TransEnterix, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue
|
$
|
2,024
|
|
|
$
|
5,422
|
|
|
$
|
7,844
|
|
|
$
|
16,578
|
|
|
Cost of revenue
|
3,446
|
|
|
4,249
|
|
|
9,849
|
|
|
10,536
|
|
|
Gross (loss) profit
|
(1,422
|
)
|
|
1,173
|
|
|
(2,005
|
)
|
|
6,042
|
|
|
Operating Expenses (Income)
|
|
|
|
|
|
|
|
|
Research and development
|
5,884
|
|
|
4,838
|
|
|
17,834
|
|
|
15,384
|
|
|
Sales and marketing
|
6,883
|
|
|
5,819
|
|
|
22,425
|
|
|
17,835
|
|
|
General and administrative
|
5,908
|
|
|
3,686
|
|
|
14,959
|
|
|
9,989
|
|
|
Amortization of intangible assets
|
2,558
|
|
|
2,674
|
|
|
7,754
|
|
|
8,244
|
|
|
Change in fair value of contingent consideration
|
(11,647
|
)
|
|
(1,358
|
)
|
|
(9,689
|
)
|
|
81
|
|
|
Acquisition related costs
|
(40
|
)
|
|
345
|
|
|
5
|
|
|
345
|
|
|
Goodwill impairment
|
78,969
|
|
|
—
|
|
|
78,969
|
|
|
—
|
|
|
Intangible assets impairment
|
7,912
|
|
|
—
|
|
|
7,912
|
|
|
—
|
|
|
Loss (gain) from sale of SurgiBot assets, net
|
—
|
|
|
44
|
|
|
97
|
|
|
(11,915
|
)
|
|
Reversal of transfer fee accrual
|
—
|
|
|
(2,994
|
)
|
|
—
|
|
|
(2,994
|
)
|
|
Total Operating Expenses
|
96,427
|
|
|
13,054
|
|
|
140,266
|
|
|
36,969
|
|
|
Operating Loss
|
(97,849
|
)
|
|
(11,881
|
)
|
|
(142,271
|
)
|
|
(30,927
|
)
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities
|
614
|
|
|
(8,760
|
)
|
|
3,036
|
|
|
(24,438
|
)
|
|
Interest income
|
63
|
|
|
391
|
|
|
559
|
|
|
982
|
|
|
Interest expense
|
(1,230
|
)
|
|
(685
|
)
|
|
(3,407
|
)
|
|
(3,398
|
)
|
|
Other expense
|
(439
|
)
|
|
(52
|
)
|
|
(935
|
)
|
|
(109
|
)
|
|
Total Other Income (Expense), net
|
(992
|
)
|
|
(9,106
|
)
|
|
(747
|
)
|
|
(26,963
|
)
|
|
Loss before income taxes
|
(98,841
|
)
|
|
(20,987
|
)
|
|
(143,018
|
)
|
|
(57,890
|
)
|
|
Income tax benefit
|
1,070
|
|
|
781
|
|
|
2,549
|
|
|
2,554
|
|
|
Net loss
|
$
|
(97,771
|
)
|
|
$
|
(20,206
|
)
|
|
$
|
(140,469
|
)
|
|
$
|
(55,336
|
)
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
(3,670
|
)
|
|
(561
|
)
|
|
(4,379
|
)
|
|
(2,651
|
)
|
|
Comprehensive loss
|
$
|
(101,441
|
)
|
|
$
|
(20,767
|
)
|
|
$
|
(144,848
|
)
|
|
$
|
(57,987
|
)
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.43
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.27
|
)
|
|
Diluted
|
$
|
(0.43
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.27
|
)
|
|
Weighted average number of shares used in computing net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
229,178
|
|
|
209,088
|
|
|
221,193
|
|
|
204,531
|
|
|
Diluted
|
230,634
|
|
|
209,088
|
|
|
223,705
|
|
|
204,531
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
22,106
|
|
|
$
|
21,061
|
|
|
Short-term investments
|
—
|
|
|
51,790
|
|
Accounts receivable, net
|
2,352
|
|
|
8,560
|
|
Inventories
|
13,657
|
|
|
10,941
|
|
Interest receivable
|
22
|
|
|
26
|
|
Other current assets
|
8,762
|
|
|
9,205
|
|
Total Current Assets
|
46,899
|
|
|
101,583
|
|
Restricted cash
|
698
|
|
|
590
|
|
Inventories, net of current portion
|
9,336
|
|
|
—
|
|
|
Property and equipment, net
|
5,428
|
|
|
6,337
|
|
Intellectual property, net
|
30,289
|
|
|
39,716
|
|
In-process research and development
|
2,400
|
|
|
10,747
|
|
Goodwill
|
—
|
|
|
80,131
|
|
Other long term assets
|
2,584
|
|
|
203
|
|
Total Assets
|
$
|
97,634
|
|
|
$
|
239,307
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
$
|
3,403
|
|
|
$
|
4,433
|
|
|
Accrued expenses
|
8,094
|
|
9,619
|
|
Deferred revenue – current portion
|
884
|
|
|
1,733
|
|
Contingent consideration – current portion
|
71
|
|
|
72
|
|
Deferred consideration - MST Acquisition
|
—
|
|
|
5,962
|
|
Total Current Liabilities
|
12,452
|
|
|
21,819
|
|
Long Term Liabilities
|
|
|
|
|
Deferred revenue – less current portion
|
46
|
|
|
109
|
|
Contingent consideration – less current portion
|
877
|
|
|
10,565
|
|
Notes payable – net of debt discount
|
15,343
|
|
|
28,937
|
|
Warrant liabilities
|
1,600
|
|
|
4,636
|
|
Net deferred tax liabilities
|
1,960
|
|
|
4,720
|
|
Other long term liabilities
|
1,590
|
|
|
—
|
|
|
Total Liabilities
|
33,868
|
|
|
70,786
|
|
Commitments and Contingencies (Note 17)
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
Common stock $0.001 par value, 750,000,000 shares authorized at
September 30, 2019 and December 31, 2018; 255,652,460 and 216,345,984 shares
issued and outstanding at September 30, 2019 and December 31, 2018, respectively
|
255
|
|
|
216
|
|
Additional paid-in capital
|
716,420
|
|
|
676,373
|
|
Accumulated deficit
|
(649,868
|
)
|
|
(509,406)
|
|
Accumulated other comprehensive (loss) income
|
(3,041
|
)
|
|
1,338
|
|
Total Stockholders’ Equity
|
63,766
|
|
|
168,521
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
97,634
|
|
|
$
|
239,307
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Total
Stockholders’
Equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance, December 31, 2018
|
216,346
|
|
$
|
216
|
|
|
—
|
|
|
—
|
|
|
$
|
676,373
|
|
|
$
|
(509,406
|
)
|
|
$
|
1,338
|
|
|
$
|
168,521
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,981
|
|
|
—
|
|
|
—
|
|
|
2,981
|
|
|
Exercise of stock options and warrants
|
159
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
236
|
|
|
—
|
|
|
—
|
|
|
236
|
|
|
Award of restricted stock units
|
613
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
194
|
|
|
—
|
|
|
(499
|
)
|
|
—
|
|
|
—
|
|
|
(499
|
)
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(194
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cumulative effect of change in accounting principle (Note 2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,949
|
)
|
|
(1,949
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,525
|
)
|
|
—
|
|
|
(22,525
|
)
|
|
Balance, March 31, 2019
|
217,118
|
|
|
$
|
217
|
|
|
—
|
|
|
—
|
|
|
$
|
679,084
|
|
|
$
|
(531,924
|
)
|
|
$
|
(611
|
)
|
|
$
|
146,766
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,355
|
|
|
—
|
|
|
—
|
|
|
3,355
|
|
|
Exercise of stock options and warrants
|
324
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
297
|
|
|
—
|
|
|
—
|
|
|
297
|
|
|
Award of restricted stock units
|
183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,240
|
|
|
1,240
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,173
|
)
|
|
—
|
|
|
(20,173
|
)
|
|
Balance, June 30, 2019
|
217,625
|
|
|
$
|
217
|
|
|
—
|
|
|
—
|
|
|
$
|
682,736
|
|
|
$
|
(552,097
|
)
|
|
$
|
629
|
|
|
$
|
131,485
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,391
|
|
|
—
|
|
|
—
|
|
|
3,391
|
|
|
Issuance of common stock, net of issuance costs
|
33,084
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
23,692
|
|
|
—
|
|
|
—
|
|
|
23,725
|
|
|
Issuance of common stock consideration to MST
|
4,816
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
6,595
|
|
|
—
|
|
|
—
|
|
|
6,600
|
|
|
Exercise of stock options and warrants
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
Award of restricted stock units
|
117
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,670
|
)
|
|
(3,670
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97,771
|
)
|
|
—
|
|
|
(97,771
|
)
|
|
Balance, September 30, 2019
|
255,653
|
|
|
255
|
|
|
—
|
|
|
—
|
|
|
716,420
|
|
|
(649,868
|
)
|
|
(3,041
|
)
|
|
63,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Income
|
|
Total
Stockholders’
Equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance, December 31, 2017
|
199,282
|
|
$
|
199
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
621,261
|
|
|
$
|
(447,640
|
)
|
|
$
|
5,028
|
|
|
$
|
178,848
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,834
|
|
|
—
|
|
|
—
|
|
|
1,834
|
|
|
Issuance of common stock and warrants, net of issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Exercise of stock options and warrants
|
1,038
|
|
1
|
|
—
|
|
|
—
|
|
|
2,227
|
|
—
|
|
|
—
|
|
|
2,228
|
|
Award of restricted stock units
|
367
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
174
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(174
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock related to sale of SurgiBot assets
|
1,286
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
2,999
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
Cumulative effect of change in accounting principle
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,308
|
|
|
2,308
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(882
|
)
|
|
—
|
|
|
(882
|
)
|
|
Balance, March 31, 2018
|
201,973
|
|
|
$
|
201
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
628,332
|
|
|
$
|
(448,511
|
)
|
|
$
|
7,336
|
|
|
$
|
187,358
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,370
|
|
|
—
|
|
|
—
|
|
|
2,370
|
|
|
Issuance of common stock and warrants, net of issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
Exercise of stock options and warrants
|
5,735
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
14,639
|
|
|
—
|
|
|
—
|
|
|
14,645
|
|
|
Award of restricted stock units
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,398
|
)
|
|
(4,398
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,248
|
)
|
|
—
|
|
|
(34,248
|
)
|
|
Balance, June 30, 2018
|
207,712
|
|
|
$
|
207
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
645,332
|
|
|
$
|
(482,759
|
)
|
|
$
|
2,938
|
|
|
$
|
165,718
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,490
|
|
|
—
|
|
|
—
|
|
|
2,490
|
|
|
Issuance of common stock and warrants, net of issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
277
|
|
|
—
|
|
|
—
|
|
|
277
|
|
|
Exercise of stock options and warrants
|
4,255
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
18,003
|
|
|
—
|
|
|
—
|
|
|
18,007
|
|
|
Award of restricted stock units
|
665
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
361
|
|
|
—
|
|
|
(1,663
|
)
|
|
—
|
|
|
—
|
|
|
(1,663
|
)
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(361
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(561
|
)
|
|
(561
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,206
|
)
|
|
—
|
|
|
(20,206
|
)
|
|
Balance, September 30, 2018
|
212,632
|
|
|
$
|
212
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
664,439
|
|
|
$
|
(502,965
|
)
|
|
$
|
2,377
|
|
|
$
|
164,063
|
|
See accompanying notes to consolidated financial statements.
|
TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
Operating Activities
|
|
|
|
|
Net loss
|
$
|
(140,469
|
)
|
|
$
|
(55,336
|
)
|
|
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
|
|
|
|
|
Loss (gain) from sale of SurgiBot assets, net
|
97
|
|
|
(11,915
|
)
|
|
Goodwill and intangible assets impairment
|
86,881
|
|
|
—
|
|
|
Depreciation
|
1,651
|
|
|
1,876
|
|
|
Amortization of intangible assets
|
7,754
|
|
|
8,244
|
|
|
Amortization of debt discount and debt issuance costs
|
1,437
|
|
|
575
|
|
|
Amortization of short-term investment discount
|
(328
|
)
|
|
(51
|
)
|
|
Interest expense on deferred consideration - MST acquisition
|
762
|
|
|
—
|
|
|
Stock-based compensation
|
9,727
|
|
|
6,694
|
|
|
Deferred tax benefit
|
(2,549
|
)
|
|
(2,572
|
)
|
|
Bad debt expense
|
1,630
|
|
|
—
|
|
|
Write down of inventory
|
761
|
|
|
—
|
|
|
Change in fair value of warrant liabilities
|
(3,036
|
)
|
|
24,438
|
|
|
Change in fair value of contingent consideration
|
(9,689
|
)
|
|
81
|
|
|
Loss on extinguishment of debt
|
—
|
|
|
1,400
|
|
|
Recovery of transfer fee
|
—
|
|
|
(2,994
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
4,313
|
|
|
(4,262
|
)
|
|
Interest receivable
|
3
|
|
|
28
|
|
|
Inventories
|
(14,141
|
)
|
|
(1,276
|
)
|
|
Other current and long term assets
|
(2,313
|
)
|
|
27
|
|
|
Accounts payable
|
(914
|
)
|
|
(903
|
)
|
|
Accrued expenses
|
(1,439
|
)
|
|
(56
|
)
|
|
Deferred revenue
|
(867
|
)
|
|
361
|
|
|
Other long term liabilities
|
1,613
|
|
|
—
|
|
|
Net cash and cash equivalents used in operating activities
|
$
|
(59,116
|
)
|
|
$
|
(35,641
|
)
|
|
Investing Activities
|
|
|
|
|
Purchase of short-term investments
|
(12,883
|
)
|
|
(39,619
|
)
|
|
Proceeds from maturities of short-term investments
|
65,000
|
|
|
—
|
|
|
Proceeds related to sale of SurgiBot assets, net
|
—
|
|
|
4,496
|
|
|
Purchase of property and equipment
|
(392
|
)
|
|
(490
|
)
|
|
Proceeds from sale of property and equipment
|
—
|
|
|
32
|
|
|
Net cash and cash equivalents provided by (used in) investing activities
|
51,725
|
|
|
(35,581
|
)
|
|
Financing Activities
|
|
|
|
|
Payment of note payable
|
(15,000
|
)
|
|
(15,305
|
)
|
|
Proceeds from issuance of debt and warrants, net of issuance costs
|
(30
|
)
|
|
18,828
|
|
|
Payment of contingent consideration
|
—
|
|
|
(395
|
)
|
|
Proceeds from issuance of common stock and warrants, net of issuance costs
|
23,725
|
|
|
279
|
|
|
Taxes paid related to net share settlement of vesting of restricted stock units
|
(499
|
)
|
|
(1,662
|
)
|
|
Proceeds from issuance of common stock related to sale of SurgiBot assets
|
—
|
|
|
3,000
|
|
|
Proceeds from exercise of stock options and warrants
|
539
|
|
|
11,396
|
|
|
Net cash and cash equivalents provided by financing activities
|
8,735
|
|
|
16,141
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(191
|
)
|
|
(114
|
)
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
1,153
|
|
|
(55,195
|
)
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
21,651
|
|
|
97,606
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
$
|
22,804
|
|
|
$
|
42,411
|
|
|
TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure for Cash Flow Information
|
|
|
|
|
Interest paid
|
$
|
2,073
|
|
|
$
|
1,135
|
|
|
Supplemental Schedule of Noncash Investing and Financing Activities
|
|
|
|
|
Transfer of inventories to property and equipment
|
$
|
478
|
|
|
$
|
2,160
|
|
|
Transfer of property and equipment to inventory
|
$
|
—
|
|
|
$
|
648
|
|
|
Reclass of warrant liability to common stock and additional paid-in capital
|
$
|
—
|
|
|
$
|
23,485
|
|
|
Cashless exercise of warrants
|
$
|
—
|
|
|
$
|
4,272
|
|
|
Issuance of common stock - MST acquisition
|
$
|
6,600
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
|
1.
|
Organization and Capitalization
|
TransEnterix, Inc. (the “Company”) 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. The Company is focused on the market development for and commercialization of the Senhance™ System, which digitizes laparoscopic minimally invasive surgery. The Senhance System allows for robotic precision, haptic feedback, surgeon camera control via eye sensing and improved ergonomics while offering responsible economics.
