to have no alternative use to the Company at the end of the lease term. All such arrangements through June 30, 2020 are classified as operating leases.

 

The Company recognizes revenues as the performance obligations are satisfied by transferring control of the product or service to a customer. The Company generally recognizes revenue for the performance obligations as follows:

 

 

System sales. For Systems and System components sold directly to end customers, revenue is recognized when the Company transfers control to the customer, which is generally at the point when acceptance occurs that indicates customer acknowledgment of delivery or installation, depending on the terms of the arrangement. For Systems sold through distributors, for which distributors are responsible for installation, revenue is recognized generally at the time of shipment. The Company’s System arrangements generally do not provide a right of return. The Systems are generally covered by a one-year warranty. Warranty costs were not material for the periods presented.

 

Lease arrangements. Revenue related to lease elements from operating lease arrangements is generally recognized on a straight-line basis over the lease term or based upon System usage and is presented as product revenue.

 

Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment, but also occurs at the time of delivery depending on the customer arrangement.

 

Service. Service revenue is recognized ratably over the term of the service period as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed.

 

13

 

The following table presents revenue disaggregated by type and geography (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

U.S.

                

Systems

 $45  $-  $75  $- 

Instruments and accessories

  7   25   67   25 

Services

  103   127   171   260 

Total U.S. revenue

  155   152   313   285 
                 

Outside of U.S. ("OUS")

                

Systems

  117   2,782   127   4,065 

Instruments and accessories

  146   535   288   1,081 

Services

  237   170   527   389 

Total OUS revenue

  500   3,487   942   5,535 
                 

Total

                

Systems

  162   2,782   202   4,065 

Instruments and accessories

  153   560   355   1,106 

Services

  340   297   698   649 

Total revenue

 $655  $3,639  $1,255  $5,820 

 

The Company recognizes sales by geographic area based on the country in which the customer is based. Operating lease revenue is included in the above table and was approximately $0.1 million and $0 for the three months ended June 30, 2020 and 2019, respectively, and $0.2 million and $0 for the six months ended June 30, 2020 and 2019, respectively.

 

Transaction price allocated to remaining performance obligations relates to amounts allocated to products and services for which the revenue has not yet been recognized. A significant portion of this amount relates to service obligations performed under the Company's System sales contracts that will be invoiced and recognized as revenue in future periods. Transaction price allocated to remaining performance obligations was approximately $3.0 million and $3.7 million as of June 30, 2020 and December 31, 2019, respectively.

 

The Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Contract assets are included in accounts receivable and totaled $0.1 million and $0.2 million as of June 30, 2020 and December 31, 2019, respectively. Deferred revenue for the periods presented was primarily related to service obligations, for which the service fees are billed up-front, generally annually. The associated deferred revenue is generally recognized ratably over the service period. The Company did not have any significant impairment losses on its contract assets for the periods presented. Revenue recognized for the three months ended June 30, 2020 and 2019, that was included in the deferred revenue balance at the beginning of each reporting period was $0.4 million and $0.4 million, respectively. Revenue recognized for the six months ended June 30, 2020 and 2019, that was included in the deferred revenue balance at the beginning of each reporting period was $0.6 million and $0.7 million, respectively. Revenue for the three and six months ended June 30, 2019 also included $1.3 million from a System sold in 2017 for which revenue was deferred until its first clinical use, which occurred in the second quarter of 2019. The aggregate amount of transaction price allocated to performance obligations that remain unsatisfied as of June 30, 2020 was $3.0 million, which is expected to be recognized as revenue over one to three years.

 

In connection with assets recognized from the costs to obtain a contract with a customer, the Company determined that the sales incentive programs for its sales team do not meet the requirements to be capitalized as the Company does not expect to generate future economic benefits from the related revenue from the initial sales transaction and such costs are expensed as incurred.

 

Cost of Revenue

Cost of revenue consists of contract manufacturing, materials, labor and manufacturing overhead incurred internally to produce the products. Shipping and handling costs incurred by the Company are included in cost of revenue. During the three months ended June 30, 2020 and 2019, the Company recorded $0 and $0.8 million of expenses, respectively, for inventory obsolescence related to certain System components. During the six months ended June 30, 2020 and 2019, the Company recorded $0 and $0.8 million of expenses, respectively, for inventory obsolescence related to certain System components.

 

14

 

Research and Development Costs

Research and development expenses primarily consist of engineering, product development and regulatory expenses, incurred in the design, development, testing and enhancement of our products. Research and development costs are expensed as incurred.

 

Stock-Based Compensation

The Company follows ASC 718 “Stock Compensation”, which provides guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company recognizes as expense, the grant-date fair value of stock options and other stock-based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. The Company uses the Black-Scholes-Merton model to estimate the fair value of our stock-based payments. The volatility assumption used in the Black-Scholes-Merton model is based on the calculated historical volatility based on an analysis of reported data for a peer group of companies as well as the Company’s historical volatility. The expected term of options granted has been determined based upon the simplified method, because the Company does not have sufficient historical information regarding its options to derive the expected term. Under this approach, the expected term is the mid-point between the weighted average of vesting period and the contractual term. The risk-free interest rate is based on U.S. Treasury rates whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company estimates forfeitures based on its historical experience and adjust the estimated forfeiture rate based upon actual experience.

