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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 September 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 October 31, 2020 was 99,910,279.

 



 

 

 

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

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

48
     
 

SIGNATURES

49

 

 

 

 

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., TransEnterix Netherlands B.V. and TransEnterix Canada, Inc.

 

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Revenue:

                

Product

 $436  $1,649  $992  $6,820 

Service

  378   375   1,076   1,024 

Total revenue

  814   2,024   2,068   7,844 
                 

Cost of revenue:

                

Product

  720   2,399   2,353   6,628 

Service

  703   1,047   2,220   3,221 

Total cost of revenue

  1,423   3,446   4,573   9,849 
                 

Gross loss

  (609)  (1,422)  (2,505)  (2,005)

Operating Expenses:

                

Research and development

  4,673   5,884   12,867   17,834 

Sales and marketing

  3,136   6,883   10,291   22,425 

General and administrative

  3,462   5,908   10,426   14,959 

Amortization of intangible assets

  2,780   2,558   7,964   7,754 

Change in fair value of contingent consideration

  502   (11,647)  1,770   (9,689)

Restructuring and other charges

  -   -   858   - 

Goodwill impairment

  -   78,969   -   78,969 

Intangible assets impairment

  -   7,912   -   7,912 

Loss from sale of SurgiBot assets, net

  -   -   -   97 

Acquisition related costs

  -   (40)  -   5 

Total Operating Expenses

  14,553   96,427   44,176   140,266 
                 

Operating Loss

  (15,162)  (97,849)  (46,681)  (142,271)

Other Income (Expense):

                

Change in fair value of warrant liabilities

  63   614   (206)  3,036 

Interest income

  3   63   34   559 

Interest expense

  -   (1,230)  -   (3,407)

Other income (expense), net

  16   (439)  (54)  (935)

Total Other Income (Expense), net

  82   (992)  (226)  (747)
                 

Loss before income taxes

  (15,080)  (98,841)  (46,907)  (143,018)

Income tax (expense) benefit

  (2)  1,070   1,386   2,549 
                 

Net loss

  (15,082)  (97,771)  (45,521)  (140,469)

Deemed dividend related to beneficial conversion feature of preferred stock

  -   -   (412)  - 

Deemed dividend related to conversion of preferred stock into common stock

  -   -   (299)  - 

Net loss attributable to common stockholders

  (15,082)  (97,771)  (46,232)  (140,469)
                 

Comprehensive loss:

                

Net loss

  (15,082)  (97,771)  (45,521)  (140,469)

Foreign currency translation gain (loss)

  2,101   (3,670)  2,191   (4,379)
                 

Comprehensive loss

 $(12,981) $(101,441) $(43,330) $(144,848)
                 

Net loss per common share attributable to common stockholders - basic

 $(0.15) $(5.55) $(0.77) $(8.26)

Net loss per common share attributable to common stockholders - diluted

 $(0.15) $(5.55) $(0.77) $(8.34)

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

  97,538   17,629   59,737   17,015 

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

  97,538   17,741   59,737   17,208 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

(Unaudited)

 

  

September 30, 2020

  

December 31, 2019

 

Assets

        

Current Assets:

        

Cash and cash equivalents

 $19,964  $9,598 

Accounts receivable, net

  903   620 

Inventories

  10,856   10,653 

Other current assets

  5,780   7,084 

Total Current Assets

  37,503   27,955 
         

Restricted cash

  1,154   969 

Inventories, net of current portion

  6,769   7,594 

Property and equipment, net

  8,702   4,706 

Intellectual property, net

  24,139   28,596 

In-process research and development

  -   2,470 

Net deferred tax assets

  41   - 

Other long term assets

  1,836   2,489 

Total Assets

 $80,144  $74,779 
         

Liabilities and Stockholders' Equity

        

Current Liabilities:

        

Accounts payable

 $2,973  $3,579 

Accrued expenses

  7,492   8,553 

Deferred revenue - current portion

  818   818 

Notes payable - current portion, net of debt discount

  279   - 

Contingent consideration - current portion

  -   73 

Total Current Liabilities

  11,562   13,023 
         

Long Term Liabilities:

        

Deferred revenue - less current portion

  -   27 

Contingent consideration - less current portion

  2,780   1,011 

Notes payable, net of issuance costs

  2,536   - 

Warrant liabilities

  124   2,388 

Net deferred tax liabilities

  -   1,392 

Other long term liabilities

  973   1,403 

Total Liabilities

  17,975   19,244 
         

Commitments and Contingencies (Note 13)

          
         