The Senhance System has a CE Mark in Europe for laparoscopic abdominal and pelvic surgery, as well as limited thoracic operations excluding cardiac and vascular surgery. On October 13, 2017, the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery. These indications cover 23 procedures, including benign and oncologic procedures. In May 2018, the indications for use expanded when the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery for a total of 28 indicated procedures. The Senhance System is available for sale in the United States, the European Union, Japan, Taiwan and select other countries.
The Senhance System is a multi-port robotic surgery system that allows multiple robotic arms to control instruments and a camera. The system features advanced technology to enable surgeons with haptic feedback and the ability to move the camera via eye movement.
On October 31, 2018, the Company acquired the assets, intellectual property and highly experienced multidisciplinary personnel of MST Medical Surgical Technologies, Inc., or MST, an Israeli-based medical technology company. Through this acquisition the Company acquired MST’s AutoLap™ assets and technology, one of the only image-guided robotic scope positioning systems with FDA clearance and CE Mark. The Company believes MST’s image analytics technology will accelerate and drive meaningful Senhance System developments, and allow the Company to expand the Senhance System to add augmented, intelligent vision capability. See Note 3 for a description of the acquisition transaction. The Company sold the AutoLap assets, while retaining the core technology, in October 2019. See Note 18 for a description of the asset sale.
During 2018 and early 2019, the Company successfully obtained FDA clearance and a CE Mark for 3 millimeter diameter instruments and its Senhance ultrasonic 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 Company has also developed the SurgiBot System, a single-port, robotically enhanced laparoscopic surgical platform. In December 2017, the Company entered into an agreement with Great Belief International Limited, or GBIL, to advance the SurgiBot System towards global commercialization. The agreement transferred ownership of the SurgiBot System assets to GBIL, while the Company retained the option to distribute or co-distribute the SurgiBot System outside of China. GBIL intends to manufacture the SurgiBot System in China, obtain Chinese regulatory clearance from the National Medical Products Administration ("NMPA"), and commercialize in the Chinese market. The agreement provides the Company with proceeds of at least $29.0 million, of which $15.0 million has been received to date. The remaining $14.0 million represents minimum royalties and will be paid beginning at the earlier of receipt of Chinese regulatory approval or March 2023.
On September 18, 2015, the Company entered into a Membership Interest Purchase Agreement, (the “Purchase Agreement”) with Sofar S.p.A., (“Sofar”) as seller, Vulcanos S.r.l. (“Vulcanos”), as the acquired company, and TransEnterix International, Inc. (“TransEnterix International”), a direct, wholly owned subsidiary of the Company that was incorporated in September 2015, as buyer. The closing of the transactions occurred on September 21, 2015 (the “Closing Date”) pursuant to which the Company acquired all of the membership interests of Vulcanos from Sofar (now known as the “Senhance Acquisition”), and changed the name of Vulcanos to TransEnterix Italia S.r.l (“TransEnterix Italia”). The Senhance Acquisition included all of the assets, employees and contracts related to the Senhance System. See Note 3 for a description of the related transactions.
On September 3, 2013, TransEnterix Surgical, Inc. a Delaware corporation (“TransEnterix Surgical”), and SafeStitch Medical, Inc., a Delaware corporation (“SafeStitch”) consummated a merger transaction whereby TransEnterix Surgical merged with a merger subsidiary of SafeStitch, with TransEnterix Surgical as the surviving entity in the merger (the “Merger”). As a result of the Merger, TransEnterix Surgical became a wholly owned subsidiary of SafeStitch. On December 6, 2013, SafeStitch changed its name to TransEnterix, Inc. and increased the authorized shares of common stock from 225,000,000 to 750,000,000, and authorized 25,000,000 shares of preferred stock, par value $0.01 per share.
As used herein, the term “Company” refers to the combination of SafeStitch and TransEnterix Surgical after giving effect to the Merger, and includes TransEnterix International, 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.
|
|
|
|
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 2018 Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”) have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The accompanying Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, SafeStitch LLC, TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l., TransEnterix Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V. All material inter-company accounts and transactions have been eliminated in consolidation.
Going Concern
The Company's consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $649.9 million as of September 30, 2019, and has working capital of $34.4 million as of September 30, 2019. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. In order to continue as a going concern, the Company will need, among other things, additional capital resources.
Traditionally, the Company has raised additional capital through equity offerings. Management's plan to obtain such resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into a strategic collaboration, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of our markets. In addition, the Company may consider fundamental business combination transactions. If the Company is unable to obtain adequate capital through one of these methods, or if expected capital from existing agreements is not received when due, or at all, it would need to reduce its sales and marketing and administrative expenses and delay research and development projects, including the purchase of equipment and supplies, until it is able to obtain sufficient funds. If such sufficient funds are not received on a timely basis, the Company would then need to pursue a plan to license or sell its assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection. However, management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to meet its future financial covenants on its existing debt, and to continue as a going concern within one year from the date that these financial statements are issued. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
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.
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, 2019 and December 31, 2018 includes $0.7 million and $0.6 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards and automobile leases.
Short-term Investments
Short-term investments are considered to be “held-to-maturity” and are carried at amortized cost using the effective interest method. As of September 30, 2019 and December 31, 2018, short-term investments consisted of $0.0 million and $51.8 million, respectively, in U.S. government securities, all of which mature in less than a year.
The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period. The Company has determined that its debt securities should be classified as held-to-maturity as of December 31, 2018. The Company had no debt securities as of September 30, 2019. This classification as of December 31, 2018 was based upon management’s determination that it has the positive intent and ability to hold the securities until their maturity dates, as the investments mature within six months and the underlying cash invested in these securities is not required prior to the investments maturity. Due to the short-term maturities of these instruments, the amortized cost approximates the related fair values, which are based on level 1 inputs as defined in Note 5. As of December 31, 2018, the gross holding gains and losses were immaterial.
The Company reviews its short-term investments for other-than-temporary impairment if the cost exceeds the fair value. No such impairment was recorded as of December 31, 2018.
Concentrations and Credit Risk
The Company’s principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents, including amounts held in money market accounts and short-term investments. 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's overseas cash deposits follows the EU Directive, whereby €0.1 million is deemed an appropriate level of protection, with deposits covered per depositor per bank. The Company’s short-term investments as of December 31, 2018 consist of U.S. government securities. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks on such accounts.
The Company’s accounts receivable are derived from sales to customers located throughout the world. The Company evaluates its customers’ financial condition and, generally, requires no collateral from its customers. The Company provides reserves for potential credit losses and recorded a bad debt charge totaling $1.6 million during the three months ended September 30, 2019. The Company had five customers who constituted 90% of the Company’s net accounts receivable at September 30, 2019. The Company had five customers who constituted 89% of the Company’s net accounts receivable at December 31, 2018. The Company had five customers who accounted for 83% of sales for the three months ended September 30, 2019 and four different customers who accounted for 96% of sales for the three months ended September 30, 2018. For the nine months ended September 30, 2019, the Company had five customers who accounted for 83% of the Company's net revenue, while for the nine months ended September 30, 2018, the Company had five different customers who accounted for 68% of the Company's net revenue.
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 collectibility.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or net realizable value. Inventory costs include direct materials, direct labor, and normal manufacturing overhead. The Company records reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. Management considers forecast demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Any inventory on hand at the measurement date in excess of the Company's current requirements based on anticipated levels of sales is classified as long-term on the Company's consolidated balance sheets. The Company's classification of long-term inventory requires it to estimate the portion of on hand inventory that can be realized over the upcoming twelve months.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over 5 to 10 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Intellectual property consists of purchased patent rights and developed technology acquired as part of a business acquisition. Amortization of the patent rights is recorded using the straight-line method over the estimated useful life of the patents of 10 years. Amortization of the developed technology is recorded using the straight-line method over the estimated useful life of 5 to 7 years.
The Company continues to operate in one segment, which is considered to be the sole reporting unit and therefore, goodwill is tested for impairment at the enterprise level. Indefinite-lived intangible assets, such as goodwill, are not amortized.
The Company typically tests goodwill for impairment annually, however, recent market conditions as well as reduced forecasts, required that we test our goodwill carrying value as of September 30, 2019.
Pursuant to ASU 2017-04, a company must record a goodwill impairment charge if a reporting unit’s carrying value exceeds its fair value. The Company generally determines the fair value of its reporting unit using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method the key assumptions consider projected sales, cost of sales, and operating expenses. These assumptions were determined by management utilizing the Company's internal operating plan, growth rates for revenues and operating expenses, and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates of capital, current market interest rates, and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change.
Under the “Market Approach — Guideline Public Company Method” the Company identified several publicly traded companies, which it believed had sufficiently relevant similarities. Similar to the income approach discussed above, sales, cost of sales, operating expenses, and their respective growth rates are key assumptions utilized. The market prices of the Company’s common stock and other guideline companies are additional key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.
The results of these two methods were weighted based upon management’s evaluation of the relevance of the two approaches. In the 2019 evaluation, management determined that the income and market value approach should be weighted 50%-50%. In addition, management considered the decline in both the Company's stock price and market capitalization after the September 30, 2019 measurement date as relevant factors in the analysis.
The Company also performed a recoverability test on the intellectual property and concluded that there was no impairment as of September 30, 2019.
During the third quarter of 2019, the Company performed the annual assessment, determined that the goodwill associated with the business was impaired, and recorded impairment charges of $79.0 million. The impairment charge resulted from decreased sales and estimated cash flows and a recent decline in the Company's stock price.
No impairment existed at December 31, 2018.
In-Process Research and Development
In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired, which at the time of acquisition have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.
The IPR&D for the Senhance System was acquired on September 21, 2015. On October 13, 2017, upon receiving FDA clearance and the ability to commercialize the products associated with the IPR&D assets, the assets were deemed definite-lived, reclassified to intellectual property and are now amortized based on their estimated useful lives.
The IPR&D from MST was acquired on October 31, 2018.
The Company performed an impairment test of its IPR&D at the end of the third quarter 2019 as recent events and changes in market conditions indicated that the asset might be impaired.
The impairment test consisted of a comparison of the fair value of the IPR&D with its carrying amount. If the carrying amount of the IPR&D exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
During the third quarter of 2019, the Company concluded that the fair value determined by the market value approach, was lower than the carrying value. As a result, the Company recognized a $7.9 million impairment charge to its IPR&D.
Property and Equipment
Property and equipment consists primarily of machinery, manufacturing equipment, demonstration equipment, computer equipment, furniture, and leasehold improvements, which are recorded at cost.
Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
|
|
|
Machinery, manufacturing and
demonstration equipment
|
3-5 years
|
|
Computer equipment
|
3 years
|
|
Furniture
|
5 years
|
|
Leasehold improvements
|
Lesser of lease term or 3 to 10 years
|
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the long-lived assets, then such assets are written down to their fair value. The Company’s estimates of anticipated cash flows and the remaining estimated useful lives of long-lived assets could be reduced in the future, resulting in a reduction to the carrying amount of long-lived assets.
Contingent Consideration
Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones, future Euro-to-USD exchange rates, and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The contingent consideration is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and comprehensive loss.
Warrant Liabilities
The Company’s Series B Warrants (see Note 14) are measured at fair value using a simulation model which takes into account, as of the valuation date, factors including the current exercise price, the expected life of the warrant, the current price of the underlying stock, its expected volatility, holding cost and the risk-free interest rate for the term of the warrant (see Note 5). The warrant liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations and
comprehensive loss. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known. As the warrant liability is required to be measured at fair value at each reporting date, it is reasonably possible that these estimates and assumptions could change in the near term.
Translation of Foreign Currencies
The functional currency of the Company’s operational foreign subsidiaries is predominately 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 consolidated statements of operations and comprehensive loss. The net gains and losses included in net loss in the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2019 and 2018 were not significant.
Business Acquisitions
Business acquisitions are accounted for using the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired.
Significant judgments are used during this process, particularly with respect to intangible assets. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.
Risk and Uncertainties
The Company is subject to a number of risks similar to other similarly-sized companies in the medical device industry. These risks include, without limitation, our ability to continue as a going concern, the historical lack of profitability; the Company’s ability to raise additional capital; the liquidity and capital resources of its partners; its ability to successfully develop, clinically test and commercialize its products; the timing and outcome of the regulatory review process for its products; changes in the health care and regulatory environments of the United States, the European Union, Japan, Taiwan and other countries in which the Company operates or intends to operate; its ability to attract and retain key management, marketing and scientific personnel; its ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights; its ability to successfully transition from a research and development company to a marketing, sales and distribution concern; competition in the market for robotic surgical devices; and its ability to identify and pursue development of additional products.
Revenue Recognition
The Company adopted ASC Topic 606, Revenue from Contracts with Customers (the “New Revenue Standard”), on January 1, 2018. 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 collectibility of the contract consideration is probable. The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.
The Company’s system sale arrangements generally contain multiple products and services. For these bundled 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 bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company’s system sale arrangements include a combination
of the following performance obligations: system(s), system components, instruments, accessories, and system service. The Company’s system sale arrangements generally include a five years period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are generally included at a stated service price. The Company considers the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, the Company generally satisfies all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a standalone basis.
The Company 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.
|
|
|
|
|
•
|
Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occurs at the time of shipment, but also occurs at the time of delivery depending on the customer arrangement. Accessory products include sterile drapes used to help ensure a sterile field during surgery, vision products such as replacement endoscopes, camera heads, light guides, and other items that facilitate use of the Senhance System.
|
|
|
|
|
•
|
Service. Service revenue is recognized ratably over the term of the service period as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed.
|
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which the Company separately sells the products or services. Due to limited sales to date, standalone selling prices are not directly observable. The Company estimates the standalone selling price using the market assessment approach considering market conditions and entity-specific factors including, but not limited to, features and functionality of the products and services, geographies, type of customer, and market conditions. The Company regularly reviews standalone selling prices and updates these estimates if necessary.
The following table presents revenue disaggregated by type and geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
2018
|
|
2019
|
2018
|
|
|
(in thousands)
(unaudited)
|
|
U.S.
|
|
|
|
|
|
|
Systems
|
$
|
—
|
|
$
|
868
|
|
|
$
|
—
|
|
$
|
1,742
|
|
|
Instruments and accessories
|
43
|
|
426
|
|
|
68
|
|
835
|
|
|
Services
|
99
|
|
87
|
|
|
359
|
|
137
|
|
|
Total U.S. revenue
|
142
|
|
1,381
|
|
|
427
|
|
2,714
|
|
|
Outside of U.S. ("OUS")
|
|
|
|
|
|
|
Systems
|
1,277
|
|
3,450
|
|
|
5,301
|
|
10,686
|
|
|
Instruments and accessories
|
330
|
|
441
|
|
|
1,411
|
|
2,653
|
|
|
Services
|
275
|
|
150
|
|
|
705
|
|
525
|
|
|
Total OUS revenue
|
1,882
|
|
4,041
|
|
|
7,417
|
|
13,864
|
|
|
Total
|
|
|
|
|
|
|
Systems
|
1,277
|
|
4,318
|
|
|
5,301
|
|
12,428
|
|
|
Instruments and accessories
|
373
|
|
867
|
|
|
1,479
|
|
3,488
|
|
|
Services
|
374
|
|
237
|
|
|
1,064
|
|
662
|
|
|
Total revenue
|
$
|
2,024
|
|
$
|
5,422
|
|
|
$
|
7,844
|
|
$
|
16,578
|
|
The Company recognizes sales by geographic area based on the country in which the customer is based.
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 $3.8 million as of September 30, 2019.
The Company invoices its customers based on the billing schedules in its sales arrangements. Contract assets for the periods presented primarily represent the difference between the revenue that was recognized based on the relative selling price of the related performance obligations and the contractual billing terms in the arrangements. Contract assets are included in accounts receivable and totaled $0.2 million and $0.1 million as of September 30, 2019 and 2018, 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 from deferred revenue attributable to warranty and maintenance agreements totaled $0.7 million for the nine months ended September 30, 2019. The Company also recognized$1.3 million during the nine months ended September 30, 2019 related to a 2017 system sale where revenue was deferred until its first clinical use, which occurred in the second quarter of 2019. Revenue recognized from deferred revenue for the nine months ended September 30, 2018 totaled $0.3 million.