 

The fair value of restricted stock units is determined by the market price of the Company’s common stock on the date of grant.

 

Compensation expense for stock-based compensation was approximately $1.9 million and $3.4 million for the three months ended June 30, 2020 and 2019, respectively, and was approximately $3.9 million and $6.3 million for the six months ended June 30, 2020 and 2019, respectively.

 

On June 8, 2020, following the 2020 annual meeting of stockholders, the Board of Directors approved and granted equity awards to the members of the Board and the executive officers of the Company. The awards to the non-employee directors consisted of annual equity grants of restricted stock units (“RSUs”) and stock options under the director compensation program, with a grant date value of $45,000 per non-employee director, as well as one-time compensatory awards to the Board members for service to the Company during this critical time in the Company’s history with a grant date value ranging from $5,000 to $10,000, depending on length of Board service.

 

The awards to the executive officers include the 2020 annual long-term incentive grants, as well as a retention and promotion grant for our Chief Executive Officer. Thirty percent of the value of the annual long-term incentive awards to our CEO is comprised of performance-based RSUs, which will only vest if the Company’s stock price is at least $1.00 or more for twenty consecutive trading days in a three-year performance period.

 

The awards were all made under the Company’s Amended and Restated Incentive Compensation Plan. An aggregate of 2,061,289 shares of common stock underlie these awards if they fully vest.

 

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax basis of the Company’s assets and liabilities, and for tax carryforwards at enacted statutory rates in effect for the years in which the asset or liability is expected to be realized. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amounts expected to be realized. The Company has elected to account for global intangible low-taxed income (“GILTI”) as a period expense in the year the tax is incurred.

 

15

 

The Company recognizes the financial statement benefit of an income tax position only after determining that the relevant taxing authority would more likely than not sustain the position following audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes.

 

Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require application of significant judgment. The Company is subject to U.S. federal and various state, local and foreign jurisdictions. Due to the Company’s net operating loss carryforwards, the Company may be subject to examination by authorities for all previously filed income tax returns.

 

In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. The referendum did not have a material impact on the Company for the 2020 or 2019 tax provisions. The Company will continue to evaluate the impact of these provisions in future periods as the enactment process in completed.

 

On March 27, 2020, the CARES Act was signed into law in response to the COVID-19 pandemic. The CARES Act, as amended on June 5, 2020 through the enactment of the Paycheck Protection Program Flexibility Act, provides numerous tax provisions and stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company continues to evaluate the provisions of the CARES Act, as amended, relating to income taxes which may result in adjustments to certain deferred tax assets and liabilities.

 

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 26% and 19% of the Company’s total consolidated assets are located within the United States as of June 30, 2020 and December 31, 2019, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable, other long-term assets and inventory of $56.4 million and $60.5 million as of June 30, 2020 and December 31, 2019, respectively. Total assets outside of the United States amounted to 74% and 81% of total consolidated assets at June 30, 2020 and December 31, 2019, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the six months ended June 30, 2020 and 2019, 25% and 5%, respectively, of net revenue were generated in the United States; while 52% and 42%, respectively, were generated in Europe; and 23% and 53% were generated in Asia. For the three months ended June 30, 2020 and 2019, 24% and 4%, respectively, of net revenue were generated in the United States; while 56% and 48%, respectively, were generated in Europe; and 20% and 47% were generated in Asia.

 

Impact of Recently Issued Accounting Standards

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The Company adopted this ASU effective January 1, 2020 and the adoption did not have a material impact on the condensed consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740, Income Tax and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those periods, with early adoption permitted. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures.

 

16

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures.

 

 

3.

Acquisitions

 

MST Medical Surgery Technologies Ltd. Acquisition

On September 23, 2018, the Company entered into an Asset Purchase Agreement (the “MST Purchase Agreement”) with MST Medical Surgery Technologies Ltd., an Israeli private company (“MST”), and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of MST (collectively, the “Buyers”). The closing of the transactions occurred on October 31, 2018, pursuant to which the Company acquired MST’s assets consisting of intellectual property and tangible assets related to surgical analytics with its core image analytics technology designed to empower and automate the surgical environment, with a focus on medical robotics and computer-assisted surgery. The core technology acquired under the MST Purchase Agreement is a software-based image analytics information platform powered by advanced visualization, scene recognition, artificial intelligence, machine learning and data analytics.