Stockholders' Equity:

        

Common stock $0.001 par value, 750,000,000 shares authorized at September 30, 2020 and December 31, 2019; 99,879,029 and 20,691,301 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  100   21 

Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding at September 30, 2020 and December 31, 2019

  -   - 

Additional paid-in capital

  770,368   720,484 

Accumulated deficit

  (709,120

)

  (663,600

)

Accumulated other comprehensive income (loss)

  821   (1,370

)

Total Stockholders' Equity

  62,169   55,535 

Total Liabilities and Stockholders' Equity

 $80,144  $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 
                                         

Stock-based compensation

  -   -   -   -   -   -   1,944   -   -   1,944 

Award of restricted stock units

  119   -   -   -   -   -   -   -   -   - 

Issuance of common stock, net of issuance costs

  42,857   43   -   -   -   -   13,606   -   -   13,649 

Other comprehensive income

  -   -   -   -   -   -   -   -   2,101   2,101 

Net loss

  -   -   -   -   -   -   -   (15,082

)

  -   (15,082

)

Balance, September 30,2020

  99,879  $100   -  $-   -  $-  $770,368  $(709,120

)

 $821  $62,169 
                                         
                                         

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 
                                         

Stock-based compensation

  -   -   -   -   -   -   3,391   -   -   3,391 

Issuance of common stock, net of issuance costs

  2,545   3   -   -   -   -   23,722   -   -   23,725 

Issuance of common stock consideration of MST

  370   -   -   -   -   -   6,600   -   -   6,600 

Exercise of stock options and warrants

  1   -   -   -   -   -   6   -   -   6 

Award of restricted stock units

  9   -   -   -   -   -   -   -   -   - 

Other comprehensive income

  -   -   -   -   -   -   -   -   (3,670

)

  (3,670

)

Net loss

  -   -   -   -   -   -   -   (97,771

)

  -   (97,771

)

Balance, September 30, 2019

  19,665  $20   -  $-   -  $-  $716,655  $(649,866

)

 $(3,041

)

 $63,768 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

TransEnterix, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

Operating Activities:

        

Net loss

 $(45,521) $(140,469)

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

        

Loss from sale of SurgiBot assets, net

  -   97 

Goodwill and intangible assets impairment

  -   86,881 

Depreciation

  2,015   1,651 

Amortization of intangible assets

  7,964   7,754 

Amortization of debt discount and debt issuance costs

  -   1,437 

Amortization of short-term investment discount

  -   (328)

Stock-based compensation

  5,800   9,727 

Interest expense on deferred consideration - MST acquisition

  -   762 

Deferred tax benefit

  (1,386)  (2,549)

Bad debt expense

  -   1,630 

Write down of inventory

  -   761 

Change in fair value of warrant liabilities

  206   (3,036)

Change in fair value of contingent consideration

  1,770   (9,689)
         

Changes in operating assets and liabilities:

        

Accounts receivable

  (252)  4,313 

Interest receivable

  -   3 

Inventories

  (4,410)  (14,141)

Other current and long term assets

  2,233   (2,313)

Accounts payable

  (706)  (914)

Accrued expenses

  (1,191)  (1,439)

Deferred revenue

  (56)  (867)

Other long term liabilities

  (376)  1,613 

Net cash and cash equivalents used in operating activities

  (33,910)  (59,116)
         

Investing Activities:

        

Purchase of short-term investments

  -   (12,883)

Proceeds from maturities of short-term investments

  -   65,000 

Purchase of property and equipment

  (3)  (392)

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

  (3)  51,725 
         

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

  24,861   23,725 

Proceeds from notes payable and warrants, net of issuance costs

  2,815   (30)

Payment of note payable

  -   (15,000)

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

  (33)  (499)

Payment of contingent consideration

  (74)  - 

Proceeds from exercise of stock options and warrants

  3,340   539 

Net cash and cash equivalents provided by financing activities

  44,434   8,735 
         

Effect of exchange rate changes on cash and cash equivalents

  30   (191)

Net increase in cash, cash equivalents and restricted cash

  10,551   1,153 

Cash, cash equivalents and restricted cash, beginning of period

  10,567   21,651 

Cash, cash equivalents and restricted cash, end of period

 $21,118  $22,804 
         

Supplemental Disclosure for Cash Flow Information:

        

Interest paid

 $-  $2,073 
         

Supplemental Schedule of Non-cash Investing and Financing Activities:

        

Transfer of inventories to property and equipment

 $5,839  $478 

Exchange of common stock for Series B Warrants

 $2,470  $- 

Transfer of in-process research and development to intellectual property

 $2,425  $- 

Issuance of common stock - MST acquisition

 $-  $6,600 

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 reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy. The Senhance System is also the first machine-vision system in robotic surgery which is powered by the new Intelligent Surgical Unit™, or ISU™, that enables augmented intelligence in surgery.