In connection with assets recognized from the costs to obtain a contract with a customer, the Company determined that the sales incentive programs for its sales team do not meet the requirements to be capitalized as the Company does not expect to generate future economic benefits from the related revenue from the initial sales transaction.
Cost of Revenue
Cost of revenue consists of contract manufacturing, materials, labor and manufacturing overhead incurred internally to produce the products. Shipping and handling costs incurred by the Company are included in cost of revenue. During the nine months ended September 30, 2019, the Company recorded a $0.8 million charge for inventory obsolescence related to certain system components.
Research and Development Costs
Research and development expenses primarily consist of engineering, product development and regulatory expenses, incurred in the design, development, testing and enhancement of our products. Research and development costs are expensed as incurred.
Stock-Based Compensation
The Company follows ASC 718 “Stock Compensation”, which provides guidance in accounting for share-based awards exchanged for services rendered and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant for awards. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of restricted stock units is determined by the market price of the Company’s common stock on the date of grant. The expense associated with stock-based compensation is recognized on a straight-line basis over the requisite service period of each award.
The Company records as expense the fair value of stock-based compensation awards, including stock options and restricted stock units. Compensation expense for stock-based compensation was approximately $9.7 million and $6.7 million for the nine months ended September 30, 2019 and 2018, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets or liabilities for the temporary differences between financial reporting and tax basis of the Company’s assets and liabilities, and for tax carryforwards at enacted statutory rates in effect for the years in which the asset or liability is expected to be realized. The effect on deferred taxes of a change in tax rates is recognized in income during the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amounts expected to be realized.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted into law, which reduced the U.S. federal corporate income tax rate to 21% for tax years beginning after December 31, 2017. As a result of the newly enacted tax rate, the Company adjusted its U.S. deferred tax assets as of December 31, 2017, by applying the new 21% rate, which resulted in a decrease to the
deferred tax assets and a corresponding decrease to the valuation allowance of approximately $36.1 million, resulting in no impact to the consolidated statement of operations.
The Tax Legislation also implements a territorial tax system. Under the territorial tax system, in general, the Company's foreign earnings will no longer be subject to tax in the U.S. As part of transition to the territorial tax system the Tax Legislation includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The Company has determined that the deemed repatriation applicable to the year ending December 31, 2017 does not result in an additional U.S. income tax liability as it has no undistributed foreign earnings.
The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income (“GILTI”), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a period expense in the year the tax is incurred.
Comprehensive (Loss) Income
Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
Segments
The Company operates in one business segment—the research, development and sale of medical device robotics to improve minimally invasive surgery. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s consolidated operating results. Approximately 28% and 54% of the Company’s total consolidated assets are located within the U.S. as of September 30, 2019 and December 31, 2018, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill, intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable and inventory of $70.5 million and $111.0 million at September 30, 2019 and December 31, 2018, respectively. Total assets outside of the U.S. excluding goodwill amounted to 72% and 34% of total consolidated assets at September 30, 2019 and December 31, 2018, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the nine months ended September 30, 2019 and 2018, 5% and 16%, respectively, of net revenue were generated in the United States; while 95% and 84%, respectively, were generated in Europe and Asia.
Impact of Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing this ASU and has not yet determined the impact ASU 2018-13 may have on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-based Payments. This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The Company adopted ASU 2018-07 on January 1, 2019, whereby the accounting for share-based payments for non-employees and employees will be substantially the same. The adoption of ASU 2018-7 did not have a material impact on the consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in this update are intended to simplify the accounting for certain equity-linked financial instruments and embedded features with down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. Under the new guidance, a down round feature will no longer need to be considered when determining whether certain financial instruments or embedded features should be classified as liabilities or equity instruments. That is, a down round feature will no longer preclude equity classification when assessing whether an instrument or embedded feature is indexed to an entity's own stock. In addition, the amendments clarify existing disclosure requirements for equity-classified instruments. These amendments are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic (842), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for most leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which amends the guidance to add a method of adoption whereby the issuer may elect to recognize a cumulative effect adjustment at the beginning of the period of adoption. ASU 2018-11 Leases (Topic 842), Targeted Improvements, does not require comparative period financial information to be adjusted. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of the identified asset for a period of time, the customer has to have both (i)the right to obtain substantially all of the economic benefits from the use of the identified asset and (ii)the right to direct the use of the identified asset. A contract does not contain an identified asset if the supplier has a substantive right to substitute such asset ("the leasing criteria"). As part of the adoption of ASC 842, the Company performed an assessment of the impact that the new lease recognition standard will have on its consolidated financial statements. The Company’s leases relate to office equipment, company owned vehicles and corporate offices, all of which are classified as operating leases and include fixed payments. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement under the new lease recognition standard.
On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company also elected, for all classes of underlying assets, to not separate non-lease components from lease components and instead to account for them as a single component. The Company elected to apply the transition provisions as of January 1, 2019, the date of adoption, using the effective date approach, and recorded lease ROU assets and related liabilities on its balance sheet without restating prior periods. Many of the Company’s leases include base rental periods coupled with options to renew or terminate the lease, generally at the Company’s discretion. In evaluating the lease term, the Company considers whether renewal is reasonably certain. To the extent a significant economic incentive exists to renew the lease, the option is included within the lease term. Based on the Company’s leases, renewal options generally do not provide a significant economic incentive and are therefore excluded from the lease term. The ROU asset is included in other long-term assets on the consolidated balance sheets. The current portion of operating lease liabilities are presented within accrued liabilities while the non-current portion of operating lease liabilities are presented within other long term liabilities on the consolidated balance sheets and represents the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate, which ranges between 6.1% and 8.5% based on the terms of the lease. The weighted average discount rate as of September 30, 2019 was 7.8%. There was no change to the Company’s consolidated statements of operations and comprehensive loss or cash flows.
The details of this adjustment are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2018
|
|
Adjustments Due
to ASC 842
|
|
Balance at
January 1, 2019
|
|
|
(unaudited)
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
Other long term assets
|
$
|
—
|
|
|
$
|
1,751
|
|
|
$
|
1,751
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
Accrued expenses
|
—
|
|
|
507
|
|
|
507
|
|
|
Other long term liabilities
|
$
|
—
|
|
|
$
|
1,244
|
|
|
$
|
1,244
|
|
As of September 30, 2019, the right-of-use asset totaled $2.4 million and is included within other long term assets on the consolidated balance sheet and the lease liability totaled $2.6 million, of which $1.0 million is classified as current within accrued expenses and $1.6 million is classified as non-current within other long term liabilities on the consolidated balance sheet. Operating lease costs for the three and nine months ended September 30, 2019 totaled $0.3 million and $1.0 million, respectively, and are included within operating expenses in the consolidated statement of operations and comprehensive loss. The weighted average remaining lease term for operating leases as of September 30, 2019 was 2.8 years. Total cash paid for operating leases during the nine month period ended September 30, 2019 was $1.3 million and is included within cash flows from operating activities within the consolidated statement of cash flows.
The following table presents the minimum lease payments as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
October 1, 2019 to December 31, 2019
|
329
|
|
|
|
January 1, 2020 to December 31, 2020
|
1,312
|
|
|
|
January 1, 2021 to December 31, 2021
|
659
|
|
|
|
January 1, 2022 to December 31, 2022
|
398
|
|
|
|
January 1, 2023 to December 31, 2023
|
194
|
|
|
|
January 1, 2024 to December 31, 2024
|
34
|
|
|
|
Thereafter
|
—
|
|
|
|
Total minimum lease payments
|
2,926
|
|
|
|
Less: Amount of lease payments representing interest
|
(294
|
)
|
|
|
Present value of future minimum lease payments
|
2,632
|
|
|
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 (the “Seller”), and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of the Seller, (collectively, the “Buyers”). The closing of the transactions occurred on October 31, 2018, pursuant to which the Company acquired the Seller’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 the Seller. 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 3.15 million 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 4,815,504 (the “Additional Consideration Shares” and, together with the Initial Shares, the “Securities Consideration”).
The MST Purchase Agreement contains customary representations and warranties of the parties and the parties have customary indemnification obligations, which are subject to certain limitations described further in the MST Purchase Agreement.
In connection with the closing under the MST Purchase Agreement (the “MST Acquisition”), the Company and the Seller entered into a Lock-Up Agreement, dated October 31, 2018, pursuant to which the Seller agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the Initial Shares for six months following the Closing Date. As of the date of this report, 75% of the Initial Shares are free from the lock-up restrictions. For the remaining 25% of the Initial Shares, the Lock-Up Agreement provides that the remaining Initial Shares will be released from the lock-up restrictions on the eighteen-month anniversary of the closing date, or earlier upon certain other conditions. The Lock-Up Agreement further provides that the Seller may not sell, transfer or convey the Additional Consideration Shares until after the six-month anniversary of the issuance of the Additional Consideration Shares, or earlier upon certain other conditions.
In connection with the MST Acquisition closing, the Company also entered into a Registration Rights Agreement, dated as of October 31, 2018, with the Seller, pursuant to which the Company agreed to register the Securities Consideration such that such Securities Consideration is eligible for resale following the end of the lock-up periods described above.
The MST Purchase Agreement was accounted for as a business combination utilizing the methodology prescribed in ASC 805. The purchase price for the acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values.
The following table summarizes the acquisition date fair value of the consideration (in thousands).
|
|
|
|
|
|
|
|
Stock consideration
|
$
|
8,300
|
|
|
Cash consideration
|
5,800
|
|
|
Present value of deferred consideration
|
5,900
|
|
|
Other consideration
|
314
|
|
|
Total consideration
|
$
|
20,314
|
|
The value of the stock consideration was determined based on the fair value of the stock on the closing date, adjusted for a lack of marketability discount related to the Lock-Up Agreement. The value of the deferred consideration was determined based on the present value of the future payment using a market interest rate.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on October 31, 2018, the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
Property and equipment
|
$
|
43
|
|
|
In-process research and development
|
10,633
|
|
|
Goodwill
|
9,638
|
|
|
Net assets acquired
|
$
|
20,314
|
|
The Company allocated $10.6 million of the purchase price to identifiable intangible assets of in-process research and development that met the separability and contractual legal criterion of ASC 805. IPR&D is principally the estimated fair value of the MST technology which had not reached commercial technological feasibility nor had alternative future use at the time of the acquisition and therefore the Company considered IPR&D, with assigned values to be allocated to the IPR&D assets acquired.
Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the fair values of the assets acquired and liabilities assumed. The goodwill resulting from this acquisition arises largely from synergies expected from combining the intellectual property acquired from MST with the Company’s existing intellectual property as well as acquired employees. The goodwill is deductible for income tax purposes.
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) 15,543,413 shares of the Company’s common stock (the “Securities Consideration”) and (ii) approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration (the “Cash Consideration”). On December 30, 2016, the Company and Sofar entered into an Amendment to the Purchase Agreement (the “Amendment”) to restructure the terms of the second tranche of the Cash Consideration (the “Second Tranche”). The initial Securities Consideration was issued in full at the closing of the Senhance Acquisition; under the Amendment, the second tranche of the Cash Consideration was restructured, and an additional issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of €5.0 million occurred in January 2017. Following the Amendment, the total Cash Consideration was $25.0 million U.S. Dollars and approximately €22.5 million Euro, of which all but €15.1 million Euro has been paid as of September 30, 2019. The majority of the remaining Cash Consideration to be paid is the third tranche of the Cash Consideration (the “Third Tranche”) of €15.0 million which shall be payable upon achievement of trailing revenues from sales or services contracts of the Senhance System of at least €25.0 million over a calendar quarter. The 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.
|
|
|
|
4.
|
Cash, Cash Equivalents, and Restricted Cash
|
Restricted cash at September 30, 2019 and December 31, 2018 includes $0.7 million and $0.6 million respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit card agreement and automobile leases.
The Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These assets and liabilities include cash and cash equivalents, restricted cash, contingent consideration and warrant liabilities. ASC 820-10 (“Fair Value Measurement Disclosure”) requires the valuation using a three-tiered approach, which requires that fair value measurements be classified and disclosed in one of three tiers. These tiers are: Level 1, defined as quoted prices in active markets for identical assets or liabilities; Level 2, defined as valuations based on observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable input data; and Level 3, defined as valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. The Company did not have any transfers of assets and liabilities between Level 1, Level 2, and Level 3 of the fair value hierarchy during the nine months ended September 30, 2019 and the year ended December 31, 2018.
For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and therefore, are based primarily upon estimates, are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
As prescribed by U.S. GAAP, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures and based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects changes in classifications between levels will be rare.
The carrying values of accounts receivable, short-term investments, interest receivable, accounts payable, and certain accrued expenses at September 30, 2019 and December 31, 2018, approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance also approximates fair value as of September 30, 2019 and December 31, 2018, as the interest rates on the notes payable approximate the rates available to the Company as of these dates.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
(In thousands)
(unaudited)
|
|
Description
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total
|
|
Assets measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,106
|
|
|
Restricted cash
|
|
698
|
|
|
—
|
|
|
—
|
|
|
698
|
|
|
Total Assets measured at fair value
|
|
$
|
22,804
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,804
|
|
|
Liabilities measured at fair value
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
—
|
|
|
—
|
|
|
948
|
|
|
948
|
|
|
Warrant liabilities
|
|
—
|
|
|
—
|
|
|
1,600
|
|
|
1,600
|
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,548
|
|
|
$
|
2,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total
|
|
Assets measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,061
|
|
|
Restricted cash
|
|
590
|
|
—
|
|
|
—
|
|
|
590
|
|
Total Assets measured at fair value
|
|
$
|
21,651
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,651
|
|
|
Liabilities measured at fair value
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,637
|
|
|
$
|
10,637
|
|
|
Warrant liabilities
|
|
—
|
|
|
—
|
|
|
4,636
|
|
|
4,636
|
|
|
Total liabilities measured at fair value
|
|
—
|
|
|
—
|
|
|
15,273
|
|
|
15,273
|
|
The Company’s financial liabilities consisted of contingent consideration potentially payable to Sofar related to the Senhance Acquisition in September 2015 (Note 3). This liability is reported as Level 3 as estimated fair value of the contingent consideration related to the acquisition requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome. The decrease in fair value of the contingent consideration of $9.7 million for the nine months ended September 30, 2019 was primarily due to a change in our long-term forecast. The increase in fair value of the contingent consideration of $0.1 million for the nine months ended September 30, 2018 was primarily due to the passage of time on the fair value measurement, the impact of foreign currency exchange rates and changes in the Company's long-range forecast. Adjustments associated with the change in fair value of contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.
On April 28, 2017, the Company sold 24.9 million units (the “Units”), each consisting of one share of the Company’s Common Stock, a Series A warrant to purchase one share of Common Stock with an exercise price of $1.00 per share (the “Series A Warrants”), and a Series B warrant to purchase 0.75 shares of Common Stock with an exercise price of $1.00 per Unit (the “Series B Warrants,” together with the Series A Warrants, the “Warrants”), at an offering price of $1.00 per Unit. Each Series A Warrant was exercisable at any time beginning on the date of issuance, and from time to time thereafter, through and including the first anniversary of the issuance date, unless terminated earlier as provided in the Series A Warrant. Receipt of 510(k) clearance for the Senhance System on October 13, 2017 triggered the acceleration of the expiration date of the Series A Warrants to October 31, 2017. Each Series B Warrant may be exercised at any time beginning on the date of issuance and from time to time thereafter through and including the fifth anniversary of the issuance date.
The fair value of the Series A Warrants of $2.5 million at the date of issuance was estimated using the Black-Scholes Merton model which used the following inputs: term of 1 year, risk free rate of 1.07%, no dividends, volatility of 73.14%, and share price of $0.65 per share based on the trading price of the Company’s Common Stock. All Series A Warrants were exercised as of October 31, 2017.