 

Under the terms of the MST Purchase Agreement, at the closing the Buyers purchased substantially all of the assets of MST. The acquisition price consisted of two tranches. At or prior to the closing of the transaction the Buyers paid $5.8 million in cash and the Company issued approximately 242,310 shares of the Company’s common stock (the "Initial Shares"). A second tranche of $6.6 million in additional consideration was payable in cash, stock or cash and stock, at the discretion of the Company, within one year after the closing date. On August 7, 2019, the Company notified MST that the Company would satisfy the additional consideration payment of $6.6 million by issuing shares of TransEnterix common stock. The number of shares issued to MST was 370,423 (the “Additional Consideration Shares” and, together with the Initial Shares, the “Securities Consideration”). The Additional Consideration Shares contained certain lock-up restrictions all of which lapsed on February 7, 2020.

 

On July 3, 2019 the Company entered into a System Sale Agreement with Great Belief International Limited or GBIL to sell certain assets related to the AutoLap technology. On October 15, 2019, the Company amended the prior AutoLap Sale Agreement with GBIL. Pursuant to the amended agreement the Company sold the AutoLap laparoscopic vision system, or AutoLap, and related assets to GBIL. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap. The purchase price was $17.0 million, all of which was received in 2019 in the form of $16 million in cash and a commitment by GBIL to pay $1.0 million to settle certain Company obligations in China. GBIL subsequently paid the obligation. Under the amended AutoLap Agreement, the Company entered into a cross-license agreement with GBIL to retain rights to use any AutoLap-related intellectual property sold to GBIL, and to non-exclusively license additional intellectual property to GBIL. The Company recorded a $16.0 million gain on the sale of the AutoLap assets during the year ended December 31, 2019, which represented the proceeds received in excess of the carrying value of the assets, less contract costs.

 

Senhance Surgical Robotic System

On September 21, 2015, the Company completed the strategic acquisition, through its wholly owned subsidiary TransEnterix International, from Sofar, of all of the assets, employees and contracts related to the advanced robotic system for minimally invasive laparoscopic surgery now known as the Senhance System. Under the terms of the Purchase Agreement, the consideration consisted of the issuance of (i) 1,195,647 shares of the Company’s common stock (the “Securities Consideration”) and (ii) approximately $25.0 million U.S. Dollars and 27.5 million Euro in cash consideration (the “Cash Consideration”).

 

17

 

On December 30, 2016, the Company and Sofar entered into an Amendment to the Purchase Agreement (the “Amendment”) to restructure the terms of the second tranche of the Cash Consideration (the “Second Tranche”). The initial Securities Consideration was issued in full at the closing of the Senhance Acquisition; under the Amendment, the second tranche of the Cash Consideration was restructured, and an additional issuance of 286,360 shares of the Company’s common stock with an aggregate fair market value of 5.0 million occurred in January 2017. Following the Amendment, the total Cash Consideration was $25.0 million and approximately 22.5 million, of which all but 15.0 million has been paid as of June 30, 2020.  The remaining Cash Consideration to be paid is the third tranche of the Cash Consideration (the “Third Tranche”) of 15.0 million which shall be payable upon achievement of trailing revenues from sales or services contracts of the Senhance System of at least 25.0 million over a calendar quarter.

 

The fourth tranche of the Cash Consideration of 2.5 million was payable in installments by December 31 of each year as reimbursement for certain debt payments made by Sofar under an existing Sofar loan agreement in such year, with payments beginning as of December 31, 2017. As of June 30, 2020, the Company had paid all installments of the fourth tranche.

 

The Third Tranche payments will be accelerated in the event that (i) the Company or TransEnterix International is acquired, (ii) the Company significantly reduces or suspends selling efforts of the Senhance System, or (iii) the Company acquires a business that offers alternative products that are directly competitive with the Senhance System. The remaining amounts due to Sofar are included in contingent consideration as of June 30, 2020 and December 31, 2019 at their estimated fair value.

 

 

4.

Fair Value

 

The carrying values of accounts receivable, accounts payable, and certain accrued expenses as of June 30, 2020 and December 31, 2019, approximate their fair values due to the short-term nature of these items.

 

The Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities include cash and cash equivalents, restricted cash, contingent consideration and warrant liabilities. ASC 820-10 (“Fair Value Measurement Disclosure”) requires the valuation using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are:

 

 

Level 1, defined as quoted prices in active markets for identical assets or liabilities;

 

Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and

 

Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

 

The determination of where an asset or liability falls in the hierarchy requires significant judgment; however, the Company expects changes in classifications between levels will be rare. The Company did not have any transfers of assets and liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy during the three and six months ended June 30, 2020 and the year ended December 31, 2019.

 

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

 

18

 

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

 

   

June 30, 2020

 
   

(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

  $ 15,603     $ -     $ -     $ 15,603  

Restricted cash

    627       -       -       627  

Total assets measured at fair value

  $ 16,230     $ -     $ -     $ 16,230  

Liaiblities measured at fair value

                               

Contingent consideration

  $ -     $ -     $ 2,278     $ 2,278