 

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 36 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 (the 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 ISU.

 

In February 2020, the Company received CE Mark for the Senhance System and related instruments for pediatric use indications in CE Mark territories. 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.

 

6

 

The Company is focusing on markets with high utilization of laparoscopic technique, including Japan, Western Europe and the United States. The 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. The Company is not focusing on revenue targets, especially in the United States. As further discussed in this report, 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.

 

Soon after implementing this strategy, the Company’s business and customers were negatively impacted by the COVID-19 pandemic, which suspended many elective surgical procedures globally, curtailed travel and necessarily diverted the attention of hospital customers. The Company has taken steps, and continues to take further actions, to minimize the impact of the COVID 19 pandemic on its business. A variety of travel restrictions have caused delays in product installation and training activities. Since 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 its ability to implement its market development activities to place its 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 ongoing business, results of operations and overall financial performance cannot be reasonably estimated at this time.

 

The Company continues to focus on growing its business globally and enhancing the Senhance System capabilities. In September 2020, the Company announced the successful completion of the first surgical procedures using the ISU. In October 2020, the Company announced that Japan has become one of the fastest growing markets for the Senhance System in terms of placements and clinical cases with the addition of a new agreement with Toshima Hospital of the Tokyo Metropolitan Health and Hospitals Corporation to lease and utilize the Senhance Surgical System, and the September 2020 establishment of the first training center for the Senhance System in the Asia-Pacific region in Japan at the Saitama Medical University International Medical Center in the Greater Tokyo Area. In the U.S., in August 2020 the Company announced a 510(k) application to add general surgery indications to existing indications for use and is working with the FDA on such submission. Upon clearance, this is expected to add approximately 800,000 general and bariatric procedures to the Company’s addressable market.

 

As of October 31, 2020, under this new strategy the Company has installed eight Senhance Systems in 2020 under leasing arrangements and has one Senhance System pending installation. Approximately 1,200 procedures have been conducted to date in 2020, which is tracking lower than the Company’s goal as a result of the COVID-19 pandemic.

 

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.

 

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 $709.1 million as of September 30, 2020 and working capital of $26.1 million as of September 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 $13.6 million in net proceeds in the July 2020 public offering (see Note 10). 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), although forgiveness is not assured. 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.

 

At September 30, 2020, the Company had cash and cash equivalents, excluding restricted cash, of approximately $20.0 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.

 

8

 

Use of Estimates

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

 

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

 

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., TransEnterix Netherlands B.V. and TransEnterix Canada, Inc. 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 nine months ended September 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 a bad debt charge totaling $1.6 million during the three and nine months ended September 30, 2019 (none during the three and nine months ended September 30, 2020). The Company had seven customers who constituted 69% of the Company’s net accounts receivable as of September 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 nine customers who accounted for 57% of revenue for the three months ended September 30, 2020 and five customers who accounted for 83% of revenue for the three months ended September 30, 2019. The Company had nine customers who accounted for 58% of revenue for the nine months ended September 30, 2020 and five customers who accounted for 83% of revenue for the nine months ended September 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 September 30, 2020 and December 31, 2019 included $1.2 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 September 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 nine months ended September 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 reclassifies IPR&D assets to intellectual property when development is complete, which generally occurs upon regulatory approval when 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 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. As of March 31, 2020, all IPR&D asset development was completed and reclassified to intellectual property.

 

As of September 30, 2020, there were no remaining IPR&D assets.

 

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). 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 operating lease Senhance System assets, 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:

 

Operating lease assets – Senhance System leasing (in years)

 5   

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

 

 

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.

 

11

 

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 nine months ended September 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.

 

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 training and proctoring services, 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.

 

12

 

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 September 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.

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

U.S.

                

Systems

 $101  $-  $176  $- 

Instruments and accessories

  82   43   149   68 

Services

  106   99   278   359 
Total U.S. revenue  289   142   603   427 
                 

Outside of U.S. ("OUS")

                

Systems

  131   1,276   257   5,341 

Instruments and accessories

  122   330   410   1,411 

Services

  272   276   798   665 
Total OUS revenue  525   1,882   1,465   7,417 
                 

Total

                

Systems

  232   1,276   433   5,341 

Instruments and accessories

  204   373