The Series B Warrants contain provisions, often referred to as “down-round protection,” that leads to adjustment of the exercise price and number of underlying warrant shares if we issue securities, including our common stock or convertible securities or debt securities, in the future at sale prices below the then-current exercise price. This adjustment feature of the Series B Warrants was triggered during the three months ended September 30, 2019 with the issuance of common stock in the 2019 ATM Offering at prices below the then applicable exercise price of the outstanding Series B Warrants (Note 15). As such, the exercise price of all outstanding Series B Warrants was adjusted from $1.00 per share to $0.67 per share and the number of shares of common stock reserved for and issuable upon the exercise of outstanding Series B Warrants is increased by 1,336,326 underlying warrant shares, from 2,729,085 underlying warrant shares at June 30, 2019 to 4,065,411 underlying warrant shares at September 30, 2019.
The change in fair value of all outstanding Series B Warrants for the nine months ended September 30, 2019 was a decrease of $3.0 million compared to an increase of $24.4 million for the nine months ended September 30, 2018, and is included in the Company’s consolidated statements of operations and comprehensive loss. The following table presents the inputs and valuation methodologies used for the Company’s fair value of the Series B Warrants:
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
September 30, 2019
|
|
December 31, 2018
|
|
April 28, 2017
(date of issuance)
|
|
Fair value
|
|
$1.6 million
|
|
$4.6 million
|
|
$6.2 million
|
|
Valuation methodology
|
|
Monte Carlo
|
|
Monte Carlo
|
|
Black-Scholes Merton
|
|
Term
|
|
2.6 years
|
|
3.3 years
|
|
5.0 years
|
|
Risk free rate
|
|
1.56%
|
|
2.47%
|
|
1.81%
|
|
Dividends
|
|
—
|
|
—
|
|
—
|
|
Volatility
|
|
91.4%
|
|
87.60%
|
|
73.14%
|
|
Share price
|
|
$0.67
|
|
$2.26
|
|
$0.65
|
|
Probability of additional financing
|
|
100% in 2019
|
|
100% in 2019
|
|
Not Applicable
|
The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements classified in Level 3 with the exception of the warrant liability, which is explained above as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
Valuation
Methodology
|
|
Significant
Unobservable Input
|
|
Weighted Average
(range, if
applicable)
|
|
Contingent consideration
|
Probability weighted
income approach
|
|
Milestone dates
|
|
2019 to 2022
|
|
|
|
|
Discount rate
|
|
10% to 12%
|
The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and revenue projections for the contingent consideration for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement at
Reporting Date
(Level 3)
|
|
|
(In thousands)
(unaudited)
|
|
|
Common stock
warrants
|
|
Contingent
consideration
|
|
Balance at December 31, 2018
|
$
|
4,636
|
|
|
$
|
10,637
|
|
|
Change in fair value
|
(3,036
|
)
|
|
(9,689
|
)
|
|
Balance at September 30, 2019
|
$
|
1,600
|
|
|
$
|
948
|
|
|
Current portion
|
—
|
|
|
71
|
|
|
Long-term portion
|
1,600
|
|
|
877
|
|
|
Balance at September 30, 2019
|
$
|
1,600
|
|
|
$
|
948
|
|
|
|
|
|
6.
|
Accounts Receivable, Net
|
The following table presents the components of accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
|
(unaudited)
|
|
|
|
Gross accounts receivable
|
$
|
4,036
|
|
|
$
|
8,640
|
|
|
Allowance for uncollectible accounts
|
(1,684
|
)
|
|
(80
|
)
|
|
Total accounts receivable, net
|
$
|
2,352
|
|
|
$
|
8,560
|
|
The Company recorded $1.6 million in bad debt expense during the three and nine months ended September 30, 2019.
7. Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
|
(unaudited)
|
|
|
|
Finished goods
|
$
|
9,766
|
|
|
$
|
5,439
|
|
|
Raw materials
|
13,227
|
|
|
5,502
|
|
|
Total inventories
|
$
|
22,993
|
|
|
$
|
10,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
$
|
13,657
|
|
|
$
|
10,941
|
|
|
Long-term portion
|
9,336
|
|
|
—
|
|
|
Total inventories
|
$
|
22,993
|
|
|
$
|
10,941
|
|
The following table presents the components of other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
|
(unaudited)
|
|
|
|
Advances to vendors
|
$
|
6,555
|
|
|
$
|
7,758
|
|
|
Prepaid expenses
|
2,186
|
|
|
1,438
|
|
|
Other receivables
|
21
|
|
|
9
|
|
|
Total
|
$
|
8,762
|
|
|
$
|
9,205
|
|
9. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
|
(unaudited)
|
|
|
|
Machinery, manufacturing and demonstration equipment
|
$
|
12,326
|
|
|
$
|
12,320
|
|
|
Computer equipment
|
2,313
|
|
|
2,260
|
|
Furniture
|
629
|
|
|
639
|
|
Leasehold improvements
|
2,283
|
|
|
2,280
|
|
Total property and equipment
|
17,551
|
|
|
17,499
|
|
Accumulated depreciation and amortization
|
(12,123
|
)
|
|
(11,162)
|
|
Property and equipment, net
|
$
|
5,428
|
|
|
$
|
6,337
|
|
Depreciation expense was approximately $1.7 million and $1.9 million, for the nine months ended September 30, 2019 and 2018, respectively.
|
|
|
|
10.
|
Goodwill, In-Process Research and Development and Intellectual Property
|
Goodwill
Goodwill of $93.8 million was recorded in connection with the Merger, as described in Note 1, goodwill of $38.3 million was recorded in connection with the Senhance Acquisition, as described in Note 3, and goodwill of $9.6 million was recorded in connection with the MST Acquisition, as described in Note 3. The carrying value of goodwill and the change in the balance for the nine months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(In thousands)
(unaudited)
|
|
Balance at December 31, 2018
|
$80,131
|
|
Impairment
|
(78,969
|
)
|
|
Foreign currency translation impact
|
(1,162
|
)
|
|
Balance at September 30, 2019
|
$
|
—
|
|
As of September 30, 2019, goodwill was deemed to be fully impaired, and the Company recorded an impairment charge of $79.0 million. See Note 2. No impairment was recorded during the nine months ended September 30, 2018.
Accumulated impairment of goodwill as of September 30, 2019 and December 31, 2018 was $140.8 million and $61.8 million, respectively.
In-Process Research and Development
As described in Note 3, on October 31, 2018, the Company acquired the MST assets, technology and business from MST and recorded $10.6 million of IPR&D. The estimated fair value of the IPR&D was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 15% and cash flows that have been probability adjusted to reflect the risks of product integration, which the Company believes are appropriate and representative of market participant assumptions.
As of September 30, 2019, IPR&D was deemed to be significantly impaired, and the Company recorded an impairment charge of $7.9 million. See Note 2.
The carrying value of the Company’s IPR&D assets and the change in the balance for the nine months ended September 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
In-Process
Research and
Development
|
|
|
(In thousands)
(unaudited)
|
|
Balance at December 31, 2018
|
$
|
10,747
|
|
|
Impairment
|
(7,912
|
)
|
|
Foreign currency translation impact
|
(435
|
)
|
|
Balance at September 30, 2019
|
$
|
2,400
|
|
Intellectual Property
As described in Note 3, on September 21, 2015, the Company acquired all of the developed technology related to the Senhance System and recorded $48.5 million of intellectual property. The estimated fair value of the intellectual property was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 45% and cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions.
As described in Note 3, on September 21, 2015, the Company acquired all of the assets related to the Senhance System and recorded $17.1 million of IPR&D. The estimated fair value of the IPR&D was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows were based on certain key assumptions, including estimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 45% and cash flows that have been probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions. On October 13, 2017, upon regulatory approval and the ability to commercialize the products associated with the IPR&D assets, the assets were deemed definite-lived, reclassified to intellectual property and are now being amortized based on their estimated useful lives.
The components of gross intellectual property, accumulated amortization, and net intellectual property as of September 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
(In thousands)
(unaudited)
|
|
|
(In thousands)
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
currency
translation
impact
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
currency
translation
impact
|
|
Net
Carrying
Amount
|
|
Developed technology
|
$
|
66,413
|
|
|
$
|
(38,272
|
)
|
|
$
|
1,838
|
|
|
$
|
29,979
|
|
|
|
$
|
66,413
|
|
|
$
|
(30,550
|
)
|
|
$
|
3,495
|
|
|
$
|
39,358
|
|
|
Technology and patents purchased
|
400
|
|
|
(104
|
)
|
|
14
|
|
|
310
|
|
|
|
400
|
|
|
(72
|
)
|
|
30
|
|
|
358
|
|
|
Total intellectual property
|
$
|
66,813
|
|
|
$
|
(38,376
|
)
|
|
$
|
1,852
|
|
|
$
|
30,289
|
|
|
|
$
|
66,813
|
|
|
$
|
(30,622
|
)
|
|
$
|
3,525
|
|
|
$
|
39,716
|
|
The weighted average remaining useful life of the developed technology and technology and patents purchased was 3.0 years and 7.6 years, respectively as of September 30, 2019. The weighted average remaining useful life of the developed technology and technology and patents purchased was 3.8 years and 8.3 years, respectively as of December 31, 2018.
Income taxes have been accounted for using the asset and liability method in accordance with ASC 740 “Income Taxes”. The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate method. The Company estimates an annual effective tax rate of 2.3% for the year ending December 31, 2019. This rate does not include the impact of any discrete items. The Company incurred losses for the nine month period ended September 30, 2019 and is forecasting additional losses through the year, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2019. Due to the Company’s history of losses, there is not sufficient evidence to record a net deferred tax asset associated with the U.S., Europe and Asian operations. Accordingly, a full valuation allowance has been recorded related to the net deferred tax assets in those jurisdictions. The Swiss jurisdiction has indefinite-lived intangibles that create deferred tax liabilities which cannot be offset against the deferred tax assets, resulting in a net deferred tax liability recorded in that jurisdiction. There is no net deferred tax asset recorded in relation to TransEnterix Italia and accordingly no valuation allowance has been recorded in that jurisdiction. The deferred tax benefit during the nine months ended September 30, 2019 and 2018, was approximately $2.5 million and $2.6 million, respectively.
The Company’s effective tax rate for each of the nine month periods ended September 30, 2019 and 2018 was 1.8% and 4.4%, respectively. At September 30, 2019, the Company had no unrecognized tax benefits that would affect the Company’s effective tax rate.
The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income ("GILTI"), states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Because the Company was evaluating the provision of GILTI as of December 31, 2017, no GILTI-related deferred amounts were recorded in 2017. The Company has elected to account for GILTI in the year the tax is incurred. The Company does not expect a GILTI inclusion for 2018 or 2019; no GILTI tax has been recorded for the nine months ending September 30, 2019 or 2018.
12. Accrued Expenses
The following table presents the components of accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
|
(unaudited)
|
|
|
|
Compensation and benefits
|
$
|
2,779
|
|
|
$
|
6,225
|
|
|
Consulting and other vendors
|
2,172
|
|
|
895
|
|
Other
|
355
|
|
|
539
|
|
Lease liability
|
1,042
|
|
|
—
|
|
|
Royalties
|
662
|
|
|
498
|
|
Legal and professional fees
|
313
|
|
|
432
|
|
Deferred rent
|
—
|
|
|
391
|
|
Taxes and other assessments
|
650
|
|
|
383
|
|
Interest
|
121
|
|
|
256
|
|
Total
|
$
|
8,094
|
|
|
$
|
9,619
|
|
On May 23, 2018, the Company and its domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement (the “Hercules Loan Agreement”) with several banks and other financial institutions or entities from time to time party to the Loan Agreement (collectively, the “Lender”) and Hercules Capital, Inc., as administrative agent and collateral agent (the “Agent”). Under the Hercules Loan Agreement, the Lender agreed to make certain term loans to the Company in the aggregate principal amount of up to $40.0 million, with funding of the first $20.0 million tranche occurring on May 23, 2018 (the “Initial Funding Date”). On October 23, 2018, the Lender funded the second tranche of $10.0 million under the Hercules Loan Agreement. The Company is entitled to make interest-only payments until December 1, 2020, and at the end of the interest-only period, the Company will be required to repay the term loans over an eighteen-month period based on an eighteen-month amortization schedule, with a final maturity date of June 1, 2022. The term loans will be required to be repaid if the term loans are accelerated following an event of default.
Effective April 30, 2019, the Hercules Loan Agreement was amended (the “Hercules Amendment”) to eliminate the availability of the Tranche III Loan facility, add a new Tranche IV Loan facility of up to $20.0 million, revise certain financial covenants and make other changes. The availability of advances under the Tranche IV Loan was not milestone-based, rather the Company could request advances in minimum $5.0 million increments at any time during the period from July 1, 2019 through December 31, 2020, subject to the funding discretion of the Lender. The monthly trailing six month net revenue financial covenant was amended to be tested quarterly and to change the projected net revenue percentage to be met for the six months ending on the last day of each fiscal quarter. If such quarterly financial covenant is not achieved as of the last day of any fiscal quarter, as tested on the thirtieth day after quarter end, the Company must comply with the waiver conditions in the Hercules Amendment from such test date until the next quarterly test date. The Hercules Amendment was executed by the parties on May 7, 2019. The Amendment was treated as a debt modification for accounting purposes.
In connection with the entry into the AutoLap Sale Agreement with respect to the AutoLap assets, the Company commenced discussions with the Agent in order to obtain the required consent of the Agent and the Lender with respect to the sale of the AutoLap assets. In connection with obtaining such consent, the Company entered into the Consent and Second Amendment to the Loan and Security Agreement on July 10, 2019 (the “Hercules Second Amendment”). Under the Hercules Second Amendment, in consideration for the consent to the sale of, and the release of the Lender’s security interest on, the AutoLap assets, the Company reduced its indebtedness under the Hercules Loan Agreement by repaying $15.0 million) of the $30.0 million of outstanding indebtedness thereunder, without any prepayment penalties, amendment fee or acceleration of the end of term charges, and received adjustments to the quarterly financial covenants and related waiver conditions to reflect the decreased outstanding indebtedness. The Amendment was treated as a debt modification for accounting purposes.
Under the Hercules Second Amendment, the applicable waiver condition for fiscal year 2019 was changed to maintenance of unrestricted cash equal to $7.0 million.
The term loans bore interest at a rate equal to the greater of (i) 10.05% per annum (the “Fixed Rate”) and (ii) the Fixed Rate plus the prime rate (as reported in The Wall Street Journal) minus 5.00%. On the Initial Funding Date, the Company was obligated to pay a facility fee of $0.4 million, recorded as a debt discount. The Company also incurred other debt issuance costs totaling $1.1 million in conjunction with its entry into the Hercules Loan Agreement. In addition, the Company is permitted to prepay the term loans in full at any time, with a prepayment fee of 3.0% of the outstanding principal amount of the loan in the first year after the Initial Funding Date, 2.0% if the prepayment occurs in the second year after the Initial Funding Date and 1.0% thereafter. Upon prepayment
of the term loans in full or repayment of the terms loans at the maturity date or upon acceleration, the Company is required to pay a final fee of 6.95% of the aggregate principal amount of term loans funded. The final payment fee is accreted to interest expense over the life of the term loan and included within notes payable on the consolidated balance sheet.
The Company’s obligations under the Hercules Loan Agreement were guaranteed by all current and future material foreign subsidiaries of the Company and are secured by a security interest in all of the assets of the Company and their current and future domestic subsidiaries and all of the assets of their current and future material foreign subsidiaries, including a security interest in the intellectual property. The Hercules Loan Agreement contains customary representations and covenants that, subject to exceptions, restrict the Company’s and its subsidiaries’ ability to do the following, among other things: declare dividends or redeem or repurchase equity interests; incur additional indebtedness and liens; make loans and investments; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. Under the terms of the Hercules Loan Agreement, the Company is required to maintain cash and/or investment property in accounts which perfect the Agent’s first priority security interest in such accounts in an amount equal to the lesser of (i) (x) 120% of the then-outstanding principal balance of the term loans, including accrued interest and any other fees payable under the agreement to the extent accrued and payable plus (y) an amount equal to the then-outstanding accounts payable of the Company on a consolidated basis that are more than 90 days past due and (ii) 80% of the aggregate cash of the Company and its consolidated subsidiaries. As of September 30, 2019, the Company was in compliance with its debt covenants. The Agent is granted the option to invest up to $2.0 million in any future equity offering broadly marketed by the Company to investors on the same terms as the offering to other investors.
On November 4, 2019, the Company entered into a payoff letter with the Agent pursuant to which the Company terminated the Hercules Loan Agreement, as amended. The Company determined it was in the best interests of the Company to pay down the debt and terminate the Hercules Agreement to simplify the Company's balance sheet and provide additional flexibility as the Board of Directors continues to explore strategic and financial alternatives for the Company. Under the payoff letter, the Company repaid all amounts owed under the Hercules Loan Agreement totaling approximately $16.4 million, which included end of term fees of $1.4 million, and Hercules released all security interests held on the assets of the Company and its subsidiaries, including, without limitation, on the intellectual property assets of the Company.
In connection with its entrance into the Hercules Loan Agreement, the Company repaid its existing loan and security agreement (the “Innovatus Loan Agreement”) with Innovatus Life Sciences Lending Fund I, LP (“Innovatus”). The Company recognized a loss of $1.4 million on the extinguishment of notes payable which is included in interest expense on the consolidated statement of operations and comprehensive loss for the year ended December 31, 2018. The Company paid $0.7 million in final payment obligations and $0.3 million in prepayment fees under the Innovatus Loan Agreement upon repayment.
Under the Innovatus Loan Agreement, entered into on May 10, 2017, Innovatus agreed to make certain term loans in the aggregate principal amount of up to $17.0 million. Funding of the first $14.0 million tranche occurred on May 10, 2017.
The Innovatus Loan Agreement allowed for interest-only payments for up to twenty-four months at a fixed rate equal to 11% per annum, of which 2.5% could be paid in-kind and added to the outstanding principal amount of the term loans until the earlier of (i) the first anniversary following the funding date and (ii) the Company’s failure to achieve an Interest-Only Milestone. At the end of the interest-only period, the Company would be required to repay the term loans over a two-year period, based on a twenty-four (24) month amortization schedule, with a final maturity date of May 10, 2021.
In connection with the Innovatus funding, the Company paid a facility fee of $0.2 million on the date of funding of the first tranche and incurred additional debt issuance costs of approximately $1.2 million, recorded as a debt discount. In addition, the Company issued warrants to Innovatus to purchase shares of the Company’s common stock that will expire five (5) years from such issue date. The warrants issued in connection with funding of the first tranche entitle Innovatus to purchase up to 1,244,746 shares of the Company’s common stock at an exercise price of $1.00 per share. The Company estimated the fair value of the warrants to be $0.3 million. The value of the warrants was classified as equity and recorded as a discount to the loan. The debt discount was amortized as interest expense using the effective interest method over the life of the loan. As of December 31, 2018, the unamortized debt discount was $0.
14. Warrants
The Series B warrants contain provisions, often referred to as “down-round protection,” that leads to adjustment of the exercise price and number of underlying warrant shares if the Company issues securities, including its common stock or convertible securities or debt securities, in the future at sale prices below the then-current exercise price. This adjustment feature of the Series B Warrants was triggered during the three months ended September 30, 2019 with the issuance of common stock in the 2019 ATM Offering and Firm Commitment Offering at prices below the then applicable exercise price of the outstanding Series B Warrants (Note 15). As such, the exercise price of the Series B Warrants was adjusted from $1.00 per share to $0.67 per share and the number of shares of
common stock reserved for and issuable upon the exercise of outstanding Series B Warrants is increased by 1,336,326 underlying warrant shares, from 2,729,085 underlying warrant shares at June 30, 2019 to 4,065,411 underlying warrant shares at September 30, 2019.
The following table summarizes the change in warrant shares for all outstanding warrants, including the Series B Warrants for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrant Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Weighted
Average
Fair Value
|
|
Outstanding at December 31, 2018
|
4,329,437
|
|
|
$1.03
|
|
3.7
|
|
$
|
0.26
|
|
|
Exercised
|
(200,000
|
)
|
|
1.00
|
|
8.2
|
|
—
|
|
|
Expired
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
Reserved for future issuance
|
1,336,326
|
|
|
0.67
|
|
2.6
|
|
0.20
|
|
|
Outstanding at September 30, 2019
|
5,465,763
|
|
|
$0.78
|
|
2.7
|
|
$
|
0.22
|
|
|
|
|
|
15.
|
At-The-Market Offering and Firm Commitment Offering
|
On August 12, 2019, the Company terminated the At-the-Market Equity Offering Sales Agreement dated December 28, 2018 (the “Stifel Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”) pursuant to which the Company was entitled to sell from time to time, at its option, up to an aggregate of $75.0 million of shares of the Company's common stock through Stifel, as sales agent. The Company sold no shares of its common stock under the Stifel Sales Agreement.
On August 12, 2019, the Company entered into a Controlled Equity Offering Sales Agreement (the “2019 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $25.0 million, shares of the Company’s common stock, through Cantor, as sales agent (the “ATM Offering”). Pursuant to the Sales Agreement, sales of the Common Stock were made under the Company’s previously filed and currently effective Registration Statement on Form S-3. The aggregate compensation payable to Cantor was 3.0% of the aggregate gross proceeds from each sale of the Company’s Common Stock.
On September 4, 2019, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co. (the “Underwriter”). Subject to the terms and conditions of the Underwriting Agreement, the Company agreed to sell to the Underwriter, in a firm commitment underwritten offering, 28,000,000 shares of the Company’s common stock (the “Firm Commitment Offering”). In addition, the Company granted the Underwriter a 30-day option to purchase 4,200,000 of additional shares of common stock. The 30-day option was not exercised.
The following table summarizes the total sales under the 2019ATM Offering and Firm Commitment Offering for the period indicated (in thousands except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Firm Commitment
|
|
|
|
|
ATM Offering
|
|
Offering
|
|
|
|
|
For the Quarter Ended
|
|
For the Quarter Ended
|
|
Total
|
|
|
September 30, 2019
|
|
September 30, 2019
|
|
September 30, 2019
|
|
Total shares of common stock sold
|
5,084,151
|
|
28,000,000
|
|
|
33,084,151
|
|
Average price per share
|
$
|
0.999
|
|
|
$
|
0.6713
|
|
|
0.722
|
|
|
Gross proceeds
|
$
|
5,081
|
|
|
$
|
18,796
|
|
|
$
|
23,877
|
|
|
Commissions earned by Cantor
|
$
|
152
|
|
|
$
|
—
|
|
|
$
|
152
|
|
|
Net Proceeds
|
$
|
4,929
|
|
|
$
|
18,796
|
|
|
$
|
23,725
|
|
|
|
|
|
16.
|
Basic and Diluted Net Loss per Share
|
Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options, warrants and restricted stock units.
For the three and nine month periods ended September 30, 2019, the effect of outstanding warrants is reflected in diluted net loss per common share by applying the treasury stock method resulting in 1.5 million and 2.5 million incremental shares that were included in the weighted average number of common shares used in the diluted net loss per common share calculation for the three months and nine months ended September 30, 2019, respectively. Additionally, the gain on the fair value of warrant liabilities of $0.6 million and $3.0 million for the three and nine month periods ended September 30, 2019, respectively, increased the net loss attributable to common stockholders in calculating diluted net loss per common share.
No adjustments have been made to the weighted average outstanding common shares figures for the three and nine months periods ended September 30, 2018.
As of September 30, 2019, there were 25,547,652 outstanding options, 1,400,352 outstanding warrants, and 6,109,752 unvested restricted stock units that were excluded from the calculation of diluted net loss per common share as the effect of including these instruments would have been anti-dilutive.
|
|
|
|
17.
|
Commitments and Contingencies
|
Contingent Consideration
As discussed in Note 3, in September 2015, the Company completed the Senhance Acquisition using a combination of cash, stock and potential post-acquisition milestone payments. These milestone payments may be payable in the future, depending on the achievement of certain commercial milestones. On December 30, 2016, the Company entered into an Amendment to restructure the terms of the Second Tranche of the Cash Consideration. Under the Amendment, the Second Tranche was restructured to reduce the contingent cash consideration by €5.0 million in exchange for the issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of €5.0 million. As of September 30, 2019 and December 31, 2018, the fair value of the contingent consideration was $0.9 million and $10.6 million, respectively.
Legal Proceedings
No liability or related charge was recorded to earnings in the Company’s consolidated financial statements for legal contingencies for the nine months ended September 30, 2019 or the year ended December 31, 2018.
On October 14, 2019, Joseph P. Slattery, the Executive Vice President and Chief Financial Officer of the Company notified the Company of his decision to retire from his role as the public company principal financial officer of the Company.
Mr. Slattery will remain as Executive Vice President and Chief Financial Officer of the Company and its subsidiaries until December 31, 2019, and then will enter into a seven-month consulting agreement with the Company to provide additional transition services to the Company. The Company and Mr. Slattery entered into a Transition Agreement, dated October 17, 2019 (the “Transition Agreement”) pursuant to which he will continue in his current roles and continue to perform the duties of an executive officer of the Company. Under the Transition Agreement, his compensation and benefits will continue through December 31, 2019 and his outstanding equity awards will continue in full force, subject to the rights and conditions of such awards under the Company’s 2019 Amended and Restated Equity Incentive Compensation Plan (the “Plan”), including, without limitation, the change in control provisions of the Plan. If he should die or become disabled before December 31, 2019, he or his estate will be paid his base salary through December 31, 2019.
Under the Consulting Agreement, Mr. Slattery’s equity awards will continue to vest in accordance with his Award Agreements through July 31, 2020. If there is a change in control (as defined in the Plan) during the consulting term, his outstanding equity awards shall accelerate and vest on the closing of such transaction.
The Company intends to initiate a search for a principal financial officer.
On October 15, 2019, the Company entered into an Amended and Restated System Sale Agreement (the “Amended AutoLap Agreement”) with GBIL to restructure the sale of its AutoLap assets. Pursuant to the Amended AutoLap Agreement, the Company sold the AutoLap laparoscopic vision system (“AutoLap”) and related assets to GBIL for $17.0 million. The Company had acquired AutoLap and its related assets from MST Medical Surgical Technologies Ltd. in October 2018. See Note 3. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap. The equity investment of $30.0 million, which was agreed to in the initial agreement in July 2019, is no longer an element of the
Amended AutoLap Agreement. In addition, the Company will enter into a cross‑license agreement with the Buyer to retain rights to use any AutoLap-related intellectual property sold to the Buyer, and to non-exclusively license additional intellectual property to the Buyer. The total consideration of $17.0 million is to be paid in installments of $3.0 million, which was received on October 15, 2019, $13.0 million to be paid through the delivery of an irrevocable, confirmed letter of credit by October 31, 2019 and $1.0 million to be paid by December 15, 2019. The Amended AutoLap Agreement did not meet the criteria of assets held for sale pursuant to ASC 360 at September 30, 2019 as there was no carrying value on the Company' balance sheet attributable to the assets sold.
On October 17, 2019, the Company announced that it has engaged J.P. Morgan Securities LLC to assist the Board of Directors in considering strategic alternatives for the Company to enhance stockholder value, including, but not limited to a sale of the Company, a financing of the Company, a strategic partnership or collaboration or some other form of commercial relationship. In addition, the Company announced the implementation of a restructuring plan to reduce operating expenses as it continues the global market development of the Senhance platform.
On October 30, 2019, the Company announced that its Board of Directors had approved a proposal, to be submitted to stockholders for approval at a Special Meeting of Stockholders to be held on December 11, 2019, to authorize the Board of Directors to effect a reverse stock split of the Company’s common stock. The reverse stock split proposal includes a proposed range between 1-for-10 and 1-for-40 shares of outstanding common stock. The final ratio will be determined by the Board of Directors after stockholder approval. In addition, if the reverse stock split selected is in the range of 1-for-20 to 1-for-30, the authorized common stock would be reduced to 500,000,000 shares, and if the range selected is greater than 1-for-30, the authorized common stock would be reduced to 250,000,000 shares.
On November 4, 2019, the Company entered into a payoff letter with the Agent pursuant to which the Company terminated the Hercules Loan Agreement, as amended. The Company determined it was in the best interests of the Company to pay down the debt and terminate the Hercules Agreement to simplify the Company's balance sheet and provide additional flexibility as the Board of Directors continues to explore strategic and financial alternatives for the Company. Under the payoff letter, the Company repaid all amounts owed under the Hercules Loan Agreement totaling approximately $16.4 million, which included end of term fees of $1.4 million, and Hercules released all security interests held on the assets of the Company and its subsidiaries, including, without limitation, on the intellectual property assets of the Company.
On November 8, 2019, the Company announced that Todd M. Pope was leaving the positions of President and Chief Executive Officer and was leaving the Board of Directors, and Anthony Fernando was appointed as President and Chief Executive Officer and elected to the Board of Directors with immediate effect. The Company entered into a separation agreement with Mr. Pope and a consulting agreement with Mr. Pope to secure transition services from him. The Company also entered into an amended and restated employment agreement with Mr. Fernando on November 8, 2019.
|
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. The following discussion contains forward-looking statements. See cautionary note regarding “Forward-Looking Statements” at the beginning of this report.
Overview
TransEnterix 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. The Company is focused on the commercialization of the Senhance™ System, that digitizes laparoscopic minimally invasive surgery. The Senhance System allows for robotic precision, haptic feedback, surgeon camera control via eye sensing and improved ergonomics while offering responsible economics.
The Senhance System has a CE Mark in Europe for laparoscopic abdominal and pelvic surgery, as well as limited thoracic operations excluding cardiac and vascular surgery. On October 13, 2017, the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery. These indications cover 23 procedures, including benign and oncologic procedures. In May 2018, the indications for use expanded when the Company received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery for a total of 28 indicated procedures. The Senhance System is available for sale in the U.S., the EU, Japan, Taiwan and select other countries.
On October 17, 2019, the Company announced that it has engaged J.P. Morgan Securities LLC to assist the Board of Directors in considering strategic alternatives for the Company to enhance stockholder value, including, but not limited to a sale of the Company, a financing of the Company, a strategic partnership or collaboration or some other form of commercial relationship. In addition, the
Company announced the implementation of a restructuring plan to reduce operating expenses as it continues the global market development of the Senhance platform.
The Senhance System is a multi-port robotic surgery system that allows multiple robotic arms to control instruments and a camera. The system features advanced technology to enable surgeons with haptic feedback and the ability to move the camera via eye movement.
On October 31, 2018, the Company acquired the assets, intellectual property and highly experienced multidisciplinary personnel of MST Medical Surgical Technologies, Inc., or MST, an Israeli-based medical device company. Through this acquisition, the Company acquired MST’s AutoLap™ technology, one of the only image-guided robotic scope positioning systems with FDA clearance and CE Mark. The Company believes MST’s image analytics technology will accelerate and drive meaningful Senhance System developments, and allow it to expand the Senhance System to add augmented, intelligent vision capability. On July 3, 2019, the Company announced the sale of the AutoLap assets.
During 2018 and early 2019, the Company successfully obtained FDA clearance and CE Mark for 3 millimeter diameter instruments and its Senhance ultrasonic system. The 3 millimeter instruments enable the Senhance System to be used for microlaparoscopic surgeries, allowing for tiny incisions, and 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 Company has also developed the SurgiBot System, a single-port, robotically enhanced laparoscopic surgical platform. In December 2017, the Company entered into an agreement with Great Belief International Limited, or GBIL, to advance the SurgiBot System towards global commercialization. The agreement transferred ownership of the SurgiBot System assets, while the Company retained the option to distribute or co-distribute the SurgiBot System outside of China. GBIL intends to have the SurgiBot System manufactured in China and obtain Chinese regulatory clearance from the China Food and Drug Administration while entering into a nationwide distribution agreement with China National Scientific and Instruments and Materials Company for the Chinese market. The agreement provides the Company with proceeds of at least $29 million, of which $15 million has been received to date. The remaining $14.0 million, representing minimum royalties, will be paid beginning at the earlier of receipt of Chinese regulatory approval or March 2023.
The Company believes that future outcomes of minimally invasive laparoscopic surgery will be enhanced through its combination of more advanced tools and robotic functionality, that are designed to: (i) empower surgeons with improved precision, dexterity and visualization; (ii) improve patient satisfaction and enable a desirable post-operative recovery; and (iii) provide a cost-effective robotic system, compared to existing alternatives today, for a wide range of clinical indications.
From our inception, we devoted a substantial percentage of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical studies, manufacturing, recruiting qualified personnel and raising capital.
Since inception, we have been unprofitable. As of September 30, 2019, we had an accumulated deficit of $649.9 million.
Due to a decline in market conditions and changes in our forecast, the Company tested its goodwill and in-process research & development ("IPR&D") for potential impairment as of September 30, 2019.
The Company performed the impairment testing using the Income Approach and Market Approach, applying a weighted average value of 50%-50% between the two approaches. In addition, management considered the decline in both our stock price and market capitalization after the September 30, 2019 measurement date as relevant factors in the analysis.
During the third quarter of 2019, the Company determined that the carrying value of both its goodwill and IPR&D were impaired, and recorded impairment charges of $79.0 million and $7.9 million, respectively.
The Company is currently implementing a restructuring plan, and is looking at reducing our operating costs in sales and marketing, general and administrative, and research and development expenses while we continue the global market development of the Senhance platform.
We operate in one business segment.
Debt Refinancing
On May 23, 2018, the Company and its domestic subsidiaries, as co-borrowers, entered into a Loan and Security Agreement, or the Hercules Loan Agreement, with several banks and other financial institutions or entities from time to time party to the Hercules Loan Agreement, collectively, the Lender, and Hercules Capital, Inc., as administrative agent and collateral agent, or the Agent. Under the Hercules Loan Agreement, the Lender agreed to make certain term loans to the Company in the aggregate principal amount of up to $40.0 million, with funding of the first $20.0 million tranche occurring on May 23, 2018, or the Initial Funding Date. On October 23, 2018, the Lender funded the second tranche of $10.0 million under the Hercules Loan Agreement. The Company was entitled to make interest-only payments until December 1, 2020, and at the end of the interest-only period, the Company would be required to repay the term loans over an eighteen-month period based on an eighteen-month amortization schedule, with a final maturity date of June 1, 2022. The term loans would be required to be repaid if the term loans are accelerated following an event of default. Effective April 30, 2019, the Hercules Loan Agreement was amended, or the Hercules Amendment, to eliminate the availability of the Tranche III loan facility, add a new Tranche IV loan facility of up to $20 million, revise certain financial covenants and make other changes.
In connection with the entry into the AutoLap Sale Agreement with respect to the AutoLap assets, the Company commenced discussions with the Agent, or Hercules Capital, Inc., in order to obtain the required consent of the Agent and the Lender with respect to the sale of the AutoLap assets. In connection with obtaining such consent, the Company entered into the Consent and Second Amendment to the Loan and Security Agreement on July 10, 2019 (the “Hercules Second Amendment”). Under the Hercules Second Amendment, in consideration for the consent to the sale of, and the release of the Lender’s security interest on, the AutoLap assets, the Company reduced its indebtedness under the Hercules Loan Agreement by repaying $15.0 million of the $30.0 million of outstanding indebtedness thereunder, without any prepayment penalties, amendment fee or acceleration of the end of term charges, and received adjustments to the quarterly financial covenants and related waiver conditions to reflect the decreased outstanding indebtedness.
Under the Hercules Second Amendment, the applicable waiver condition for fiscal year 2019 was changed to maintenance of unrestricted cash equal to $7.0 million.
The term loans bore interest at a rate equal to the greater of (i) 10.05% per annum, or the Fixed Rate, and (ii) the Fixed Rate plus the prime rate (as reported in The Wall Street Journal) minus 5.0%. On the Initial Funding Date, the Company was obligated to pay a facility fee of $0.4 million. In addition, the Company is permitted to prepay the term loans in full at any time, with a prepayment fee of 3.0% of the outstanding principal amount of loan in the first year after the Initial Funding Date, 2.0% if the prepayment occurs in the second year after the Initial Funding Date and 1.0% thereafter. Upon prepayment of the term loans in full or repayment of the term loans at the maturity date or upon acceleration, the Company is required to pay a final fee of 6.95% of the aggregate principal amount of term loans funded.
The Company’s obligations under the Hercules Loan Agreement were guaranteed by all current and future material foreign subsidiaries of the Company and are secured by a security interest in all of the assets of the Company and their current and future domestic subsidiaries and all of the assets of their current and future material foreign subsidiaries, including a security interest in the intellectual property. The Hercules Loan Agreement contains customary representations and covenants that, subject to exceptions, restrict the Company’s and its subsidiaries’ ability to do the following, among things: declare dividends or redeem or repurchase equity interests; incur additional indebtedness and liens; make loans and investments; engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in businesses that are not related to its existing business. Under the terms of the Hercules Loan Agreement, the Company is required to maintain cash and/or investment property in accounts which perfect the Agent’s first priority security interest in such accounts in an amount equal to the lesser of (i) (x) 120% of the then-outstanding principal balance of the term loans, including accrued interest and any other fees payable under the agreement to the extent accrued and payable plus (y) an amount equal to the then-outstanding accounts payable of the Company on a consolidated basis that are more than 90 days past due and (ii) 80% of the aggregate cash of the Company and its consolidated subsidiaries. The Agent is granted the option to invest up to $2.0 million in any future equity offering broadly marketed by the Company to investors on the same terms as the offering to other investors.
On November 4, 2019, the Company entered into a payoff letter with the Agent pursuant to which the Company terminated the Hercules Loan Agreement, as amended. The Company determined it was in the best interests of the Company to pay down the debt and terminate the Hercules Agreement to simplify the Company’s balance sheet and provide additional flexibility as the Board of Directors continues to explore strategic and financial alternatives for the Company. Under the payoff letter, the Company repaid all amounts owed under the Hercules Loan Agreement totaling approximately $16.4 million, which included end of term fees of $1.4 million, and Hercules released all security interests held on the assets of the Company and its subsidiaries, including, without limitation, on the intellectual property assets of the Company.
In connection with its entrance into the Hercules Loan Agreement, the Company repaid its existing credit facility with Innovatus Life Sciences Lending Fund I, LP, or Innovatus, entered into on May 10, 2017, which loan and security agreement is referred to as
the Innovatus Loan Agreement. For a description of the Innovatus Loan Agreement, see “Notes to Consolidated Financial Statements (Unaudited)– Note. 13. Notes Payable.”
Public Offering of Units
On April 28, 2017, we entered into an underwriting agreement with Stifel, Nicolaus & Company, Incorporated, or the Underwriter, relating to an underwritten public offering of an aggregate of 24,900,000 Units, each consisting of one share of the Company’s Common Stock, a Series A Warrant to purchase one share of Common Stock and a Series B Warrant to purchase 0.75 shares of Common Stock at an offering price to the public of $1.00 per Unit. Certain of the Company’s officers, directors and existing stockholders purchased approximately $2.5 million of Units in the public offering. The closing of the public offering occurred on May 3, 2017.
Each Series A Warrant had an initial exercise price of $1.00 per share and was able to be exercised at any time beginning on the date of issuance, and from time to time thereafter, through and including the first anniversary of the issuance date, unless terminated earlier as provided in the Series A Warrant. Receipt of 510(k) clearance for the Senhance System on October 13, 2017, triggered the acceleration of the expiration date of the Series A Warrants to October 31, 2017. As of December 31, 2017, all of the Series A Warrants had been exercised.
Each Series B Warrant has an initial exercise price of $1.00 per share and may be exercised at any time beginning on the date of issuance and from time to time thereafter through and including the fifth anniversary of the issuance date, or by May 3, 2022. As of September 30, 2019, Series B Warrants representing approximately 15.9 million shares had been exercised.
The exercise prices and the number of shares issuable upon exercise of the outstanding Series B Warrants are subject to adjustment upon the occurrence of certain events, including, but not limited to, stock splits or dividends, business combinations, sale of assets, similar recapitalization transactions, or other similar transactions. The Series B Warrants are subject to adjustment in the event that the Company issues or is deemed to issue shares of common stock for less than the then applicable exercise price of the Series B Warrants. Such adjustments occurred in August and September 2019 due to sales under the 2019 Sales Agreement and the Underwriting Agreement at prices less than the then applicable exercise price of the Series B Warrants. See "Notes to Consolidated Financial Statements (unaudited) - Note 14 Warrants." The exercisability of the Series B Warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of our common stock. If, at any time Series B Warrants are outstanding, any fundamental transaction occurs, as described in the Series B Warrants and generally including any consolidation or merger into another corporation, the consummation of a transaction whereby another entity acquires more than 50% of the Company’s outstanding voting stock, or the sale of all or substantially all of its assets, the successor entity must assume in writing all of the obligations to the Series B Warrant holders. Additionally, in the event of a fundamental transaction, each Series B Warrant holder will have the right to require the Company, or its successor, to repurchase the Series B Warrants for an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of such Series B Warrants.
The underwriting agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. The representations, warranties and covenants contained in the underwriting agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties.
The net proceeds to the Company from the offering were approximately $23.2 million, prior to any exercise of the Series A Warrants or Series B Warrants, after deducting underwriting discounts and commissions and estimated offering expenses paid by the Company. The net proceeds to the Company from the exercise of all of the Series A Warrants and the Series B Warrants exercised prior to September 30, 2019 were approximately $37.6 million.
The Units were issued pursuant to a prospectus supplement dated April 28, 2017 and an accompanying base prospectus dated June 22, 2016 that form a part of the registration statement on Form S-3 that the Company filed with the SEC on November 7, 2014 and was declared effective on December 19, 2014 (File No. 333-199998), and post-effectively amended pursuant to Post-Effective Amendment No. 1 on Form S-3, as filed with the SEC on March 8, 2016 and declared effective on June 22, 2016 and a related registration statement filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933.
On December 15, 2017, we filed a registration statement on Form S-3 (File No. 333-222103) to register shares of common stock underlying outstanding Series B Warrants previously issued as part of the Company’s May 3, 2017 public offering. The new registration statement replaced the registration statement on Form S-3 that expired on December 19, 2017 with respect to these securities. On January 26, 2018, we filed an Amendment No. 1 to such registration statement on Form S-3 to update the information,
in the registration statement. The registration statement covers up to 9,579,884 shares of common stock underlying the outstanding Series B Warrants. This registration statement on Form S-3 was declared effective on January 29, 2018.
At-the-Market Offering and Firm Commitment Offering
On December 28, 2018, we entered into an At-the-Market Equity Offering Sales Agreement, or the 2018 Sales Agreement with Stifel, under which we could offer and sell, through Stifel, up to approximately $75.0 million in shares of common stock in an at-the-market offering, or the 2018 ATM Offering. All sales of shares were to be made pursuant to an effective shelf registration statement on Form S-3 filed with the SEC. Stifel would have received a commission of approximately 3% of the aggregate gross proceeds received from all sales of common stock under the 2018 Sales Agreement. Effective August 12, 2019, the Company terminated the 2018 Sales Agreement. The Company sold no shares of its common stock under the 2018 Sales Agreement.
On August 12, 2019, the Company entered into a Controlled Equity Offering Sales Agreement (the “2019 Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $25.0 million shares of the Company’s common stock, through Cantor, as sales agent (the “2019 ATM Offering”). Pursuant to the 2019 Sales Agreement, sales of the common stock were made under the Company’s previously filed and currently effective Registration Statement on Form S-3. The aggregate compensation payable to Cantor was 3.0% of the aggregate gross proceeds from each sale of the Company’s common stock. The Company raised gross proceeds of $5.1 million under the 2019 ATM Offering and net proceeds of $4.9 million during the quarter ended September 30, 2019.
On September 4, 2019, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Cantor (the “Underwriter”). Subject to the terms and conditions of the Underwriting Agreement, the Company agreed to sell to the Underwriter, in a firm commitment underwritten offering, 28,000,000 shares of the Company’s common stock. In addition, the Company granted the Underwriter a 30-day option to purchase 4,200,000 of additional shares of common stock. The Company raised $18.8 million in gross / net proceeds under this offering. The option to purchase additional shares of common stock was not exercised.
MST Acquisition and Related Transactions
Purchase Agreement
On September 23, 2018, the Company entered into an Asset Purchase Agreement, or the MST Purchase Agreement, with MST Medical Surgery Technologies Ltd., an Israeli private company, or the Seller, and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of the Seller, including the intellectual property assets, collectively, the Buyers. The closing of the transactions contemplated by the MST Purchase Agreement occurred on October 31, 2018, pursuant to which the Company acquired the Seller’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 the Seller. 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 3.15 million shares of the Company’s common stock. 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 payment of additional consideration of $6.6 million due to MST under the MST Purchase Agreement by issuing shares of TransEnterix common stock, as permitted by the MST Purchase Agreement. The number of shares issued to MST as the additional consideration was 4,815,504 shares of common stock (the “Additional Consideration Shares”). In accordance with Section 2.3.6 of the MST Purchase Agreement, the number of Additional Consideration Shares was calculated based on the volume-weighted average of the closing prices of the TransEnterix common stock as quoted on the NYSE American for the ninety (90) day period ended August 6, 2019.
On July 3, 2019, the Company entered into an AutoLap System Sale Agreement (the “AutoLap Sale Agreement”) with GBIL. Pursuant to the AutoLap Sale Agreement, the Company sold the AutoLap laparoscopic vision system (“AutoLap”) and related assets to GBIL for $17.0 million plus an additional equity investment in the Company by GBIL of $30.0 million. The Company acquired AutoLap and its related assets from MST in October 2018. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap.
The purchase price was to be paid in two installments. The initial $5.0 million was due on July 31, 2019 and the remaining $12.0 million was due to be paid upon the transfer of the AutoLap and related assets, which was expected to occur in November 2019. In addition, GBIL agreed to pay $30.0 million for the purchase of 15,000,000 shares of the Company’s common stock at $2.00 per
share (the “AutoLap Shares”).
On October 15, 2019, the Company amended the previously-announced AutoLap Sale Agreement such that the total consideration of $17.0 million is to be paid in installments of $3.0 million, which was received on October 15, 2019, $13 million to be paid through the delivery of an irrevocable, confirmed letter of credit by October 31, 2019 and $1.0 million to be paid by December 15, 2019. As of November 8, 2019, the Company believes that it has satisfied all requirements to release the letter of credit funds and has submitted the letter of credit for payment. The Company continues to anticipate receiving the final $1.0 million payment by December 15, 2019. The equity investment of $30.0 million is no longer an element of the Amended AutoLap Agreement. Under the Amended AutoLap Agreement, the Company will enter 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 Amended AutoLap Agreement did not meet the criteria of assets held for sale pursuant to ASC 360 at September 30, 2019 as there was nominal carrying value on the Company's balance sheet attributable to the assets sold.
Registration Rights and Lock-Up Agreements
In connection with the closing under the MST Purchase Agreement (the “MST Acquisition”), the Company and the Seller entered into a Lock-Up Agreement, dated October 31, 2018, pursuant to which the Seller agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the Initial Shares for six months following the Closing Date. As of the date of this report, 75% of the Initial Shares are free from the lock-up restrictions. For the remaining 25% of the Initial Shares, the Lock-Up Agreement provides that all of the Initial Shares will be released from the lock-up restrictions on the eighteen-month anniversary of the closing date, or earlier upon certain other conditions. The Lock-Up Agreement further provides that the Seller may not sell, transfer or convey the Additional Consideration Shares until after the six-month anniversary of the issuance of the Additional Consideration Shares, or earlier upon certain other conditions.
In connection with the MST Acquisition closing, the Company also entered into a Registration Rights Agreement, dated as of October 31, 2018, with the Seller, pursuant to which the Company agreed to register the Securities Consideration such that such Securities Consideration is eligible for resale following the end of the lock-up periods described above.
Senhance Acquisition and Related Transactions
Membership Interest Purchase Agreement and Amendment
On September 21, 2015, the Company announced that it had entered into a Membership Interest Purchase Agreement, dated September 18, 2015 with Sofar S.p.A., as the Seller, Vulcanos S.r.l., as the acquired company, and TransEnterix International, Inc., a wholly owned subsidiary of the Company as the Buyer. The closing of the transactions contemplated by the Purchase Agreement occurred on September 21, 2015. The Buyer acquired all of the membership interests of the acquired company from the Seller, and changed the name of the acquired company to TransEnterix Italia S.r.l. On the closing date, pursuant to the Purchase Agreement, the Company completed the strategic acquisition from Sofar S.p.A. 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, or the Senhance Acquisition.
Under the terms of the Purchase Agreement, the consideration consisted of the issuance of 15,543,413 shares of the Company’s common stock, or the Securities Consideration, and approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration, or the Cash Consideration. The Securities Consideration was issued in full at closing of the acquisition; the Cash Consideration was or will be paid in four tranches, with U.S. $25.0 million paid at closing and the remaining Cash Consideration of €27.5 million to be paid in three additional tranches based on achievement of negotiated milestones. On December 30, 2016, the Company and Sofar entered into an Amendment to the Purchase Agreement to restructure the terms of the second tranche of the Cash Consideration. Under the Amendment, the second tranche was restructured to reduce the contingent cash consideration by €5.0 million in exchange for the issuance of 3,722,685 shares of the Company’s common stock with an aggregate fair market value of €5.0 million, which were issued on January 4, 2017. The price per share was $1.404 and was calculated based on the average of the closing prices of the Company’s common stock on ten consecutive trading days ending one day before the execution of the Amendment.
The issuance of the initial Securities Consideration was effected as a private placement of securities under Section 4(a)(2) of the Securities Act, and Regulation D promulgated thereunder. The issuance of the additional shares in January 2017 was made under an existing shelf registration statement on Form S-3.
As of September 30, 2019, the Company has paid all Cash Consideration due under the second tranche and approximately €2.4 million of the €2.5 million due under the fourth tranche. The fourth tranche of the Cash Consideration is 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.
The Purchase Agreement contains customary representations and warranties of the parties and the parties have customary indemnification obligations, which are subject to certain limitations described further in the Purchase Agreement.
Registration Rights
In connection with the Senhance Acquisition, we also entered into a Registration Rights Agreement, dated as of September 21, 2015, with the Seller, pursuant to which we agreed to register the Securities Consideration shares for resale following the end of the lock-up periods. The resale Registration Statement has been filed and is effective.
Results of Operations
Revenue
Our revenue consisted of product revenue resulting from the sale of Senhance Systems in Europe, Asia and the U.S., and related instruments, accessories and services for systems sold in the current and prior periods.
We expect to experience some unevenness in the number and trend, and average selling price, of units sold given the early stage of commercialization of our products.
Product and service revenue for the three months ended September 30, 2019 decreased to $2.0 million compared to $5.4 million for the three months ended September 30, 2018. The $3.4 million decrease was the result of one system sale during the three months ended September 30, 2019 as compared to four systems sold during the three months ended September 30, 2018.
Product and service revenue for the nine months ended September 30, 2019 was $7.8 million compared to $16.6 million for the nine months ended September 30, 2018. The $8.8 million decrease was primarily the result of three system sales during the nine months ended September 30, 2019 as compared to ten systems sold during the nine months ended September 30, 2018. Revenue for the nine months ended September 30, 2019 includes $1.3 million from a prior year sale that had deferred proceeds related to uncompleted performance obligations. The Company completed these performance obligations during the second quarter of 2019.
Cost of Revenue
Cost of revenue consists primarily of costs related to contract manufacturing, materials, and manufacturing overhead. We expense all inventory provisions as cost of revenue. The manufacturing overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment depreciation and operations supervision and management. We expect overhead costs as a percentage of revenues to become less significant as our production volume increases. We expect cost of revenue to increase in absolute dollars to the extent our revenues grow and as we continue to invest in our operational infrastructure to support anticipated growth.
Cost of revenue for the three months ended September 30, 2019 decreased to $3.4 million as compared to $4.2 million for the three months ended September 30, 2018. During the three months ended September 30, 2019, product costs totaled $1.2 million, with employee related costs of $1.5 million. Cost of revenue exceed revenue primarily due to costs attributable to product demonstrations, which are expensed when incurred, along with increased costs related to freight, travel and supplies. For the three months ended September 30, 2019, demonstration costs totaled $0.4 million, with freight, travel and supply costs totaling $0.2 million, $0.2 million and $0.1 million, respectively. These costs were slightly offset by $0.2 million in reduced standard cost variances.
Cost of revenue for the nine months ended September 30, 2019 decreased to $9.8 million as compared to $10.5 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, product costs totaled $2.3 million, with employee related costs of $4.2 million. Cost of revenue exceed revenue primarily due to costs attributable to product demonstrations, which are expensed when incurred, along with increased costs related to freight, travel and supplies. For the nine months ended September 30, 2019, demonstration costs totaled $1.2 million, with freight, travel, supplies and other miscellaneous costs totaling $0.5 million, $0.6 million, $0.5 million and $0.5 million, respectively.
Research and Development
Research and development, or R&D expenses primarily consist of engineering, product development and regulatory expenses incurred in the design, development, testing and enhancement of our products and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. In future periods, we expect R&D expenses to increase
moderately as we continue to invest in new products, instruments and accessories to be offered with the Senhance System. We expense R&D costs as incurred.
R&D expenses for the three months ended September 30, 2019 increased 23% to $5.9 million as compared to $4.8 million for the three months ended September 30, 2018. The $1.1 million increase primarily relates to increased personnel related costs of $1.0 million and $0.1 million in product demonstration costs.
R&D expenses for the nine months ended September 30, 2019 increased 16% to $17.8 million as compared to $15.4 million for the nine months ended September 30, 2018. The $2.4 million increase primarily relates to increased personnel related costs of $3.0 million. partially offset by reduced consulting costs of $0.3 million and testing / validation costs of $0.3 million, respectively.
Sales and Marketing
Sales and marketing expenses include costs for sales and marketing personnel, travel, demonstration product, market development, physician training, tradeshows, marketing clinical studies and consulting expenses. The Company expect sales and marketing expenses to decrease significantly as we streamline our overall sales team and reduce overall head count.
Sales and marketing expenses for the three months ended September 30, 2019 increased 19% to $6.9 million compared to $5.8 million for the three months ended September 30, 2018. The $1.1 million increase was primarily related to increased personnel costs of $0.8 million, increased travel related costs of $0.2 million and an increase in outside services of $0.1 million.
Sales and marketing expenses for the nine months ended September 30, 2019 increased 26% to $22.4 million compared to $17.8 million for the nine months ended September 30, 2018. The $4.6 million increase was primarily related to increased personnel costs of $2.3 million, increased travel related expenses of $1.2 million, increased product demonstration and trade show costs of $0.6 million, and an increase in outside services of $0.5 million as we increased our U.S. sales and marketing team as we focused on the commercialization of the Senhance System.
General and Administrative
General and administrative expenses consist of personnel costs related to the executive, finance, legal and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs, and general corporate expenses. As the Company is currently implementing a restructuring plan, we expect general and administrative costs to decrease in future periods.
General and administrative expenses for the three months ended September 30, 2019 increased 59% to $5.9 million compared to $3.7 million for the three months ended September 30, 2018. The $2.2 million increase was primarily due to increased personnel costs of $0.5 million, a bad debt charge of $1.6 million and increased consulting-outsourced services costs of $0.1 million. The Company recorded the bad debt charge due to doubt regarding collectibility on a 2018 system sale in North Africa.
General and administrative expenses for the nine months ended September 30, 2019 increased 50% to $15.0 million compared to $10.0 million for the nine months ended September 30, 2018. The $5.0 million increase was primarily due to increased personnel costs of $2.2 million, a bad debt charge of $1.6 million, increased consulting-outsourced services expense of $1.1 million and increased information technology costs of $0.2 million, partially offset by a reduction in depreciation of $0.1 million.
Loss (Gain) from Sale of SurgiBot Assets, Net
The loss from the sale of SurgiBot assets to GBIL of $0.1 million for the nine months ended September 30, 2019 was primarily due to additional outside service costs to transfer the assets. The gain from the sale of SurgiBot assets, net of $11.9 million for the nine months ended September 30, 2018, is further explained in the “Overview” section.
Amortization of Intangible Assets
Amortization of intangible assets for the three months ended September 30, 2019 decreased to $2.6 million compared to $2.7 million for the three months ended September 30, 2018. The $0.1 million decrease was primarily the result of foreign currency exchange rates.
Amortization of intangible assets for the nine months ended September 30, 2019 decreased to $7.8 million compared to $8.2 million for the nine months ended September 30, 2018. The $0.4 million decrease was primarily the result of foreign currency exchange rates.
Impairment of Goodwill and Intangible Assets
The Company typically tests goodwill for impairment annually, however, recent market conditions as well as reduced forecasts, required that we test our goodwill and IPR&D carrying values as of September 30, 2019.
Pursuant to ASU 2017-04, a company must record a goodwill impairment charge if a reporting unit’s carrying value exceeds its fair value. The Company generally determines the fair value of its reporting unit using two valuation methods: the “Income Approach — Discounted Cash Flow Analysis” method, and the “Market Approach — Guideline Public Company Method.”
Under the “Income Approach — Discounted Cash Flow Analysis” method the key assumptions consider projected sales, cost of sales, and operating expenses. These assumptions were determined by management utilizing the Company's internal operating plan, growth rates for revenues and operating expenses, and margin assumptions. An additional key assumption under this approach is the discount rate, which is determined by looking at current risk-free rates of capital, current market interest rates, and the evaluation of risk premium relevant to the business segment. If our assumptions relative to growth rates were to change or were incorrect, our fair value calculation may change.
Under the “Market Approach — Guideline Public Company Method” the Company identified several publicly traded companies, which it believed had sufficiently relevant similarities. Similar to the income approach discussed above, sales, cost of sales, operating expenses, and their respective growth rates are key assumptions utilized. The market prices of the Company’s common stock and other guideline companies are additional key assumptions. If these market prices increase, the estimated market value would increase. If the market prices decrease, the estimated market value would decrease.
The results of these two methods were weighted based upon management’s evaluation of the relevance of the two approaches. In the 2019 evaluation, management determined that the income and market value approach should be weighted 50%-50%. In addition, management considered the decline in both our stock price and market capitalization after the September 30, 2019 measurement date as relevant factors in the analysis.
As of September 30, 2019, the Company determined that the goodwill associated with the business was impaired, and recorded impairment charges of $79.0 million. The impairment charge resulted from decreased sales and estimated cash flows and a recent decline in the Company's stock price. The Company also recognized a $7.9 million impairment charge to its IPR&D as it concluded that under the market value approach, the fair value of the IPR&D was lower than the carrying value.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration in connection with the Senhance Acquisition was an $11.6 million decrease for the three months ended September 30, 2019 compared to a $1.4 million decrease for the three months ended September 30, 2018. The $10.2 million decrease was due to a significant reduction in the Company's five-year revenue forecast.
The change in fair value of contingent consideration in connection with the Senhance Acquisition was a $9.7 million decrease for the nine months ended September 30, 2019 compared to an increase of $0.1 million for the nine months ended September 30, 2018. The $9.8 million decrease was primarily due to a significant reduction in the Company's five-year revenue forecast.
Change in Fair Value of Warrant Liabilities
The change in fair value of Series B Warrants issued in April 2017 was a decrease of $0.6 million for the three months ended September 30, 2019 compared to an increase of $8.8 million for the three months ended September 30, 2018. The net $9.4 million decrease for the three months ended September 30, 2019 over the three months ended September 30, 2018 includes re-measurement associated with the warrants exercised during the quarter ended September 30, 2018. The decrease in value at September 30, 2019 was primarily the result of the difference in the stock price at June 30, 2019 versus September 30, 2019.
The change in fair value of Series B Warrants issued in April 2017 was a decrease of $3.0 million for the nine months ended September 30, 2019 compared to an increase of $24.4 million for the nine months ended September 30, 2018. The net $27.4 million decrease in change in fair value of warrant liabilities for the nine months ended September 30, 2019 over the nine months ended September 30, 2018 includes re-measurement associated with the warrants exercised during the nine months ended September 30, 2019 and 2018, and the outstanding warrants at September 30, 2019. The decrease in value at September 30, 2019 was primarily the result of the difference in the stock price at December 31, 2018 versus September 30, 2019.
Interest Income
Interest income for the three months ended September 30, 2019 was $0.1 million compared to $0.4 million for the three months ended September 30, 2018. The decrease of $0.3 million was due to less cash and short-term investments on hand at September 30, 2019 earning less interest.
Interest income for the nine months ended September 30, 2019 was $0.6 million compared to $1.0 million for the nine months ended September 30, 2018. The decrease of $0.4 million was due to less cash and short-term investments on hand at September 30, 2019 earning less interest.
Interest Expense
Interest expense for the three months ended September 30, 2019 was $1.2 million compared to $0.7 million for the three months ended September 30, 2018. The increase in interest expense relates to the write-down of debt issuance costs due to the repayment of $15.0 million in principal to Hercules Capital during the quarter.
Interest expense for the nine months ended September 30, 2019 was $3.4 million compared to$3.4 million for the nine months ended September 30, 2018. The Company incurred a $1.4 million loss on extinguishment of debt, classified as interest expense, during the second quarter of 2018, and this loss was offset by interest incurred on the increased notes payable.
Income Tax Benefit
Income tax benefit consists primarily of taxes related to the amortization of purchase accounting intangibles in connection with the Italian taxing jurisdiction for TransEnterix Italia as a result of the acquisition of the Senhance System. We recognized $1.1 million and $2.5 million of income tax benefit for the three months and nine months ended September 30, 2019, respectively, compared to $0.8 million and $2.6 million of income tax benefit for the same comparable three and nine month periods of 2018.
Liquidity and Capital Resources
Going Concern
The Company's consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $649.9 million as of September 30, 2019, and has working capital of $34.4 million as of September 30, 2019. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. In order to continue as a going concern, the Company will need, among other things, additional capital resources.
Traditionally, the Company has raised additional capital through equity offerings. Management's plan to obtain such resources for the Company may include additional sales of equity, traditional financing, such as loans, entry into a strategic collaboration, entry into an out-licensing arrangement or provision of additional distribution rights in some or all of our markets. In addition, the Company is considering strategic alternatives, including a fundamental business combination transaction. If the Company is unable to obtain adequate capital through one of these methods, it would need to reduce its sales and marketing and administrative expenses, delay research and development projects, including the purchase of equipment and supplies, and take other steps to reduce its expenses 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. Management cannot provide any assurance that the Company will be successful in accomplishing any or all of its plans. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that these financial statements are issued. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
Sources of Liquidity
Our principal sources of cash to date have been proceeds from public offerings of common stock, private placements of common and preferred stock, incurrence of debt, the sale of equity securities held as investments and asset sales.
We currently have one effective shelf registration statement on file with the SEC, which registers up to $150.0 million of debt securities, common stock, preferred stock, or warrants, or any combination thereof for future financing transactions. The shelf registration statement was declared effective by the SEC on May 19, 2017. We have raised $50.0 million in gross proceeds and approximately $48.5 million in net proceeds under such shelf registration statement through the sale of all the shares available under the 2017 ATM Offering.
On December 28, 2018, we entered into the 2018 Sales Agreement with Stifel, as sales agent, pursuant to which we could sell through Stifel, from time to time, up to $75.0 million in shares of common stock in an at-the-market offering under the shelf registration statement. Effective August 12, 2019, the Company terminated the 2018 Sales Agreement. The Company sold no shares of its common stock under the Stifel Sales Agreement.
On August 12, 2019, the Company entered into the 2019 Sales Agreement with Cantor as sales agent, to which we can sell through Cantor from time to time up to an aggregate of $25.0 million shares of the Company’s common stock. As of September 30, 2019, the Company has raised $5.1 million in gross proceeds under this ATM.
On September 4, 2019, the Company entered into the 2019 Underwriting Agreement with Cantor as underwriter, offering 28,000,000 shares of the Company’s common stock. In addition, the Company granted the Underwriter a 30-day option to purchase 4,200,000 of additional shares of common stock, which was not exercised. As of September 30, 2019, the Company raised $18.8 million in gross proceeds under the 2019 Underwriting Agreement.
As of September 30, 2019, the Company had approximately $56.2 million available under the effective shelf registration statement.
As of September 30, 2019, the Company did not meet the financial covenant related to actual net revenue as compared to projected net revenue. Under the Hercules Second Amendment, the applicable waiver condition for fiscal year 2019 has been changed to maintenance of unrestricted cash equal to $7.0 million. The Hercules Loan Agreement was terminated on November 4, 2019. Please see the description of the Hercules Loan Agreement above in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations ‑ Debt Refinancing.”
At September 30, 2019, we had cash and cash equivalents, excluding restricted cash, of approximately $22.1 million. With the proceeds from the amended AutoLap agreement of $17.0 million and cost cutting measures being implemented, the Company believes it has adequate cash on hand to operate into the first quarter of 2020. Please see the description of the sale of the AutoLap Assets above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ‑ MST Acquisition and Related Transactions - Sale of AutoLap Assets.”
On October 17, 2019, the Company announced that it has engaged J.P. Morgan Securities LLC to assist the Board of Directors in considering strategic alternatives for the Company to enhance stockholder value, including, but not limited to a sale of the Company, a financing of the Company, a strategic partnership or collaboration or some other form of commercial relationship. In addition, the Company announced the implementation of a restructuring plan to reduce operating expenses as it continues the global market development of the Senhance platform.
Consolidated Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
(in millions)
|
|
|
|
|
Net cash (used in) provided by
|
|
|
|
|
Operating activities
|
$
|
(59.1
|
)
|
|
$
|
(35.6
|
)
|
|
Investing activities
|
51.7
|
|
|
(35.6
|
)
|
|
Financing activities
|
8.7
|
|
|
16.1
|
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
(0.1
|
)
|
|
(0.1
|
)
|
|
Net increase (decrease) in cash, cash
equivalents and restricted cash
|
$
|
1.2
|
|
|
$
|
(55.2
|
)
|
Operating Activities
For the nine months ended September 30, 2019, cash used in operating activities of $59.1 million consisted of a net loss of $140.5 million and cash used for working capital of $13.7 million, offset by non-cash items of $95.1 million. The non-cash items primarily consisted of $86.9 million in impairment charges, $9.7 million of stock-based compensation expense, $8.9 million of amortization, $1.7 million of depreciation, $1.6 million in bad debt expense, $0.8 million in interest expense on deferred consideration related to the MST acquisition, and $0.8 million related to the write-down of obsolete inventory, offset by a $3.0 million change in fair value of warrant liabilities, $9.7 million change in fair value of contingent consideration and $2.5 million deferred income tax benefit. The decrease in cash from changes in working capital primarily relates to $14.1 million in increased inventory, and a $2.3 million increase in other current and long-term assets, which was partially offset by cash provided from accounts receivable of $4.3 million.
For the nine months ended September 30, 2018, cash used in operating activities of $35.6 million consisted of a net loss of $55.3 million and cash used for working capital of $6.1 million, offset by non-cash items of $25.8 million. The non-cash items primarily consisted of $24.4 million change in fair value of warrant liabilities, $8.8 million of amortization, $6.7 million of stock-based
compensation expense, $1.9 million of depreciation, $1.4 million loss on debt extinguishment, and $0.1 million change in fair value of contingent consideration, offset by $11.9 million gain from sale of SurgiBot assets, $3.0 million recovery of transfer fee and $2.6 million deferred income tax benefit. The decrease in cash from changes in working capital included $1.3 million increase in inventories, $4.3 million increase in accounts receivable and $0.9 million decrease in accounts payable, offset by $0.4 million increase in deferred revenue.
Investing Activities
For the nine months ended September 30, 2019, net cash provided by investing activities was $51.7 million. This amount primarily consists of $65.0 million in proceeds from maturities of short-term investments, offset by $12.9 million and $0.4 million in purchases of short-term investments and property and equipment, respectively.
For the nine months ended September 30, 2018, net cash used in investing activities was $35.6 million. This amount primarily consists of $39.6 million and $0.5 million in purchases of short-term investments and property and equipment, respectively, offset by $4.5 million proceeds related to the sale of SurgiBot assets.
Financing Activities
For the nine months ended September 30, 2019, net cash provided by financing activities was $8.7 million. The net change primarily related to proceeds received from the issuance of common stock, net of issuance costs, and from the exercise of stock options and warrants, totaling $23.7 million and $0.5 million, respectively, partially offset by the $15.0 million principal repayment to Hercules Capital and taxes paid by the Company in February 2019 related to the settlement of vested RSUs of $0.5 million.
For the nine months ended September 30, 2018, net cash provided by financing activities was $16.1 million. This amount was primarily related to $18.8 million in proceeds from the issuance of debt, which was partially offset by $15.3 million in payment of debt, $11.4 million in proceeds from the exercise of stock options and warrants and $3.0 million received for shares issued related to the sale of the SurgiBot assets, offset by $1.6 million related to the taxes withheld on RSU awards and $0.4 million payment of contingent consideration.
Operating Capital and Capital Expenditure Requirements
We intend to spend substantial amounts on commercial activities, on research and development activities, including product development, regulatory and compliance, clinical studies in support of our future product offerings, the enhancement and protection of our intellectual property, and on contingent consideration payments in connection with the acquisition of the Senhance System. We will need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, debt financings, strategic collaborations, other funding transactions or a fundamental business combination transaction. There can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise. If we are unable to obtain the necessary capital, we will need to pursue a plan to license or sell our assets, seek to be acquired by another entity, cease operations and/or seek bankruptcy protection.
Cash and cash equivalents held by our foreign subsidiaries totaled $1.5 million at September 30, 2019, including restricted cash. We do not intend or currently foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed in the U.S., we believe that the potential U.S. tax impact to repatriate these funds would be immaterial.
Hercules Loan Agreement
On May 23, 2018, the Company and its domestic subsidiaries, as co-borrowers, entered into the Hercules Loan Agreement with several banks and other financial institutions or entities from time to time party to the Hercules Loan Agreement and Hercules Capital, Inc., as administrative agent and Collateral Agent. Effective April 30, 2019, the Hercules Loan Agreement was amended to eliminate the availability of the Tranche III loan facility, add a new Tranche IV loan facility of up to $20 million, revise certain financial covenants and make other changes. On July 10, 2019, the Company entered into the Consent and Second Amendment to the Loan and Security Agreement on July 10, 2019 (the “Hercules Second Amendment”). Under the Hercules Second Amendment, in consideration for the consent to the sale of, and the release of the Lender’s security interest on, the AutoLap assets, the Company reduced its indebtedness under the Hercules Loan Agreement by repaying $15.0 million (net of issuance costs totaling $0.7 million), of the $30.0 million of outstanding indebtedness thereunder, without any prepayment penalties, amendment fee or acceleration of the end of term charges, and received adjustments to the quarterly financial covenants and related waiver conditions to reflect the decreased outstanding indebtedness. On November 4, 2019, the Company entered into a payoff letter with the Agent pursuant to which the Company terminated the Hercules Loan Agreement, as amended. The Company determined it was in the best interests of the Company to pay down the debt and terminate the Hercules Agreement to simplify the Company's balance sheet and provide
additional flexibility as the Board of Directors continues to explore strategic and financial alternatives for the Company. Under the payoff letter, the Company repaid all amounts owed under the Hercules Loan Agreement totaling approximately $16.4 million, which included end of term fees of $1.4 million, and Hercules released all security interests held on the assets of the Company and its subsidiaries, including, without limitation, on the intellectual property assets of the Company. Please see the description of the Hercules Loan Agreement above in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations ‑ Debt Refinancing.”
Innovatus Loan Agreement
On May 10, 2017, the Company and its domestic subsidiaries, as co-borrowers, entered into the Innovatus Loan Agreement with Innovatus Life Sciences Lending Fund I, LP, as lender and collateral agent. Please see the description of the Innovatus Loan Agreement above in “Notes to Consolidated Financial Statements (Unaudited)– Note. 13. Notes Payable.”, and incorporated by reference herein.
In connection with the entry into the Hercules Loan Agreement, the proceeds of which were used to repay the Innovatus Loan, we were obligated to pay final payment and prepayment fees under the Innovatus Loan Agreement. The final payment fee obligation was $1.0 million and was paid during the year ended December 31, 2018.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth above under the headings “Results of Operations” and “Liquidity and Capital Resources” have been prepared in accordance with U.S. GAAP and should be read in conjunction with our financial statements and notes thereto appearing in this Form 10-Q and in the Fiscal 2018 Form 10-K. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including identifiable intangible assets and goodwill, business acquisitions, in-process research and development, contingent consideration, warrant liabilities, stock-based compensation, inventory, revenue recognition and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the Financial Statements in this Form 10-Q. Actual results may differ from these estimates under different assumptions and conditions.
While all accounting policies impact the financial statements, certain policies may be viewed as critical. Critical accounting policies are those that are both most important to the portrayal of financial condition and results of operations and that require management’s most subjective or complex judgments and estimates. Our management believes the policies that fall within this category are the policies on accounting for identifiable intangible assets and goodwill, business acquisitions, in-process research and development, contingent consideration, warrant liabilities, stock-based compensation, inventory, revenue recognition and income taxes.
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets consist of purchased patent rights recorded at cost and developed technology acquired as part of a business acquisition recorded at estimated fair value. Intangible assets are amortized over 5 to 10 years. We periodically evaluate identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Indefinite-lived intangible assets, such as goodwill, are not amortized. We test the carrying amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists by performing either a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors, including industry, market and general economic conditions, market value, and future projections to determine whether it is more likely than not that the fair value of a reporting unit is less than it’s carrying amount, including goodwill.
Due to recent market conditions as well as reduced forecasts, the Company did an impairment analysis of its goodwill and its IPR&D as of September 30, 2019. For a description of the procedures followed see above under "Management's Discussion and Analysis and Results of Operations - Impairment of Goodwill and Intangible Assets."
As of September 30, 2019, the Company determined that the goodwill associated with the business was impaired, and recorded an impairment charge of $79.0 million. The impairment charge resulted from decreased sales and estimated cash flows and a recent decline in the Company's stock price.
As of December 31, 2018, we elected to bypass the qualitative assessment and calculated the fair value of our sole reporting unit based on our market capitalization, which exceeded the carrying amount. Accordingly, no charge for goodwill impairment was required as of December 31, 2018.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. Key assumptions used in the annual goodwill impairment test are highly judgmental and include selection of comparable companies and amount of control premium. Any change in these indicators or key assumptions could have a significant negative impact on the Company's financial condition, impact the goodwill impairment analysis or cause the Company to perform a goodwill impairment analysis more frequently than once per year.
Business Acquisitions
Business acquisitions are accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date. For certain assets and liabilities, book value approximates fair value. In addition, ASC 805 establishes that consideration transferred be measured at the closing date of the acquisition at the then-current market price. Under ASC 805, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred. The application of the acquisition method of accounting requires the Company to make estimates and assumptions related to the estimated fair values of net assets acquired.
Significant judgments are used during this process, particularly with respect to intangible assets. Generally, intangible assets are amortized over their estimated useful lives. Goodwill and other indefinite-lived intangibles are not amortized, but are annually assessed for impairment. Therefore, the purchase price allocation to intangible assets and goodwill has a significant impact on future operating results.
In-Process Research and Development
In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired, which at the time of acquisition have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development projects. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.
As of September 30, 2019, the Company also did an impairment analysis related to its IPR&D, and concluded that under the market value approach, the fair value of its IPR&D was lower than the carrying value and recorded an impairment charge of $7.9 million.
The IPR&D from MST was acquired on October 31, 2018.
Contingent Consideration
Contingent consideration is recorded as a liability and measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate associated with the risks of the expected cash flows attributable to the various milestones. Significant increases or decreases in any of the probabilities of success or changes in expected timelines for achievement of any of these milestones would result in a significantly higher or lower fair value of these milestones, respectively, and commensurate changes to the associated liability. The fair value of the contingent consideration at each reporting date will be updated by reflecting the changes in fair value in our statements of operations and comprehensive loss.
Warrant Liabilities
For the Series B Warrants, the warrants are recorded as liabilities and are revalued at each reporting period. The change in fair value is recognized in the consolidated statements of operations and comprehensive loss. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known. As the warrant liability is required to be measured at fair value at each reporting date, it is reasonably possible that these estimates and assumptions could change in the near term.
Stock-Based Compensation
We recognize 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. We use 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 by us has been determined based upon the simplified method, because we do not have sufficient historical information regarding our 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. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. We estimate forfeitures based on our historical experience and adjust the estimated forfeiture rate based upon actual experience.
Inventory
Inventory, which includes material, labor and overhead costs, is stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. We record reserves, when necessary, to reduce the carrying value of inventory to its net realizable value. At the point of loss recognition, a new, lower-cost basis for that inventory is established, and any subsequent improvements in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Any inventory on hand at the measurement date in excess of the Company's current requirements based on anticipated levels of sales is classified as long-term on the Company's consolidated balance sheets. The Company's classification of long-term inventory requires us to estimate the portion of on hand inventory that can be realized over the upcoming twelve months.
Revenue Recognition
Our revenue consists of product revenue resulting from the sale of systems, system components, instruments and accessories, and service revenue. We account 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. Our 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.
Our system sale arrangements generally contain multiple products and services. For these bundled sale arrangements, we account 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 bundled package, and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Our system sale arrangements include a combination of the following performance obligations: system(s), system components, instruments, accessories, and system service. Our system sale arrangements generally include a five-year period of service. The first year of service is generally free and included in the system sale arrangement and the remaining four years are generally included at a stated service price. We consider the service terms in the arrangements that are legally enforceable to be performance obligations. Other than service, we generally satisfy all of the performance obligations up-front. System components, system accessories, instruments, accessories, and service are also sold on a standalone basis.
We recognize revenues as the performance obligations are satisfied by transferring control of the product or service to a customer. We generally recognize revenue for the performance obligations at the following points in time:
|
|
|
|
•
|
System sales. For systems and system components sold directly to end customers, revenue is recognized when we transfer 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, with the distributors responsible for installation, revenue is recognized generally at the time of shipment. Our 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.
|
|
|
|
|
•
|
Instruments and accessories. Revenue from sales of instruments and accessories is recognized when control is transferred to the customers, which generally occur at the time of shipment, but also occur at the time of delivery depending on the customer arrangement. Accessory products include sterile drapes used to help ensure a sterile field during surgery, vision products such as replacement endoscopes, camera heads, light guides, and other items that facilitate use of the Senhance Surgical System.
|
|
|
|
|
•
|
Service. Service revenue is recognized ratably over the term of the service period as the customers benefit from the service throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed.
|
For multiple-element arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on observable prices at which we separately sell the products or services. Due to limited sales to date, standalone selling prices are not yet directly observable. We estimate 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. We regularly review standalone selling prices and update these estimates if necessary. 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 our system sales contracts that will be invoiced and recognized as revenue in future periods.
We invoice our customers based on the billing schedules in our 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. 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.
In connection with assets recognized from the costs to obtain a contract with a customer, we have determined that sales incentive programs for our sales team do not meet the requirements to be capitalized as we do not expect to generate future economic benefits from the related revenue from the initial sales transaction.
Income Taxes
We account 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 our 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.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Legislation”) was enacted into law, which reduced the U.S. federal corporate income tax rate to 21% for tax years beginning after December 31, 2017. As a result of the newly enacted tax rate, we adjusted our U.S. deferred tax assets as of December 31, 2017, by applying the new 21% rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $36.1 million.
The Tax Legislation also implements a territorial tax system. Under the territorial tax system, in general, our foreign earnings will no longer be subject to tax in the U.S. As part of transition to the territorial tax system the Tax Legislation includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. We estimate that the deemed repatriation will not result in any additional U.S. income tax liability as we estimate we currently have no undistributed foreign earnings.
In accordance with Staff Accounting Bulletin (“SAB”) No. 118, income tax effects of the Tax Legislation were able to be refined upon obtaining, preparing, or analyzing additional information during a measurement period of one year. During the measurement period provisional amounts were able to be adjusted for the effects, if any, of interpretive guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies. No adjustments were made during the measurement period.
Recent Accounting Pronouncements
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Fiscal 2018 Form 10-K, as well as the notes to the consolidated financial statements above in this Form 10-Q, for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on our Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss.