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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion of our financial condition and results of operations should be read in conjunction with our “Risk Factors” and our consolidated financial statements and the related notes to our consolidated financial statements included in this Annual Report. The following discussion contains forward-looking statements. See cautionary note regarding “Forward-Looking Statements” at the beginning of this Annual 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 market development for and commercialization of the Senhance® Surgical System, which digitizes laparoscopic minimally invasive surgery, or MIS. The Senhance System is the first and only digital, multi-port laparoscopic platform designed to maintain laparoscopic MIS standards while providing digital benefits such as haptic feedback, robotic precision, comfortable ergonomics, advanced instrumentation including 3 millimeter microlaparoscopic instruments, eye-sensing camera control and reusable standard instruments to help maintain per-procedure costs similar to traditional laparoscopy.
The Senhance System is available for sale in Europe, the United States, Japan, Taiwan and select other countries.
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The Senhance System has a CE Mark in Europe for adult and pediatric laparoscopic abdominal and pelvic surgery, as well as limited thoracic surgeries excluding cardiac and vascular surgery.
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In the United States, the Company has received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery in a total of 28 indicated procedures, including benign and oncologic procedures, laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery.
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In Japan, the Company has received regulatory approval and reimbursement for 98 laparoscopic procedures.
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During 2018 and 2019, we successfully obtained FDA clearance and CE Mark for our 3 millimeter diameter instruments, our Senhance ultrasonic system, our 3 millimeter and 5 millimeter hooks, and the Senhance articulating system. The 3 millimeter instruments enable the Senhance System to be used for microlaparoscopic surgeries, allowing for tiny incisions. The ultrasonic system is an advanced energy device used to deliver controlled energy to ligate and divide tissue, while minimizing thermal injury to surrounding structures. The Senhance articulating system was launched in Europe in November 2019 and we are evaluating our pathway forward to launch such a system in the United States with a planned submission for US clearance at the end of 2020.
In January 2020, we submitted an application to the FDA seeking clearance of the first machine vision system for robotic surgery (Intelligent Surgical Unit). The Company believes it is the first such FDA submission seeking clearance for machine vision technology in abdominal robotic surgery. On March 13, 2020, the Company announced that it has received FDA clearance for the Intelligent Surgical Unit.
In February 2020, we received CE Mark for the Senhance System and related instruments for pediatric use indications in CE Mark territories.
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 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 October 15, 2019, the Company announced the sale of certain AutoLap assets, as discussed in the "Sale of AutoLap Assets" section below.
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, which 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. We expect to continue to invest in research and development and market development as we implement our strategy.
Since inception, we have been unprofitable. As of December 31, 2019, we had an accumulated deficit of $663.6 million.
Due to a decline in market conditions and changes in our forecast, the Company tested its goodwill and in-process research & development, or IPR&D, for potential impairment as of September 30, 2019. 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.
We operate in one business segment.
On December 11, 2019, following receipt of approval from stockholders at a special meeting of stockholders held on the same day, the Company filed an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of one-for-thirteen, or the Reverse Stock Split. The Company’s common stock began trading on a split-adjusted basis on NYSE American on the morning of December 12, 2019. No fractional shares were issued in connection with the Reverse Stock Split. Instead, the Company rounded up each fractional share resulting from the reverse stock split to the nearest whole share. As a result of the Reverse Stock Split, the Company’s outstanding common stock decreased from approximately 261.9 million shares to approximately 20.2 million shares (without giving effect to the rounding up for each fractional share).
Unless otherwise noted, all share and per share data referenced in this Annual Report have been retroactively adjusted to reflect the Reverse Stock Split. Certain amounts in the financial statements, the notes thereto, and elsewhere in this Annual Report, may be slightly different than previously reported due to rounding of fractional shares as a result of the Reverse Stock Split.
Restructuring
Despite the number of advances and regulatory clearances received in 2018 and 2019, the Company’s Senhance System sales in 2019 were disappointing. Adoption of new technologies, particularly for capital intensive devices such as the Senhance System can be slow and uneven as market development and commercial development is time-consuming and expensive. The Company has determined to refocus its resources and efforts in 2020 on market development activities to increase awareness of:
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the benefits of the use of the Senhance System in laparoscopic surgery;
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the digitization of high volume procedures using the Senhance System;
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the indications for use, including pediatric indications of use in CE Mark territories;
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the overall cost efficiency of the Senhance System
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We intend to focus on markets with high utilization of laparoscopic technique, including Japan, Western Europe and the United States. Our focus will be on (1) increasing the number of placements of the Senhance System, not necessarily through sales, but through leasing arrangements, (2) increasing the number of procedures conducted using the Senhance System quarter over quarter, and (3) solidifying key opinion leader support and publications related to the use of the Senhance System in laparoscopic procedures. During this period we will not focus on revenue targets, especially in the United States.
During the fourth quarter of 2019, we announced the implementation of a restructuring plan to reduce operating expenses as we continue the global market development of the Senhance platform. Under the restructuring plan, we reduced headcount primarily in the sales and marketing functions and determined that the carrying value of our inventory exceeded the net realizable value due
to a decrease in expected sales. The restructuring charges amounted to $8.8 million, of which $7.4 million was an inventory write down and was included in cost of product revenue and $1.4 million related to employee severance costs and was included as restructuring and other charges in the consolidated statements of operations and comprehensive loss, during the fourth quarter of 2019. Future payments under the restructuring plan are expected to conclude in 2020.
During March 2020, we continued our restructuring with additional headcount reductions which resulted in $0.8 million related to severance costs which are expected to be paid in 2020 and 2021.
Debt Transactions
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 Loan Agreement, or 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. Funding of the first $20.0 million tranche occurred 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 have been 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 were required to be repaid if the term loans are accelerated following an event of default.
On May 7, 2019, the parties executed an amendment to the Hercules Loan Agreement, or the Hercules Amendment, effective April 30, 2019, under which 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 $20.0 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 was not achieved as of the last day of any fiscal quarter, as tested on the thirtieth day after quarter end, the Company must have complied with the waiver conditions in the Hercules Amendment from such test date until the next quarterly test date. The Amendment was treated as a debt modification for accounting purposes.
In connection with the entry into an agreement to sell certain 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 such AutoLap assets sale. 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, or 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) 9.55% per annum, or 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 was 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 occurred 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 was required to pay a final fee of 6.95% of the aggregate principal amount of term loans funded. The final payment fee was 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 were 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 contained customary representations and covenants that, subject to
exceptions, restricted 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 were not related to its existing business. Under the terms of the Hercules Loan Agreement, the Company was required to maintain cash and/or investment property in accounts which perfected 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 were more than 90 days past due and (ii) 80% of the aggregate cash of the Company and its consolidated subsidiaries. The Agent was 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 continued to evaluate 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. The Company recognized a loss of $1.0 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, 2019.
In connection with its entrance into the Hercules Loan Agreement in 2018, the Company repaid its existing loan and security agreement, or the Innovatus Loan Agreement, with Innovatus Life Sciences Lending Fund I, LP, or Innovatus. The Company recognized a loss of $1.4 million on the extinguishment of notes payable which was included in interest expense on the consolidated statements 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. For a description of the Innovatus Loan Agreement, see “Notes to Consolidated Financial Statements – Note 13. Notes Payable.”
Financing Transactions
May 2017 Public Offering
On April 28, 2017, we entered into an underwriting agreement with Stifel, Nicolaus & Company, Incorporated, or Stifel, relating to an underwritten public offering of an aggregate of 24.9 million Units, each consisting of approximately 0.077 shares of the Company’s Common Stock, a Series A Warrant to purchase approximately 0.077 shares of Common Stock and a Series B Warrant to purchase approximately 0.058 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. 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 December 31, 2019 were approximately $37.6 million.
Each Series A Warrant had an initial exercise price of $13.00 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 had an initial exercise price of $13.00 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 December 31, 2019, Series B Warrants representing approximately 1.2 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, September, November, and December 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 - Note 16 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.
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 736,914 shares of common stock underlying the then-outstanding Series B Warrants. This registration statement on Form S-3 was declared effective on January 29, 2018. On February 7, 2020, we filed a new registration statement (File No. 333-236337) to register 2,500,000 additional shares of common stock to cover the “down-round protection” adjustments made to the Series B Warrant Shares pursuant to sale prices below the then-current exercise price. This registration statement on Form S-3 was declared effective on February 13, 2020.
On February 24, 2020, the Company entered into a Series B Warrants Exchange Agreement, or the Exchange Agreement, with holders of Series B Warrants. Under the terms of the Exchange Agreement, each Series B Warrant was canceled in exchange for 0.61 of a share of common stock. The Warrant holders participating in the exchange held 3,373,900 of the 3,638,780 Series B Warrants then outstanding, and received an aggregate of 2,040,757 shares of common stock, leaving 264,880 Series B Warrants outstanding to acquire 160,226 shares of common stock.
Lincoln Park Purchase Agreement
On February 10, 2020, we entered into a purchase agreement, or the LPC 2020 Purchase Agreement, with Lincoln Park, pursuant to which we have the right to sell to Lincoln Park up to an aggregate of $25,000,000 in shares of our common stock, subject to certain limitations and conditions set forth in the LPC 2020 Purchase Agreement, including a limitation on the
number of shares of common stock we can put to LPC and the pricing parameters for the sales. In consideration for entering into the LPC 2020 Purchase Agreement, we issued to Lincoln Park 343,171 shares of Common Stock as commitment shares. We also committed to issue up to an additional 171,585 shares of Common Stock to Lincoln Park on a pro rata basis based on the number of shares Common Stock purchased by Lincoln Park pursuant to the LPC 2020 Purchase Agreement.
At-the-Market Offerings
On December 28, 2018, we entered into an At-the-Market Equity Offering Sales Agreement, or the 2018 Sales Agreement, with Stifel, Nicolaus & Company, Incorporated, or 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, or the 2019 Sales Agreement, with Cantor Fitzgerald & Co., or 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, or 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 $7.2 million under the 2019 ATM Offering and net proceeds of $7.0 million during the year ended December 31, 2019, and an additional $11.6 million of gross proceeds and $11.2 million of net proceeds to date in 2020.
On September 4, 2019, the Company entered into an Underwriting Agreement, or the Underwriting Agreement, with Cantor. Subject to the terms and conditions of the 2019 Underwriting Agreement, the Company sold to Cantor, in a firm commitment underwritten offering, 2,153,846 shares of the Company’s common stock, or the Firm Commitment Offering. In addition, the Company granted Cantor a 30-day option to purchase 323,077 of additional shares of common stock. The Company raised $18.8 million in gross proceeds under this offering. The option to purchase additional shares of common stock was not exercised.
The following table summarizes the total sales under the 2019 ATM Offering and Firm Commitment Offering for the period indicated (in thousands except for share and per share amounts):
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2019
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Firm Commitment
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ATM Offering
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Offering
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For the year ended
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For the year ended
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Total
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December 31, 2019
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December 31, 2019
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December 31, 2019
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Total shares of common stock sold
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1,374,686
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2,153,846
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3,528,532
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Average price per share
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$
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5.23
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$
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8.73
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$
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7.37
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Gross proceeds
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$
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7,193
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$
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18,796
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$
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25,989
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Commissions earned by Cantor
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$
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212
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$
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—
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$
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212
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Net Proceeds
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$
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6,981
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$
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18,796
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$
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25,777
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Since January 1, 2020, the Company has raised, under the 2019 ATM Offering, net proceeds of $11.2 million through the sale of 6,687,846 shares of common stock.
2020 Public Offering
On March 10, 2020, the Company closed an underwritten public offering (the "2020 Public Offering") with Ladenburg Thalmann & Co. Inc. as underwriter and sold an aggregate of 14,121,766 Class A Units at a public offering price of $0.68 per Class A Unit and 7,937,057 Class B Units at a public offering price of $0.68 per Class B Unit. Each Class A Unit consists of one share of the Company’s common stock, one warrant to purchase one share of common stock that expires on the first anniversary of the date of issuance (the "Series C Warrants"), and one warrant to purchase one share of common stock that expires on the fifth anniversary of the date of issuance (the "Series D Warrants"). Each Class B Unit consists of one share of Series A Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), convertible into one share of common stock, a Series C Warrant to purchase one share of common stock and a Series D Warrant to purchase one share of common stock. The Class A Units and Class B Units have no stand-alone rights and were not certificated or issued as stand-alone securities. The shares of common stock, Series A Preferred Stock, Series C Warrants and Series D Warrants are immediately separable. In addition, the underwriter for the public offering exercised an overallotment option allowing it to purchase 3,308,823 additional Series C Warrants and 3,308,823 additional Series D Warrants at the closing.
Each Series C Warrant included in the Units has an exercise price of $0.68 per share, and each Series D Warrant included in the Units has an exercise price of $0.68 per share. The Series C Warrants and the Series D Warrants are exercisable at any time on or after the date of issuance until their respective expiration dates.
The exercise prices and the number of shares issuable upon exercise of each of the Series C Warrants and Series D Warrants are subject to adjustment upon the occurrence of stock splits or dividends, business combinations, similar recapitalization transactions, or other similar transactions. The exercisability of the Series C Warrants and Series D Warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Common Stock. If, at any time Series C Warrants or Series D Warrants are outstanding, any fundamental transaction occurs, as described in the 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 holders of the Series C Warrants and Series D Warrants. Additionally, in the event of a fundamental transaction, each holder of the Series C Warrants and Series D Warrants will have the right to require the Company, or its successor, to repurchase the Series C Warrants and Series D Warrants it holds for an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of such Series C Warrants or Series D Warrants, as applicable.
The shares of Series A Preferred Stock rank on par with the shares of the common stock with regard to dividend rights and distributions of assets upon liquidation, dissolution or winding up of the Company. With certain exceptions, as described in the Series A Certificate of Designation, the shares of Series A Preferred Stock have no voting rights. However, as long as any shares of Series A Preferred Stock remain outstanding, the Series A Certificate of Designation provides that the Company shall not, without the affirmative vote of holders of a majority of the then outstanding shares of Series A Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock or alter or amend the Series A Certificate of Designation, (b) amend the Company’s certificate of incorporation or other charter documents in any manner that adversely affects
any rights of the holders of Series A Preferred Stock, (c) increase the number of authorized shares of Series A Preferred Stock, or (d) enter into any agreement with respect to any of the foregoing.
Each share of Series A Preferred Stock is convertible at any time at the holder’s option into one share of common stock, which conversion ratio will be subject to adjustment for stock splits, stock dividends, distributions, subdivisions and combinations and other similar transactions as specified in the Series A Certificate of Designation. Notwithstanding the foregoing, the Series A Certificate of Designation further provides that the Company shall not effect any conversion of the shares of Series A Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series A Preferred Stock (together with such holder’s affiliates and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of Common Stock in excess of 4.99% (or 9.99% at the election of the holder prior to the date of issuance) of the shares of Common Stock then outstanding. At the holder’s option, upon notice to the Company, the holder may increase or decrease this beneficial ownership limitation not to exceed 9.99% of the shares of Common Stock then outstanding, with any such increase becoming effective upon 61 days’ prior notice to the Company.
The net proceeds to the Company from the 2020 Public Offering were approximately $13.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
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 MST, and two of the Company’s wholly owned subsidiaries, as purchasers of the assets of the Seller, including the intellectual property assets, or 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 MST's assets consisting of intellectual property and tangible assets related to surgical analytics with its core image analytics technology designed to empower and automate the surgical environment, with a focus on medical robotics and computer-assisted surgery. The core technology acquired under the MST Purchase Agreement is a software-based image analytics information platform powered by advanced visualization, scene recognition, artificial intelligence, machine learning and data analytics.
Under the terms of the MST Purchase Agreement, at the closing the Buyers purchased substantially all of the assets of MST. The acquisition price consisted of two tranches. At or prior to the closing of the transaction the Buyers paid $5.8 million in cash and approximately 242,310 shares of the Company’s common stock, or 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 payment of additional consideration of $6.6 million due to MST under the MST Purchase Agreement by issuing shares of the Company's common stock, as permitted by the MST Purchase Agreement. The number of shares issued to MST as the additional consideration was 370,423 shares of common stock, or the Additional Consideration Shares. In accordance with the provisions 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 Company's common stock as quoted on the NYSE American for the ninety (90) day period ended August 6, 2019.
Sale of AutoLap Assets
On July 3, 2019, the Company entered into a System Sale Agreement with GBIL to sell certain assets related to the AutoLap technology. On October 15, 2019, the Company amended the prior AutoLap Sale Agreement with GBIL. Pursuant to the amended agreement the Company sold the AutoLap laparoscopic vision system, or AutoLap, and related assets to GBIL. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap. The purchase price was $17.0 million, all of which was received in 2019 in the form of $16 million in cash and a payment by GBIL of $1.0 million to settle certain Company obligations in China. Under the amended AutoLap Agreement, the Company entered into a cross‑license agreement with GBIL to retain rights to use any AutoLap-related intellectual property sold to GBIL, and to non-exclusively license additional intellectual property to GBIL. The Company recorded a $16 million gain on the sale of the AutoLap assets during the year ended December 31, 2019, which represented the proceeds received in excess of the carrying value of the assets, less contract costs.
Registration Rights and Lock-Up Agreements
In connection with the closing under the MST Purchase Agreement, or the MST Acquisition, the Company and MST entered into a lock-up agreement dated October 31, 2018, or the Lock-Up Agreement, pursuant to which MST agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the Initial Shares for six months following the closing date of the MST Purchase Agreement. As of the date of this Annual 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 May 1, 2020, or earlier upon certain other conditions. The Additional Consideration Shares were released from the lock-up restrictions on February 7, 2020.
In connection with the MST Acquisition, the Company also entered into a Registration Rights Agreement, dated as of October 31, 2018, with MST, pursuant to which the Company agreed to register the Initial Shares and Additional Consideration Shares, or collectively, the Securities Consideration, such that such Securities Consideration is eligible for resale following the end of the lock-up periods described above. All of the Securities Consideration is eligible to be sold by the holders without restriction
under Rule 144, therefore the Registration Rights Agreement has expired.
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, or the Purchase Agreement, with Sofar S.p.A., or Sofar, 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 Sofar, 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 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 1,195,647 shares of the Company’s common stock, or the Sofar Consideration, and approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration, or the Cash Consideration. The Sofar 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 286,360 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 $18.252 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.
As of December 31, 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 third tranche, consisting of €15.0 million, has not yet been paid
and is subject to certain sales revenue milestones. 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 Sofar, 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
In 2019, our revenue consisted of product and service revenue primarily resulting from the sale of a total of four Senhance Systems in Europe (one) and Asia (three), and related instruments, accessories and services for current and prior year system sales. The
Company also recognized $1.3 million during the year ended December 31, 2019 related to a 2017 system sale for which revenue was deferred until the first clinical use of the system, which occurred in the second quarter of 2019. In 2018, our revenue consisted of product and service revenue primarily resulting from the sale of a total of fifteen Senhance Systems in Europe (eleven), Asia (one) and the United States (three), and related instruments, accessories and services.
Product, instrument and accessory revenue for the year ended December 31, 2019 decreased to $7.1 million compared to $23.3 million for the year ended December 31, 2018. The $16.2 million decrease was the result of the revenue recognized on the sale of four Senhance Systems versus fifteen in the prior year, as well as instruments and accessories. Services revenue for the year ended December 31, 2019 increased to $1.4 million from $0.8 million for the year ended December 31, 2018 due to the increase in the number of Senhance Systems under service contracts.
We expect to experience some variability in the number and trend, and average selling price, of units sold given the early stage of commercialization of our products.
Cost of Revenue
Cost of revenue consists primarily of costs related to contract manufacturing, materials, and manufacturing overhead. We expense all inventory obsolescence provisions related to normal manufacturing changes 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.
Product cost for the year ended December 31, 2019 increased to $16.4 million as compared to $14.2 million for the year ended December 31, 2018. This $2.2 million increase over the prior year period was the result of the $7.4 million inventory write-down under our restructuring plan, increased personnel costs totaling $1.7 million, $0.6 million in increased standard cost variances, $0.3 million in increased travel, freight, and supplies costs, and a $1.5 million reserve for obsolete inventory offset by $9.1 million in lower product costs caused by decreased sales.
Service cost for the year ended December 31, 2019 increased to $4.3 million as compared to $2.0 million for the year ended December 31, 2018. This $2.3 million increase over the prior year period was the result of increased field service costs of $1.7 million for repairs and maintenance on a greater cumulative number of installed Senhance Systems, and a $0.6 million increase in personnel costs due to increased headcount.
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, but at a reduced rate due to the restructuring, as we continue to invest in additional regulatory approvals as well as new products, instruments and accessories to be offered with the Senhance System. R&D expenses are expensed as incurred.
R&D expenses for the year ended December 31, 2019 increased 3% to $22.5 million as compared to $21.8 million for the year ended December 31, 2018. The $0.7 million increase primarily relates to higher personnel costs totaling $1.6 million driven by higher headcount as a result of the MST acquisition offset by $0.5 million in lower technology fees, $0.2 million in lower consulting costs, and $0.2 million in lower testing and validation costs. R&D expenses for the year ended December 31, 2019 also include an impairment of IPR&D in the amount of $7.9 million that is presented separately in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2019.
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. We expect sales and marketing expenses to decrease significantly as we refocus our resources and efforts on market development activities pursuant to our restructuring plan.
Sales and marketing expenses for the year ended December 31, 2019 increased 9% to $28.0 million compared to $25.7 million for the year ended December 31, 2018. The $2.3 million increase was primarily related to increased personnel related costs of $0.8 million, increased travel of $0.8 million and increased product demonstration and trade show costs of $0.7 million as we increased our U.S, sales and marketing efforts 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 and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs, and general corporate expenses. In future periods, we expect general and administrative expenses to decrease due to the restructuring.
General and administrative expenses for the year ended December 31, 2019 increased 35% to $18.8 million compared to $13.9 million for the year ended December 31, 2018. The $4.9 million increase was primarily due to increased personnel costs of $1.5 million, increased consulting and outside services costs of $1.3 million, increased taxes, licenses, and fees of $0.4 million, increased facilities costs of $0.2 million, decreased travel costs of $0.1 million and a bad debt charge of $1.6 million. The Company recorded the bad debt charge due to uncertainty regarding collectability on a 2018 system sale in North Africa.
Restructuring Charge
During the fourth quarter of 2019, we announced the implementation of a restructuring plan to reduce operating expenses as we continue the global market development of the Senhance platform. Under the restructuring plan, we reduced headcount primarily in the sales and marketing functions and determined that the carrying value of our inventory exceeded the net realizable value due to a decrease in expected sales. The restructuring charges amounted to $8.8 million, of which $7.4 million was an inventory write down and was included in cost of product revenue and $1.4 million related to employee severance costs and was included as restructuring and other charges in the consolidated statements of operations and comprehensive loss, during the fourth quarter of 2019.
During March 2020, we continued our restructuring with additional headcount reductions which resulted in $0.8 million related to severance costs which are expected to be paid in 2020 and 2021.
Gain from Sale of AutoLap Assets, Net
The gain from the sale of AutoLap assets, net to GBIL was $16.0 million for the year ended December 31, 2019, as further explained in the "Overview" section. The gain represented the difference between the purchase price of $17 million and a $1 million liability incurred as a result of entering into the sale.
Gain from Sale of SurgiBot Assets, Net
The gain from the sale of SurgiBot assets, net to GBIL was $11.8 million for the year ended December 31, 2018, as further explained in the “Overview” section.
Amortization of Intangible Assets
Amortization of intangible assets for the year ended December 31, 2019 decreased to $10.3 million compared to $10.9 million for the year ended December 31, 2018. The $0.6 million decrease was primarily the result of a lower Euro to Dollar exchange rate.
Impairment of Goodwill and IPR&D Assets
The Company typically tests goodwill for impairment annually as of year-end, however, due to market conditions as well as reduced forecasts, we tested 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 significant 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.
No charge for goodwill and intangible asset impairment was required for the year ended December 31, 2018.
Change in Fair Value of Contingent Consideration
The change in fair value of contingent consideration in connection with the Senhance Acquisition was a $9.6 million decrease for the year ended December 31, 2019 compared to a decrease of $1.0 million for the year ended December 31, 2018. The net $8.6 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 $2.2 million for the year ended December 31, 2019 compared to an increase of $14.3 million for the year ended December 31, 2018. The net $16.5 million decrease in change in fair value of warrant liabilities for the year ended December 31, 2019 over the year ended December 31, 2018 includes re-measurement associated with the warrants exercised during the year ended December 31, 2019 and 2018, and the outstanding warrants at December 31, 2019. The decrease in value at December 31, 2019 was primarily the result of the decrease in the stock price at December 31, 2019 versus December 31, 2018.
Acquisition Related Costs
Acquisition related costs of $0.6 million for the year ended December 31, 2018 were incurred in connection with the MST Acquisition.
Reversal of Transfer Fee Accrual
In connection with the Senhance Acquisition, the Company recorded an accrual of $3.0 million in the third quarter of 2015 for the potential assessment of additional transfer fees that could be assessed during a three year period. In September 2018, the Company determined that the accrual was no longer required and reversed the accrual.
Interest Income
Interest income for the year ended December 31, 2019 was $0.6 million compared to $1.4 million for the year ended December 31, 2018. The decrease of $0.8 million was due to less cash and short-term investments on hand during the year ended December 31, 2019 earning less interest.
Interest Expense
Interest expense for the year ended December 31, 2019 was $4.6 million compared to $4.2 million for the year ended December 31, 2018. The Company incurred a $1.4 million loss on extinguishment of debt, classified as interest expense, during the second quarter of 2018 as compared to a $1.0 million loss on extinguishment of debt for the year ended December 31, 2019. This decrease in loss on extinguishment of debt was offset by greater interest incurred on the higher average principal balance of notes payable during 2019 as compared to 2018.
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 $3.1 million and $3.4 million of income tax benefit for the years ended December 31, 2019 and 2018, respectively.
Liquidity and Capital Resources
Going Concern
The Company's consolidated financial statements are prepared using U.S. generally accepted accounting principles (“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 $663.6 million as of December 31, 2019 and has working capital of $14.9 million as of December 31, 2019. The Company has not established sufficient sales revenues to cover its operating costs and requires additional capital to proceed with its operating plan. In October 2019, the Company announced the implementation of a restructuring plan to reduce operating expenses. During March 2020, the Company continued the restructuring efforts with additional headcount reductions. 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. The Company believes that its existing cash and cash equivalents from recent financings, together with cash received from product and instrument sales and leases will be sufficient to meet its anticipated cash needs into the fourth quarter of 2020.
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, as discussed below, the Company has engaged J.P. Morgan Securities LLC to assist it in 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 two effective shelf registration statements on file with the SEC. The first shelf registration statement was declared effective by the SEC on May 19, 2017 and registered up to $150.0 million of debt securities, common stock, preferred stock, or warrants, or any combination thereof for future financing transactions. The second shelf registration statement was declared effective by the SEC on February 10, 2020, and also registers up to $150.0 million of debt securities, common stock, preferred stock, or warrants, or any combination thereof for future financing transactions. We have raised or have reserved for issuance under such registration statements approximately $170.5 million since 2017. As of March 10, 2020, the Company had approximately $5.5 million available under the first effective shelf registration statement, which is due to expire in May 2020. As of the date of this Annual Report, the Company has approximately $124 million available for future financings under the second shelf registration statement.
For a discussion of our recent equity financings, see “Financing Transactions” above in this Management’s Discussion and Analysis and Results of Operations, and for a discussion of the 2019 sale of the AutoLap Assets, see “MST Acquisition and Related Transactions - Sale of AutoLap Assets” above in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 2019, we had cash and cash equivalents, excluding restricted cash, of approximately $9.6 million.
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 Company is continuing to evaluate all potential alternatives, including pursuit of financing opportunities.
Consolidated Cash Flow Data
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|
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|
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|
|
|
|
|
|
|
|
Years Ended December 31,
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|
|
2019
|
|
2018
|
|
(in millions)
|
|
|
|
|
Net cash (used in) provided by
|
|
|
|
|
Operating activities
|
$
|
(73.5
|
)
|
|
$
|
(48.5
|
)
|
|
Investing activities
|
67.6
|
|
|
(53.5
|
)
|
|
Financing activities
|
(5.6
|
)
|
|
26.5
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
0.4
|
|
|
(0.5
|
)
|
|
Net decrease in cash, cash equivalents and restricted cash
|
$
|
(11.1
|
)
|
|
$
|
(76.0
|
)
|
Operating Activities
For the year ended December 31, 2019, cash used in operating activities of $73.5 million consisted of a net loss of $154.2 million and cash used for working capital of $12.8 million, offset by non-cash items of $93.5 million. The non-cash items primarily consisted of $86.9 million in goodwill and IPR&D impairment, $11.5 million of stock-based compensation expense, $11.5 million of net amortization of intangible assets, debt discount and debt issuance costs and short-term investments discount, $2.2 million of depreciation, $1.6 million of bad debt expense, $1.0 million loss on debt extinguishment, $8.9 million related to the write-down of obsolete inventory, and $0.8 million in interest expense on deferred consideration related to the MST Acquisition, offset by $16.0 million gain from sale of AutoLap assets, $9.6 million change in fair value of contingent consideration, $3.2 million deferred income tax benefit, and $2.2 million change in fair value of warrant liabilities. The decrease in cash from changes in working capital included $16.4 million increase in inventories, $1.2 million decrease in accrued expenses, $1.0 million decrease in deferred revenue, $0.7 million decrease in accounts payable, and $0.7 million increase in other current and long term assets, offset by $6.1 million decrease in accounts receivable and $1.0 million increase in other long term liabilities. The decrease in cash from changes in working capital was primarily driven by an increase in manufacturing activities combined with decreased Senhance System sales in the current year.
For the year ended December 31, 2018, cash used in operating activities of $48.5 million consisted of a net loss of $61.8 million and cash used for working capital of $5.9 million, offset by non-cash items of $19.2 million. The non-cash items primarily consisted of $14.3 million change in fair value of warrant liabilities, $11.2 million of net amortization of intangible assets, debt discount and debt issuance costs and short-term investment discount, $9.0 million of stock-based compensation expense, $2.4 million of depreciation, and $1.4 million loss on debt extinguishment, offset by $11.8 million gain from sale of SurgiBot assets, $3.0 million reversal of transfer fee, $3.4 million deferred income tax benefit, and $1.0 million change in fair value of contingent consideration. The decrease in cash from changes in working capital included $2.1 million increase in inventories, $7.2 million increase in accounts receivable, and $0.3 million increase in other current and long term assets, offset by $0.8 million increase in accounts payable, $2.1 million increase in accrued expenses and $0.8 million increase in deferred revenue.
Investing Activities
For the year ended December 31, 2019, net cash provided by investing activities was $67.6 million. This amount primarily consists of $65.0 million proceeds from maturities of short-term investments and $16.0 million in proceeds related to the sale of the AutoLap assets, offset by $12.9 million purchase of short-term investments and $0.4 million purchases of property and equipment.
For the year ended December 31, 2018, net cash used in investing activities was $53.5 million. This amount primarily consists of $55.4 million purchase of short-term investments, $5.8 million payment for acquisition of MST and $0.8 million purchases of property and equipment, offset by $4.5 million proceeds related to the sale of the SurgiBot assets and proceeds from maturities of short-term investments of $4.0 million.
Financing Activities
For the year ended December 31, 2019, net cash used in financing activities was $5.6 million. This amount was primarily related to $31.4 million payment of notes payable and $0.5 million related to the taxes withheld on restricted stock unit, or RSU, awards, offset by $25.8 million in proceeds from the issuance of common stock and warrants and $0.5 million in proceeds from the exercise of stock options and warrants.
For the year ended December 31, 2018, net cash provided by financing activities was $26.5 million. This amount was primarily related to $28.5 million in proceeds from the issuance of debt, which was partially offset by $15.3 million in payment of debt, $12.4 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 $1.7 million related to the taxes withheld on RSU awards and $0.8 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, and the enhancement and protection of our intellectual property. 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 December 31, 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 United States, 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., or Hercules, 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, or 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. 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 the “Notes to the Consolidated Financial Statements - Note 13. Notes Payable.”
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 this “Management’s Discussion and Analysis of Financial Condition and Results of Operations ‑ Debt Refinancing.”
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.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations as of December 31, 2019 (in millions):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
Total
|
|
Less than
1 year
|
|
1 to 3 years
|
|
3 to 5 years
|
|
Thereafter
|
|
Operating leases
|
$
|
2.8
|
|
|
$
|
1.4
|
|
|
$
|
1.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
License, supply and vendor agreements
|
$
|
9.1
|
|
|
$
|
5.6
|
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
Total contractual obligations
|
$
|
11.9
|
|
|
$
|
7.0
|
|
|
$
|
2.5
|
|
|
$
|
1.3
|
|
|
$
|
1.1
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During 2019, the Company fully repaid its outstanding indebtedness to Hercules Capital, and all related liens and encumbrances
have been terminated. As of December 31, 2019, the third tranche contingent consideration that may be paid under the Purchase Agreement with Sofar upon the achievement of milestones is €15.0 million. Due to uncertainty regarding the timing and amount of future payments related to this liability, the amount is excluded from the contractual obligations table above.
Operating lease amounts include future minimum lease payments under all our non-cancelable operating leases with an initial term in excess of one year. We rent office space in North Carolina under an operating lease which expires in 2020. In Italy, we rent space for research and development and demonstration facilities under an operating lease which expires in 2022. In Israel, we rent space for research and development under an operating lease which expires in 2024. In Japan, we rent office space under an operating lease which expires in 2023. In Switzerland, we rent office space under an operating lease which expires in 2023. This table does not include obligations for any lease extensions.
License, supply and third party vendor agreements include agreements assumed as part of the Senhance Acquisition and other third party vendor agreements.
Off-Balance Sheet Arrangements
As of December 31, 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 Item 8 of this Annual Report. 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 Consolidated Financial Statements which are included in Item 8 of this Annual Report. 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 assessment. 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 its carrying amount, including goodwill.
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. During the third quarter of 2019, the Company's stock price declined significantly as a result of decreased sales and estimated cash flows. As of September 30, 2019, goodwill was deemed to be fully impaired, and the Company recorded an impairment charge of $79.0 million.
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. During the year ended December 31, 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:
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•
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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.
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•
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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.
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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.
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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.
U.S. shareholders are subject to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, 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 in the year the tax is incurred. As of December 31, 2019, no GILTI tax has been recorded.
In a referendum held on May 19, 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. The referendum did not have a material impact on the Company’s 2019 tax provision. The Company will continue to evaluate the impact of these provisions in future periods as the enactment process in completed.
Recent Accounting Pronouncements
See “Note 2. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this Annual Report 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.
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Page
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Consolidated Financial Statements:
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
TransEnterix, Inc.
Morrisville, North Carolina
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of TransEnterix, Inc. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2020 expressed an adverse opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 31, 2019 upon adoption of Accounting Standards Codification Topic 842, Leases, using the modified retrospective method.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has not generated significant revenue or positive cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2013.
Raleigh, North Carolina
March 16, 2020
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
TransEnterix, Inc.
Morrisville, North Carolina
Opinion on Internal Control over Financial Reporting
We have audited TransEnterix, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the Company after the date of management’s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes and our report dated March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9.A., “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain controls over the Company’s income tax accounting and disclosures for the significant components of deferred tax assets and liabilities related to a foreign non-recurring transaction has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report dated March 16, 2020 on those financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Raleigh, North Carolina
March 16, 2020
TransEnterix, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
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December 31,
2019
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December 31,
2018
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Assets
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Current Assets
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Cash and cash equivalents
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$
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9,598
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$
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21,061
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Short-term investments
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—
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51,790
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Accounts receivable, net
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620
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8,560
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Inventories
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10,653
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10,941
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Interest receivable
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—
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26
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Other current assets
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7,084
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9,205
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Total Current Assets
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27,955
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101,583
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Restricted cash
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969
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590
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Inventories, net of current portion
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7,594
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—
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Property and equipment, net
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4,706
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6,337
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Intellectual property, net
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28,596
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39,716
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In-process research and development
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2,470
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10,747
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Goodwill
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—
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80,131
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Other long term assets
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2,489
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203
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Total Assets
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$
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74,779
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$
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239,307
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Liabilities and Stockholders’ Equity
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Current Liabilities
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Accounts payable
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$
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3,579
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$
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4,433
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Accrued expenses
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8,553
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9,619
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Deferred revenue – current portion
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818
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1,733
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Contingent consideration – current portion
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73
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72
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Deferred consideration - MST Acquisition
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—
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5,962
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Total Current Liabilities
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13,023
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21,819
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Long Term Liabilities
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Deferred revenue – less current portion
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27
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|
|
109
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Contingent consideration – less current portion
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1,011
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10,565
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Notes payable, net of debt discount
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—
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28,937
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Warrant liabilities
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2,388
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|
|
4,636
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Net deferred tax liabilities
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1,392
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|
|
4,720
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Other long term liabilities
|
1,403
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|
—
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Total Liabilities
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19,244
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|
|
70,786
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Commitments and Contingencies (Note 21)
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Stockholders’ Equity
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Common stock $0.001 par value, 750,000,000 shares authorized at December 31, 2019 and December 31, 2018; 20,691,301 and 16,641,999 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
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21
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|
|
17
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Additional paid-in capital
|
720,484
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|
676,572
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Accumulated deficit
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(663,600
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)
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(509,406
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)
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Accumulated other comprehensive (loss) income
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(1,370
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)
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|
1,338
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Total Stockholders’ Equity
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55,535
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|
|
168,521
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|
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Total Liabilities and Stockholders’ Equity
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$
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74,779
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|
|
$
|
239,307
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|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands except per share amounts)
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Year ended December 31,
|
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2019
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2018
|
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Revenue:
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Product
|
7,104
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|
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23,268
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Service
|
1,427
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|
|
834
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|
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Total revenue
|
8,531
|
|
|
24,102
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Cost of revenue:
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Product
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16,439
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|
|
14,162
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Service
|
4,292
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|
|
2,009
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Total cost of revenue
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20,731
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|
|
16,171
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Gross (loss) profit
|
(12,200
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)
|
|
7,931
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Operating Expenses (Income)
|
|
|
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Research and development
|
22,468
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|
|
21,823
|
|
|
Sales and marketing
|
28,014
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|
|
25,736
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|
|
General and administrative
|
18,758
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|
|
13,854
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|
|
Amortization of intangible assets
|
10,301
|
|
|
10,868
|
|
|
Change in fair value of contingent consideration
|
(9,553
|
)
|
|
(1,011
|
)
|
|
Restructuring and other charges
|
1,374
|
|
|
—
|
|
|
Goodwill impairment
|
78,969
|
|
|
—
|
|
|
In-process research and development impairment
|
7,912
|
|
|
—
|
|
|
Acquisition related costs
|
—
|
|
|
647
|
|
|
Loss (gain) from sale of SurgiBot assets, net
|
97
|
|
|
(11,840
|
)
|
|
Gain from sale of AutoLap assets, net
|
(15,965
|
)
|
|
—
|
|
|
Reversal of transfer fee accrual
|
—
|
|
|
(2,994
|
)
|
|
Total Operating Expenses
|
142,375
|
|
|
57,083
|
|
|
Operating Loss
|
(154,575
|
)
|
|
(49,152
|
)
|
|
Other Income (Expense)
|
|
|
|
|
Change in fair value of warrant liabilities
|
2,248
|
|
|
(14,320
|
)
|
|
Interest income
|
582
|
|
|
1,400
|
|
|
Interest expense
|
(4,613
|
)
|
|
(4,208
|
)
|
|
Other (expense) income
|
(967
|
)
|
|
1,126
|
|
|
Total Other Expense, net
|
(2,750
|
)
|
|
(16,002
|
)
|
|
Loss before income taxes
|
$
|
(157,325
|
)
|
|
$
|
(65,154
|
)
|
|
Income tax benefit
|
3,124
|
|
|
3,377
|
|
|
Net loss
|
$
|
(154,201
|
)
|
|
$
|
(61,777
|
)
|
|
Comprehensive loss
|
|
|
|
|
Foreign currency translation loss
|
(2,708
|
)
|
|
(3,690
|
)
|
|
Comprehensive loss
|
$
|
(156,909
|
)
|
|
$
|
(65,467
|
)
|
|
Net loss per common share - basic and diluted
|
$
|
(8.69
|
)
|
|
$
|
(3.88
|
)
|
|
Weighted average number of shares used in computing net loss per common share - basic and diluted
|
17,737
|
|
|
15,938
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
15,329
|
|
|
$
|
16
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
621,446
|
|
|
$
|
(447,640
|
)
|
|
$
|
5,028
|
|
|
$
|
178,850
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,039
|
|
|
—
|
|
|
—
|
|
|
9,039
|
|
|
Issuance of common stock and warrants, net of issuance costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
279
|
|
|
—
|
|
|
—
|
|
|
279
|
|
|
Issuance of common stock for MST Acquisition
|
242
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
8,300
|
|
|
—
|
|
|
—
|
|
|
8,300
|
|
|
Exercise of stock options and warrants
|
889
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
36,171
|
|
|
—
|
|
|
—
|
|
|
36,172
|
|
|
Award of restricted stock units
|
82
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
41
|
|
|
1
|
|
|
(1,663
|
)
|
|
—
|
|
|
—
|
|
|
(1,662
|
)
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(41
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Issuance of common stock related to sale of SurgiBot assets
|
100
|
|
|
0
|
|
|
—
|
|
|
|
|
3,000
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
Cumulative effect of change in accounting principle (Note 2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,690
|
)
|
|
(3,690
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61,777
|
)
|
|
—
|
|
|
(61,777
|
)
|
|
Balance, December 31, 2018
|
16,642
|
|
|
$
|
17
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
676,572
|
|
|
$
|
(509,406
|
)
|
|
$
|
1,338
|
|
|
$
|
168,521
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,508
|
|
|
—
|
|
|
—
|
|
|
11,508
|
|
|
Issuance of common stock, net of issuance costs
|
3,571
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
25,773
|
|
|
—
|
|
|
—
|
|
|
25,777
|
|
|
Issuance of common stock consideration to MST
|
370
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
6,599
|
|
|
—
|
|
|
—
|
|
|
6,599
|
|
|
Exercise of stock options and warrants
|
38
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
538
|
|
|
—
|
|
|
—
|
|
|
538
|
|
|
Award of restricted stock units
|
70
|
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Return of common stock to pay withholding taxes on restricted stock
|
—
|
|
|
—
|
|
|
15
|
|
|
0
|
|
|
(499
|
)
|
|
—
|
|
|
—
|
|
|
(499
|
)
|
|
Cancellation of treasury stock
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cumulative effect of change in accounting principle (Note 2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
7
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,708
|
)
|
|
(2,708
|
)
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(154,201
|
)
|
|
—
|
|
|
(154,201
|
)
|
|
Balance, December 31, 2019
|
20,691
|
|
|
$
|
21
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
720,484
|
|
|
$
|
(663,600
|
)
|
|
$
|
(1,370
|
)
|
|
$
|
55,535
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
2019
|
|
2018
|
|
Operating Activities
|
|
|
|
|
Net loss
|
$
|
(154,201
|
)
|
|
$
|
(61,777
|
)
|
|
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
|
|
|
|
|
Gain from sale of AutoLap assets, net
|
(15,965
|
)
|
|
—
|
|
|
Loss (gain) from sale of SurgiBot assets, net
|
97
|
|
|
(11,840
|
)
|
|
Goodwill and in-process research and development impairment
|
86,881
|
|
|
—
|
|
|
Depreciation
|
2,166
|
|
|
2,420
|
|
|
Amortization of intangible assets
|
10,301
|
|
|
10,868
|
|
|
Amortization of debt discount and debt issuance costs
|
1,513
|
|
|
725
|
|
|
Amortization of short-term investment discount
|
(327
|
)
|
|
(351
|
)
|
|
Stock-based compensation
|
11,508
|
|
|
9,039
|
|
|
Inventory write-down related to restructuring
|
7,408
|
|
|
—
|
|
|
Inventory write-down
|
1,523
|
|
|
—
|
|
|
Bad debt expense
|
1,634
|
|
|
—
|
|
|
Interest expense on deferred consideration - MST acquisition
|
756
|
|
|
—
|
|
|
Deferred tax benefit
|
(3,224
|
)
|
|
(3,377
|
)
|
|
Loss on extinguishment of debt
|
1,006
|
|
|
1,400
|
|
|
Change in fair value of warrant liabilities
|
(2,248
|
)
|
|
14,320
|
|
|
Change in fair value of contingent consideration
|
(9,553
|
)
|
|
(1,011
|
)
|
|
Reversal of transfer fee accrual
|
—
|
|
|
(2,994
|
)
|
|
Changes in operating assets and liabilities, net of effect of acquisition:
|
|
|
|
|
Accounts receivable
|
6,083
|
|
|
(7,225
|
)
|
|
Interest receivable
|
26
|
|
|
54
|
|
|
Inventories
|
(16,404
|
)
|
|
(2,145
|
)
|
|
Other current and long term assets
|
(655
|
)
|
|
(325
|
)
|
|
Accounts payable
|
(668
|
)
|
|
767
|
|
|
Accrued expenses
|
(1,180
|
)
|
|
2,134
|
|
|
Deferred revenue
|
(959
|
)
|
|
825
|
|
|
Other long term liabilities
|
998
|
|
|
—
|
|
|
Net cash and cash equivalents used in operating activities
|
(73,484
|
)
|
|
(48,493
|
)
|
|
Investing Activities
|
|
|
|
|
Proceeds from sale of AutoLap assets
|
15,965
|
|
|
—
|
|
|
Purchase of short-term investments
|
(12,883
|
)
|
|
(55,439
|
)
|
|
Proceeds from maturities of short-term investments
|
65,000
|
|
|
4,000
|
|
|
Payment for acquisition of a business
|
—
|
|
|
(5,800
|
)
|
|
Proceeds related to sale of SurgiBot assets, net
|
—
|
|
|
4,496
|
|
|
Purchase of property and equipment
|
(437
|
)
|
|
(770
|
)
|
|
Proceeds from sale of property and equipment
|
—
|
|
|
32
|
|
|
Net cash and cash equivalents provided by (used in) investing activities
|
67,645
|
|
|
(53,481
|
)
|
|
Financing Activities
|
|
|
|
|
Payment of notes payable
|
(31,425
|
)
|
|
(15,305
|
)
|
|
Proceeds from issuance of debt and warrants, net of issuance costs
|
—
|
|
|
28,507
|
|
|
Payment of contingent consideration
|
—
|
|
|
(770
|
)
|
|
Proceeds from issuance of common stock and warrants, net of issuance costs
|
25,777
|
|
|
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
|
538
|
|
|
12,403
|
|
|
Net cash and cash equivalents (used in) provided by financing activities
|
(5,609
|
)
|
|
26,452
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
364
|
|
|
(433
|
)
|
|
Net (decrease) increase in cash, cash equivalents and restricted cash
|
(11,084
|
)
|
|
(75,955
|
)
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
21,651
|
|
|
97,606
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
$
|
10,567
|
|
|
$
|
21,651
|
|
TransEnterix, Inc.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure for Cash Flow Information
|
|
|
|
|
Interest paid
|
$
|
2,187
|
|
|
$
|
1,730
|
|
|
Supplemental Schedule of Non-cash Investing and Financing Activities
|
|
|
|
|
Transfer of inventories to property and equipment
|
$
|
486
|
|
|
$
|
2,160
|
|
|
Transfer of property and equipment to inventories
|
$
|
323
|
|
|
$
|
637
|
|
|
Reclass of warrant liability to common stock and additional paid-in capital
|
$
|
—
|
|
|
$
|
23,774
|
|
|
Cashless exercise of warrants
|
$
|
—
|
|
|
$
|
4,272
|
|
|
Issuance of common stock related to MST acquisition
|
$
|
6,600
|
|
|
$
|
8,300
|
|
|
Proceeds from sale of AutoLap assets exchanged for settlement of Company obligations
|
$
|
1,000
|
|
|
$
|
—
|
|
|
Deferred consideration - MST acquisition
|
$
|
—
|
|
|
$
|
5,962
|
|
See accompanying notes to consolidated financial statements.
TransEnterix, Inc.
Notes to Consolidated Financial Statements
|
|
|
|
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 is available for sale in Europe, the United States, Japan, Taiwan and select other countries.
|
|
|
|
•
|
The Senhance System has a CE Mark in Europe for adult and pediatric laparoscopic abdominal and pelvic surgery, as well as limited thoracic surgeries excluding cardiac and vascular surgery.
|
|
|
|
|
•
|
In the United States, the Company has received 510(k) clearance from the FDA for use of the Senhance System in laparoscopic colorectal and gynecologic surgery in a total of 28 indicated procedures, including benign and oncologic procedures, laparoscopic inguinal hernia and laparoscopic cholecystectomy (gallbladder removal) surgery.
|
|
|
|
|
•
|
In Japan, the Company has received regulatory approval and reimbursement for 98 laparoscopic procedures.
|
During 2018 and 2019, the Company successfully obtained FDA clearance and CE Mark for the Company's 3 millimeter diameter instruments, Senhance ultrasonic system, 3 millimeter and 5 millimeter hooks, and the Senhance articulating system. The 3 millimeter instruments enable the Senhance System to be used for microlaparoscopic surgeries, allowing for tiny incisions. The ultrasonic system is an advanced energy device used to deliver controlled energy to ligate and divide tissue, while minimizing thermal injury to surrounding structures. The Senhance articulating system was launched in Europe in November 2019 and the Company is evaluating its pathway forward to launch such a system in the United States with a planned submission for U.S. clearance at the end of 2020.
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 3 for a description of the asset sale. On January 14, 2020, the Company announced that it had filed a 510(k) submission with the U.S. Food and Drug Administration for its Intelligent Surgical Unit (ISU™) for use with the Senhance System. The Company believes it is the first such FDA submission seeking clearance for machine vision technology in abdominal robotic surgery. On March 13, 2020, the Company announced that it has received FDA clearance for the Intelligent Surgical Unit.
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. The Company recorded a gain during the year ended December 31, 2018 based on the cash proceeds (excluding future royalties) in excess of the carrying value of the assets sold.
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 Surgical, Inc., SafeStitch LLC, TransEnterix International, Inc.; TransEnterix Italia S.r.l.; TransEnterix Europe S.à.R.L; TransEnterix Asia Pte. Ltd.; TransEnterix Taiwan Ltd.; TransEnterix Japan KK; TransEnterix Israel Ltd. and TransEnterix Netherlands B.V.
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2.
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Summary of Significant Accounting Policies
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Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and 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.
On December 11, 2019, following receipt of approval from stockholders at a special meeting of stockholders held on the same day, the Company filed an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a ratio of one-for-thirteen, or the Reverse Stock Split. The Company’s common stock began trading on a split-adjusted basis on NYSE American on the morning of December 12, 2019. No fractional shares were issued in connection with the Reverse Stock Split. Instead, the Company rounded up each fractional share resulting from the reverse stock split to the nearest whole share. As a result of the Reverse Stock Split, the Company’s outstanding common stock decreased from approximately 261.9 million shares to approximately 20.2 million shares (without giving effect to the rounding up for each fractional share).
Unless otherwise noted, all share and per share data referenced in the consolidated financial statements and the notes thereto have been retroactively adjusted to reflect the Reverse Stock Split. As a result of the Reverse Stock Split, certain amounts in the consolidated financial statements and the notes thereto may be slightly different than previously reported due to rounding of fractional shares, and certain amounts within the consolidated balance sheets were reclassified between common stock and additional paid-in capital.
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 $663.6 million as of December 31, 2019, and has working capital of $14.9 million as of December 31, 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 existing obligations, 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 December 31, 2019 and 2018 includes $1.0 million and $0.6 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, automobile leases, and a performance guarantee required by the government of a country in which a Senhance System was sold in 2018.
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 December 31, 2018, short-term investments consisted of $51.8 million in U.S. government securities, all of which matured in less than a year. There were no short-term investments as of December 31, 2019.
The Company reassesses the appropriateness of the classification of its investments at the end of each reporting period. The Company 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 December 31, 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 approximated the related fair values, which was 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 during the years ended December 31, 2019 or 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. The Company places cash deposits with a federally insured financial institution. The Company maintains its cash at banks and financial institutions it considers to be of high credit quality; however, the Company’s domestic cash deposits may at times exceed the Federal Deposit Insurance Corporation’s insured limit. Balances in excess of federally insured limitations may not be insured. The Company has not experienced losses on these accounts, and management believes that the Company is not exposed to significant risks on such accounts.
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 year ended December 31, 2019. The Company had eight customers who constituted 85% of the Company’s net accounts receivable at December 31, 2019. The Company had five customers who constituted 89% of the Company’s net accounts receivable at December 31, 2018. The Company had six customers who accounted for 82% of sales in 2019 and twelve customers who accounted for 89% of sales in 2018.
Accounts Receivable
Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectible accounts. The allowance for uncollectible accounts was determined on a customer specific basis based on deemed collectability.
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, market conditions as well as reduced forecasts required that the Company test its goodwill carrying value as of September 30, 2019.
Subsequent to the adoption of Accounting Standards Update ("ASU") 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , 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 the Company's assumptions relative to growth rates were to change or were incorrect, the 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 or December 31, 2019.
During the third quarter of 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 significant 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.
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. The company performed its annual impairment assessment at December 31, 2019 and no additional impairment was required.
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:
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Machinery, manufacturing and demonstration equipment
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3-5 years
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Computer equipment
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3 years
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Furniture
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5 years
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Leasehold improvements
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Lesser of lease term or 3 to 10 years
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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 16) 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 predominantly the Euro. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for a subsidiary using a functional currency other than the U.S. dollar is included in accumulated other comprehensive income or loss as a separate component of stockholders’ equity.
The Company’s intercompany accounts are denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in accumulated other comprehensive income or loss as a separate component of stockholders’ equity, while gains and losses resulting from the remeasurement of intercompany receivables from a foreign subsidiary for which the Company anticipates settlement in the foreseeable future are recorded in the 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 years ended December 31, 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, the Company's 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 collectability of the contract consideration is probable. The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and taxes collected from customers that are remitted to government authorities.
The Company's system sale arrangements generally 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:
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•
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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.
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|
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•
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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.
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•
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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.
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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:
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Year Ended
December 31,
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2019
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2018
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(in thousands)
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|
U.S.
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|
|
|
|
Systems
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$
|
90
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|
|
$
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2,556
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|
|
Instruments and accessories
|
108
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|
|
967
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|
|
Services
|
338
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|
255
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|
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Total U.S. revenue
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536
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|
3,778
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Outside of U.S. ("OUS")
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|
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Systems
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5,459
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|
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16,193
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|
Instruments and accessories
|
1,447
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|
|
3,552
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Services
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1,089
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|
579
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Total OUS revenue
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7,995
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|
|
20,324
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Total
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|
|
|
|
Systems
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5,549
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|
|
18,749
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|
Instruments and accessories
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1,555
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|
|
4,519
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|
|
Services
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1,427
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|
|
834
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|
|
Total revenue
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$
|
8,531
|
|
|
$
|
24,102
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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 $3.7 million as of December 31, 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 $0.2 million as of December 31, 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 $1.0 million for the year ended December 31, 2019. The Company also recognized $1.3 million during the year ended December 31, 2019, half of which was deferred at December 31, 2018, 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 year ended December 31, 2018 totaled $0.4 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 year ended December 31, 2019, the Company recorded a $7.4 million inventory write-down as part of a restructuring plan and a $1.5 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.
Reversal of Transfer Fee Accrual
In connection with the Senhance acquisition, the Company recorded an accrual of $3.0 million in the 2015 third quarter for the potential assessment of additional transfer fees that could be assessed during a three year period. In September 2018, the Company determined that the accrual was no longer required and reversed the accrual.
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 $11,508,000 and $9,039,000 for the years ended December 31, 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, 2018. As a result of the newly enacted tax rate, the Company adjusted its U.S. deferred tax assets as of December 31, 2018, 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 and comprehensive loss.
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 ended December 31, 2018 did 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.
In a referendum held on May, 19 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. The referendum did not have a material impact on the Company’s 2019 tax provision. The Company will continue to evaluate the impact of these provisions in future periods as the enactment process in completed.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.
Segments
The Company operates in one business segment—the research, development and sale of medical device robotics to improve minimally invasive surgery. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the
Company’s consolidated operating results. Approximately 19% and 54% of the Company’s total consolidated assets are located within the U.S. as of December 31, 2019 and 2018, respectively. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill (as of December 2018 only), intellectual property, in-process research and development, other current assets, property and equipment, cash, accounts receivable, other long-term assets and inventory of $60.5 million and $111.0 million at December 31, 2019 and 2018. Total assets outside of the U.S. excluding goodwill amounted to 81% and 34% of total consolidated assets at December 31, 2019 and 2018, respectively. The Company recognizes sales by geographic area based on the country in which the customer is based. For the years ended December 31, 2019 and 2018, 6% and 16%, respectively, of net revenue were generated in the United States; 39% and 78% were generated in Europe; and 55% and 6% were generated in 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 adoption of this ASU should not have a material impact on the 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. With the adoption of ASU 2018-07, the Company recorded a charge to accumulated deficit of $7 thousand.
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 December 31, 2019 was 7.8%. As a result of the adoption of ASU 2016-02, other long-term assets increased by $1.8 million, accrued expenses increased by $0.5 million, and other long-term liabilities increased by $1.2 million. There was no change to the Company’s consolidated statements of operations and comprehensive loss or cash flows as a result of the adoption of ASU 2016-02.
As of December 31, 2019, the right-of-use asset totaled $2.3 million and is included within other long term assets on the consolidated balance sheet and the lease liability totaled $2.5 million, of which $1.1 million is classified as current within accrued expenses and $1.4 million is classified as non-current and makes up the full balance of other long term liabilities on the consolidated balance sheet. Operating lease costs for the year ended December 31, 2019 totaled $1.4 million and are included within operating expenses in the consolidated statement of operations and comprehensive loss. Rent expense for the year ended December 31, 2018 was approximately $1.2 million. The weighted average remaining lease term for operating leases as of December 31, 2019 was 2.6 years. Total cash paid for operating leases during the year ended December 31, 2019 was $1.7 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 December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
January 1, 2020 to December 31, 2020
|
$
|
1,372
|
|
|
January 1, 2021 to December 31, 2021
|
716
|
|
|
January 1, 2022 to December 31, 2022
|
454
|
|
|
January 1, 2023 to December 31, 2023
|
207
|
|
|
January 1, 2024 to December 31, 2024
|
28
|
|
|
Thereafter
|
—
|
|
|
Total minimum lease payments
|
$
|
2,778
|
|
|
Less: Amount of lease payments representing interest
|
(266
|
)
|
|
Present value of future minimum lease payments
|
$
|
2,512
|
|
The following table presents the minimum lease payments as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
January 1, 2019 to December 31, 2019
|
$
|
929
|
|
|
January 1, 2020 to December 31, 2020
|
399
|
|
|
January 1, 2021 to December 31, 2021
|
385
|
|
|
January 1, 2022 to December 31, 2022
|
175
|
|
|
January 1, 2023 to December 31, 2023
|
38
|
|
|
Thereafter
|
—
|
|
|
Total minimum lease payments
|
$
|
1,926
|
|
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 approximately 242,310 shares of the Company’s common stock (the "Initial Shares"). A second tranche of $6.6 million in additional consideration was payable in cash, stock or cash and stock, at the discretion of the Company, within one year after the closing date. On August 7, 2019, the Company notified MST that the Company would satisfy the additional consideration payment of $6.6 million by issuing shares of TransEnterix common stock. The number of shares issued to MST was 370,423 (the “Additional Consideration Shares” and, together with the Initial Shares, the “Securities Consideration”).
The 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 all of the Initial Shares will be released from the lock-up restrictions on May 1, 2020, or earlier upon certain other conditions. The Additional Consideration Shares were released from the lock-up restrictions on February 7, 2020.
In connection with the MST Acquisition, the Company also entered into a Registration Rights Agreement, dated as of October 31, 2018, with MST, 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. All of the Securities Consideration is eligible to be sold by the holders without restriction under Rule 144, therefore the Registration Rights Agreement has expired. 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.
The following unaudited pro forma information presents the combined results of operations for the year ended December 31, 2018, as if the Company had completed the MST Acquisition at the beginning of fiscal 2018. The pro forma financial information is provided for comparative purposes only and is not necessarily indicative of what actual results would have been had the acquisition occurred on the date indicated, nor does it give effect to synergies, cost savings, fair market value adjustments, and other changes expected to result from the acquisition. Accordingly, the pro forma financial results do not purport to be indicative of consolidated results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period. The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for transaction-related costs.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
|
(In thousands except
per share amounts)
(unaudited)
|
|
Revenue
|
$
|
24,170
|
|
|
Net loss
|
(64,365
|
)
|
|
Net loss per share
|
$
|
(0.31
|
)
|
During the year ended December 31, 2018 no revenue and a net loss of $0.4 million associated with MST’s operations are included in the consolidated financial statements.
On July 3, 2019 the Company entered into a System Sale Agreement with GBIL to sell certain assets related to the AutoLap technology. On October 15, 2019, the Company amended the prior AutoLap Sale Agreement with GBIL. Pursuant to the amended agreement the Company sold the AutoLap laparoscopic vision system, or AutoLap, and related assets to GBIL. The assets include inventory, spare parts, production equipment, testing equipment and certain intellectual property specifically related to the AutoLap. The purchase price was $17.0 million, all of which was received in 2019 in the form of $16 million in cash and a commitment by GBIL to pay $1.0 million to settle certain Company obligations in China. GBIL subsequently paid the obligation. Under the amended AutoLap Agreement, the Company entered into a cross‑license agreement with GBIL to retain rights to use any AutoLap-related intellectual property sold to GBIL, and to non-exclusively license additional intellectual property to GBIL. The Company recorded a $16.0 million gain on the sale of the AutoLap assets during the year ended December 31, 2019, which represented the proceeds received in excess of the carrying value of the assets, less contract costs.
Senhance Surgical Robotic System
On September 21, 2015, the Company completed the strategic acquisition, through its wholly owned subsidiary TransEnterix International, from Sofar, of all of the assets, employees and contracts related to the advanced robotic system for minimally invasive laparoscopic surgery now known as the Senhance System.
Under the terms of the Purchase Agreement, the consideration consisted of the issuance of (i) 1,195,647 shares of the Company’s common stock (the “Securities Consideration”) and (ii) approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration (the “Cash Consideration”).
On December 30, 2016, the Company and Sofar entered into an Amendment to the Purchase Agreement (the “Amendment”) to restructure the terms of the second tranche of the Cash Consideration (the “Second Tranche”). The initial Securities Consideration was issued in full at the closing of the Senhance Acquisition; under the Amendment, the Second Tranche of the Cash Consideration was restructured, and an additional issuance of 286,360 shares of the Company’s common stock with an aggregate fair market value of €5.0 million occurred in January 2017. Following the Amendment, the total Cash Consideration was $25.0 million U.S. Dollars and approximately €22.5 million Euro, of which all but €15.1 million Euro has been paid as of December 31, 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 fourth tranche of the Cash Consideration of €2.5 million was payable in installments by December 31 of each year as reimbursement for certain debt payments made by Sofar under an existing Sofar loan agreement in such year, with payments beginning as of December 31, 2017. As of December 31, 2019, the Company had paid €2.4 million of the fourth tranche.
The Third Tranche payments will be accelerated in the event that (i) the Company or TransEnterix International is acquired, (ii) the Company significantly reduces or suspends selling efforts of the Senhance System, or (iii) the Company acquires a business that offers alternative products that are directly competitive with the Senhance System. The remaining amounts due to Sofar are included in contingent consideration as of December 31, 2019 and 2018.
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.
|
|
|
|
4.
|
Cash, Cash Equivalents, and Restricted Cash
|
Cash, cash equivalents and restricted cash consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Cash
|
$
|
9,596
|
|
|
$
|
1,485
|
|
|
Money market
|
2
|
|
|
19,576
|
|
|
Total cash and cash equivalents
|
$
|
9,598
|
|
|
$
|
21,061
|
|
|
Restricted cash
|
969
|
|
|
590
|
|
|
Total
|
$
|
10,567
|
|
|
$
|
21,651
|
|
Restricted cash at December 31, 2019 and 2018 includes $1.0 million and $0.6 million, respectively, in cash accounts held as collateral primarily under the terms of an office operating lease, credit cards, automobile leases, and a performance guarantee required by the government of a country in which a Senhance System was sold in 2018.
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 years ended December 31, 2019 and 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 December 31, 2019 and 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 December 31, 2018, as the interest rate on the notes payable approximates the rates available to the Company as of this date.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
9,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,598
|
|
|
Restricted cash
|
969
|
|
|
—
|
|
|
—
|
|
|
969
|
|
|
Total Assets measured at fair value
|
$
|
10,567
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,567
|
|
|
Liabilities measured at fair value
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,084
|
|
|
$
|
1,084
|
|
|
Warrant liabilities
|
—
|
|
|
—
|
|
|
2,388
|
|
|
2,388
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,472
|
|
|
$
|
3,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Description
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Total
|
|
Assets measured at fair value
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
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 $9.6 million for the year ended December 31, 2019 was primarily due to a change in the Company's long-term forecast. The decrease in fair value of the contingent consideration of $1.0 million for the year ended December 31, 2018 was primarily due to 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 approximately 0.077 shares of the Company's Common Stock, a Series A warrant to purchase approximately 0.077 shares of Common Stock with an exercise price of $13.00 per share (the “Series A Warrants”), and a Series B warrant to purchase approximately 0.058 shares of Common Stock with an exercise price of $13.00 per share (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 (see Note 16). As such, all of the Series A Warrants were exercised
prior to the expiration date. 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 $8.45 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 exercise prices and the number of shares issuable upon exercise of each of the 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 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. As a result of this adjustment feature and after giving effect to the Company’s reverse stock split at a ratio of one-for-thirteen shares effective December 11, 2019, or the Reverse Stock Split, the exercise price of all outstanding Series B Warrants has been adjusted to $1.39 per share and the number of shares of common stock reserved for and issuable upon the exercise of outstanding Series B Warrants has been adjusted to 1,963,451 warrant shares as of December 31, 2019.
The change in fair value of all outstanding Series B warrants for the years ended December 31, 2019 and 2018 of a decrease of $2.2 million and an increase of $14.3 million, respectively, was 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
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Fair value
|
|
$2.4 million
|
|
$4.6 million
|
|
Valuation methodology
|
|
Monte Carlo
|
|
Monte Carlo
|
|
Term
|
|
2.32 years
|
|
3.32 years
|
|
Risk free rate
|
|
1.59%
|
|
2.47%
|
|
Dividends
|
|
—
|
|
—
|
|
Volatility
|
|
109.80%
|
|
87.60%
|
|
Share price
|
|
$1.47
|
|
$29.38
|
|
Probability of additional financing
|
|
100% in 2020
|
|
100% in 2019
|
The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements for contingent consideration as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Methodology
|
|
Significant
Unobservable Input
|
|
Weighted Average
(range, if
applicable)
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Contingent consideration
|
Probability weighted
income approach
|
|
Milestone dates
|
|
2020 to 2024
|
|
2019 to 2022
|
|
|
|
|
Discount rate
|
|
10% to 11%
|
|
11.5% to 12%
|
The following table summarizes the change in fair value, as determined by Level 3 inputs for the warrants and the contingent consideration for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement at
Reporting Date
(Level 3)
|
|
|
|
(In thousands)
|
|
|
|
Common stock
warrants
|
|
Contingent
consideration
|
|
Balance at December 31, 2017
|
|
$
|
14,090
|
|
|
$
|
12,418
|
|
|
Payment for contingent consideration
|
|
—
|
|
|
(770
|
)
|
|
Exercise of warrants
|
|
(23,774
|
)
|
|
—
|
|
|
Change in fair value
|
|
14,320
|
|
|
(1,011
|
)
|
|
Balance at December 31, 2018
|
|
4,636
|
|
|
10,637
|
|
|
Change in fair value
|
|
(2,248
|
)
|
|
(9,553
|
)
|
|
Balance at December 31, 2019
|
|
2,388
|
|
|
1,084
|
|
|
Current portion
|
|
—
|
|
|
73
|
|
|
Long-term portion
|
|
2,388
|
|
|
1,011
|
|
|
Balance at December 31, 2019
|
|
$
|
2,388
|
|
|
$
|
1,084
|
|
6. Accounts Receivable, Net
The following table presents the components of accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Gross accounts receivable
|
$
|
2,274
|
|
|
$
|
8,640
|
|
|
Allowance for uncollectible accounts
|
(1,654
|
)
|
|
(80
|
)
|
|
Total accounts receivable, net
|
$
|
620
|
|
|
$
|
8,560
|
|
The Company recorded $1.6 million in bad debt expense during the year ended December 31, 2019.
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Finished goods
|
$
|
9,737
|
|
|
$
|
5,439
|
|
|
Raw materials
|
8,510
|
|
|
5,502
|
|
|
Total inventories
|
$
|
18,247
|
|
|
$
|
10,941
|
|
|
|
|
|
|
|
Current Portion
|
$
|
10,653
|
|
|
$
|
10,941
|
|
|
Long-term portion
|
7,594
|
|
|
—
|
|
|
Total inventories
|
$
|
18,247
|
|
|
$
|
10,941
|
|
The Company recorded a write-down of obsolete inventory for the year-ended December 31, 2019 totaling $7.4 million as part of a restructuring plan and a $1.5 million charge for inventory obsolescence related to certain system components. There were no such write-downs or charges for the year ended December 31, 2018.
8. Other Current Assets
The following table presents the components of other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Advances to vendors
|
$
|
2,534
|
|
|
$
|
5,427
|
|
|
Prepaid expenses
|
1,834
|
|
|
1,443
|
|
|
VAT receivable
|
2,716
|
|
|
2,335
|
|
|
Total
|
$
|
7,084
|
|
|
$
|
9,205
|
|
|
|
|
|
9.
|
Property and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Machinery, manufacturing and demonstration equipment
|
$
|
10,421
|
|
|
$
|
12,320
|
|
|
Computer equipment
|
2,321
|
|
|
2,260
|
|
|
Furniture
|
637
|
|
|
639
|
|
|
Leasehold improvements
|
2,295
|
|
|
2,280
|
|
|
Total property and equipment
|
15,674
|
|
|
17,499
|
|
|
Accumulated depreciation and amortization
|
(10,968
|
)
|
|
(11,162
|
)
|
|
Property and equipment, net
|
$
|
4,706
|
|
|
$
|
6,337
|
|
Depreciation expense was approximately $2.2 million and $2.4 million for the years ended December 31, 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 years ended December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(In thousands)
|
|
Balance at December 31, 2017
|
71,368
|
|
|
Additions
|
9,638
|
|
|
Foreign currency translation impact
|
(875
|
)
|
|
Balance at December 31, 2018
|
$
|
80,131
|
|
|
Foreign currency translation impact
|
(1,162
|
)
|
|
Impairment
|
(78,969
|
)
|
|
Balance at December 31, 2019
|
$
|
—
|
|
Accumulated impairment of goodwill as of December 31, 2019 and 2018 was $140.8 million and $61.8 million, respectively.
The Company performs an annual impairment test of goodwill at December 31, or more frequently if events or changes in circumstances indicate that the carrying value of the Company’s one reporting unit may not be recoverable. As of December 31, 2018, the Company calculated the fair value of the Company’s sole reporting unit, based on the Company’s market capitalization, which exceeded the carrying amount. Accordingly, no charge for goodwill impairment was required as of December 31, 2018. During the third quarter of 2019, the Company's stock price declined significantly as a result of decreased sales. As of September 30, 2019, goodwill was deemed to be fully impaired, and the Company recorded an impairment charge of $79.0 million.
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.
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. The company performed its annual impairment assessment at December 31, 2019 and no additional impairment was required.
The carrying value of the Company’s IPR&D assets and the change in the balance for the years ended December 31, 2018 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
In-Process
Research and
Development
|
|
|
(In thousands)
|
|
Balance at December 31, 2017
|
$
|
—
|
|
|
Additions
|
10,633
|
|
|
Foreign currency translation impact
|
114
|
|
|
Balance at December 31, 2018
|
10,747
|
|
|
Impairment
|
(7,912
|
)
|
|
Foreign currency translation impact
|
(365
|
)
|
|
Balance at December 31, 2019
|
$
|
2,470
|
|
Intellectual Property
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 December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
currency
translation
impact
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
currency
translation
impact
|
|
Net
Carrying
Amount
|
|
Developed technology
|
$
|
66,413
|
|
|
$
|
(36,918
|
)
|
|
$
|
(1,208
|
)
|
|
$
|
28,287
|
|
|
|
$
|
66,413
|
|
|
$
|
(27,174
|
)
|
|
$
|
119
|
|
|
$
|
39,358
|
|
|
Technology and patents purchased
|
400
|
|
|
(112
|
)
|
|
21
|
|
|
309
|
|
|
|
400
|
|
|
(72
|
)
|
|
30
|
|
|
358
|
|
|
Total intellectual property
|
$
|
66,813
|
|
|
$
|
(37,030
|
)
|
|
$
|
(1,187
|
)
|
|
$
|
28,596
|
|
|
|
$
|
66,813
|
|
|
$
|
(27,246
|
)
|
|
$
|
149
|
|
|
$
|
39,716
|
|
The weighted average remaining useful life of the developed technology and technology and patents purchased was 2.8 years and 7.3 years, respectively as of December 31, 2019.
The estimated future amortization expense of intangible assets as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Year ending December 31, 2019
|
|
|
(In thousands)
|
|
2020
|
$
|
10,328
|
|
|
2021
|
10,328
|
|
|
2022
|
7,757
|
|
|
2023
|
42
|
|
|
2024
|
42
|
|
|
Thereafter
|
99
|
|
|
Total
|
$
|
28,596
|
|
The components for the income tax expense (benefit) are as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Current income taxes
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
—
|
|
|
—
|
|
|
Foreign
|
100
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
|
|
Federal
|
—
|
|
|
—
|
|
|
State
|
—
|
|
|
—
|
|
|
Foreign
|
(3,224
|
)
|
|
(3,377
|
)
|
|
Total income tax benefit
|
$
|
(3,124
|
)
|
|
$
|
(3,377
|
)
|
The United States and foreign components of loss from operations before taxes are as follows for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
United States
|
$
|
(91,935
|
)
|
|
$
|
(44,744
|
)
|
|
Foreign
|
(65,390
|
)
|
|
(20,410
|
)
|
|
Total loss from operations before taxes
|
$
|
(157,325
|
)
|
|
$
|
(65,154
|
)
|
Significant components of the Company’s deferred tax assets consist of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
Stock-based compensation
|
$
|
3,665
|
|
|
$
|
2,281
|
|
|
Accrued expenses and other
|
1,007
|
|
795
|
|
|
Research credit carryforward
|
6,776
|
|
|
6,182
|
|
|
Fixed assets
|
345
|
|
|
392
|
|
|
Capitalized start-up costs and other intangibles
|
3,618
|
|
|
1,859
|
|
|
Net operating loss carryforwards
|
113,410
|
|
|
74,566
|
|
|
|
128,821
|
|
|
86,075
|
|
|
Valuation allowance
|
(123,108)
|
|
(81,337
|
)
|
|
Net noncurrent deferred tax asset
|
5,713
|
|
|
4,738
|
|
|
Noncurrent deferred tax liabilities
|
|
|
|
|
Fixed assets and other
|
(1,445
|
)
|
|
(686
|
)
|
|
Purchase accounting intangibles
|
(5,660
|
)
|
|
(8,772
|
)
|
|
Net noncurrent deferred tax liability
|
(7,105
|
)
|
|
(9,458
|
)
|
|
Net deferred tax liability
|
$
|
(1,392
|
)
|
|
$
|
(4,720
|
)
|
At December 31, 2019 and 2018, the Company has provided a full valuation allowance against its net deferred tax assets in the U.S., Luxembourg, Swiss, and Asian tax jurisdictions, since realization of these benefits is not more likely than not. The valuation allowance increased approximately $41.8 million from the prior year. At December 31, 2019, the Company had U.S. federal net operating loss carryforwards of $337.6 million. Of this amount, $254.5 million begin to expire in 2027, while the remaining $83.1 million carry forward indefinitely. At December 31, 2019, the Company had U.S. state net operating loss carryforwards of $287.5 million. Of this amount, $282.8 million begin to expire in 2022, while the remaining $4.7 million carry forward indefinitely. At December 31, 2019, the Company had federal research credit carryforwards in the amount of $6.8 million. These carryforwards begin to expire in 2027. The utilization of the federal net operating loss carryforwards and credit carryforwards will depend on the Company’s ability to generate sufficient taxable income prior to the expiration of the carryforwards. In addition, the maximum annual use of net operating loss and research credit carryforwards is limited in certain situations where changes occur in stock ownership.
At December 31, 2019, the Company had foreign operating loss carryforwards in Italy of approximately $23.1 million, which can be carried forward indefinitely; foreign operating loss carryforwards in Luxembourg of approximately $95.1 million, which will begin to expire in 2035; foreign operating loss carryforwards in Switzerland of approximately $42.3 million, which begin to expire in 2023; and foreign operating loss carryforwards in Japan of approximately $2.0 million, which begin to expire in 2028.
The Company has evaluated its tax positions to consider whether it has any unrecognized tax benefits. As of December 31, 2019, the Company had gross unrecognized tax benefits of approximately $1.5 million. Of the total, none would reduce the Company’s effective tax rate if recognized. The Company does not anticipate a significant change in total unrecognized tax benefits or the Company’s effective tax rate due to the settlement of audits or the expiration of statutes of limitations within the next twelve months. Furthermore, the Company does not expect any cash settlement with the taxing authorities as a result of these unrecognized tax benefits as the Company has sufficient unutilized carryforward attributes to offset the tax impact of these adjustments.
The following is a tabular reconciliation of the Company’s change in gross unrecognized tax positions at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Beginning balance
|
$
|
1,363
|
|
|
$
|
1,202
|
|
|
Gross increases for tax positions related to current periods
|
149
|
|
|
161
|
|
|
Gross increases for tax positions related to prior periods
|
—
|
|
|
—
|
|
|
Ending balance
|
$
|
1,512
|
|
|
$
|
1,363
|
|
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2019 and 2018, the Company had no accrued interest or penalties related to uncertain tax positions.
The Company has analyzed its filing positions in all significant federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to United States Federal, state, and local tax examinations by tax authorities for years before 2016, although carryforward attributes that were generated prior to 2016 may still be adjusted upon examination by the taxing authorities if they either have been or will be used in a future period. No income tax returns are currently under examination by taxing authorities.
Taxes computed at the then-current statutory federal income tax rate of 21% are reconciled to the provision for income taxes as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Amount
|
|
% of Pretax
Earnings
|
|
Amount
|
|
% of Pretax
Earnings
|
|
United States federal tax at statutory rate
|
$
|
(33,038
|
)
|
|
21.0
|
%
|
|
$
|
(13,682
|
)
|
|
21.0
|
%
|
|
State taxes (net of deferred benefit)
|
(4,778
|
)
|
|
3.0
|
%
|
|
(1,080
|
)
|
|
1.7
|
%
|
|
Nondeductible expenses
|
709
|
|
|
(0.5
|
)%
|
|
(1,320
|
)
|
|
2.0
|
%
|
|
Change in fair market value of contingent consideration
|
(2,342
|
)
|
|
1.5
|
%
|
|
(256
|
)
|
|
0.4
|
%
|
|
Warrant remeasurement and financing costs
|
(551
|
)
|
|
0.4
|
%
|
|
3,630
|
|
|
(5.6
|
)%
|
|
Research & Development credits
|
(743
|
)
|
|
0.5
|
%
|
|
(803
|
)
|
|
1.2
|
%
|
|
Change in unrecognized tax benefits
|
149
|
|
|
(0.1
|
)%
|
|
161
|
|
|
(0.2
|
)%
|
|
Foreign tax rate differential
|
2,590
|
|
|
(1.6
|
)%
|
|
(96
|
)
|
|
0.1
|
%
|
|
Goodwill impairment
|
(6,638
|
)
|
|
4.2
|
%
|
|
—
|
|
|
—
|
|
|
Change in enacted tax rates and other, net
|
(253
|
)
|
|
0.2
|
%
|
|
252
|
|
|
(0.3
|
)%
|
|
Change in valuation allowance
|
41,771
|
|
|
(26.6
|
)%
|
|
9,817
|
|
|
(15.1
|
)%
|
|
Income tax benefit
|
$
|
(3,124
|
)
|
|
2.0
|
%
|
|
$
|
(3,377
|
)
|
|
5.2
|
%
|
U.S. shareholders are subject to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, 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 in the year the tax is incurred. As of December 31, 2019, no GILTI tax has been recorded.
In a referendum held on May, 19 2019, Swiss voters adopted the Federal Act on Tax Reform and AVS Financing (TRAF). TRAF introduces major changes in the Swiss tax system by abolishing certain current preferential tax regimes and replacing them with new measures that are in line with international standards. The referendum did not have a material impact on the Company’s 2019 tax provision. The Company will continue to evaluate the impact of these provisions in future periods as the enactment process in completed.
The following table presents the components of accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
(In thousands)
|
|
Compensation and benefits
|
$
|
5,061
|
|
|
$
|
6,243
|
|
|
Restructuring costs
|
882
|
|
|
—
|
|
|
Consulting and other vendors
|
308
|
|
|
895
|
|
|
Other
|
242
|
|
|
539
|
|
|
Lease Liability
|
1,112
|
|
|
—
|
|
|
Royalties
|
148
|
|
|
498
|
|
|
Legal and professional fees
|
474
|
|
|
432
|
|
|
Deferred rent
|
—
|
|
|
391
|
|
|
Taxes and other assessments
|
326
|
|
|
365
|
|
|
Interest
|
—
|
|
|
256
|
|
|
Total
|
$
|
8,553
|
|
|
$
|
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. Funding of the first $20.0 million tranche occurred 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 was entitled to make interest-only payments until December 1, 2020, and at the end of the interest-only period, the Company would have been 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 were required to be repaid if the term loans were 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 was not achieved as of the last day of any fiscal quarter, as tested on the thirtieth day after quarter end, the Company must have complied 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) 9.55% 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 was 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 occurred 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
was required to pay a final fee of 6.95% of the aggregate principal amount of term loans funded. The final payment fee was 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 were 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 contained customary representations and covenants that, subject to exceptions, restricted 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 were not related to its existing business. Under the terms of the Hercules Loan Agreement, the Company was required to maintain cash and/or investment property in accounts which perfected 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 were more than 90 days past due and (ii) 80% of the aggregate cash of the Company and its consolidated subsidiaries. The Agent was 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. The Company recognized a loss of $1.0 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, 2019.
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 was included in interest expense on the consolidated statements 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 years from such issue date. The warrants issued in connection with funding of the first tranche entitle Innovatus to purchase up to 95,750 shares of the Company’s common stock at an exercise price of $13.00 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.
|
Stock-Based Compensation
|
The Company’s stock-based compensation plans include the TransEnterix, Inc. Amended and Restated Incentive Compensation Plan, previously named the TransEnterix, Inc. 2007 Incentive Compensation Plan, or the Plan, as well as options outstanding under the TransEnterix, Inc. Stock Option Plan, or the 2006 Plan. As part of the Merger, options outstanding, whether vested or unvested, under the 2006 Plan were adjusted by the Exchange Ratio of approximately 0.0887, and assumed by the Company concurrent with the closing of the Merger.
The Plan was initially approved by the majority of the stockholders on November 13, 2007. The Plan was amended on June 19, 2012 to increase the number of shares of common stock available for issuance to 76,923 and was amended on October 29, 2013 to (a) increase the number of shares of common stock authorized for issuance under the Plan from 76,923 shares of common stock to 380,000 shares of common stock, (b) increase the per-person award limitations for options or stock appreciation rights from 15,385 to 76,923 shares and for restricted stock, deferred stock, performance shares and/or other stock-based awards from 7,692 to 38,462 shares, and (c) change the name of the Plan to reflect the Merger-related change. The Plan was again amended on May 7, 2015 to (i) increase the number of shares reserved for issuance under the Plan to 918,462 shares; (ii) extend the term of the Plan until May 7, 2025; and (iii) make other changes and updates to the Plan and was further amended in October 2015 to add French Sub-Plan amendments applicable to awards made to France-based employees. The Plan was further amended on June 8, 2016 to (a) approve an increase in the number of shares reserved for issuance under the Plan to 1,456,923 shares and (b) establish maximum equity award limits for initial awards and annual awards to non-employee directors. The Plan was subsequently amended as of May 25, 2017, increasing the number of shares of Common Stock authorized under the Plan to 1,995,385. The Plan was again amended on May 24, 2018, increasing the number of shares of Common Stock authorized under the Plan to 3,149,231. The Plan was again amended in October 2018 to add an Israeli Sub-Plan applicable to awards made to Israel-based employees. The Plan was again amended on April 24, 2019, to increase the number of shares of Common Stock authorized under the Plan to 4,072,308 and to make other changes.
The October 2013, May 2015, June 2016, May 2017, May 2018, and April 2019 amendments were approved by the Board of Directors and stockholders; the French Sub-Plan and Israeli Sub-Plan were approved by the Board of Directors. Under the Plan, which is administered by the Compensation Committee, the Company may grant stock options, stock appreciation rights, restricted stock and/or deferred stock to employees, officers, directors, consultants and vendors. The exercise price of stock options or stock appreciation rights may not be less than the fair market value of the Company’s shares at the date of grant. Additionally, no stock options or stock appreciation rights granted under the Plan may have a term exceeding ten years.
The 2006 Plan was adopted and approved by stockholders in September 2006 and provided for the granting of up to 6,154 stock options to employees, directors, and consultants. Under the 2006 Plan, both employees and non-employees were eligible for such stock options. In 2009, the 2006 Plan was amended to increase the total options pool to 85,389. In 2011, the 2006 Plan was amended to increase the total options pool to 259,861. The amendments were approved by the Board of Directors and stockholders. The Board of Directors had the authority to administer the plan and determine, among other things, the exercise price, term and dates of the exercise of all options at their grant date. Under the 2006 Plan, options become vested generally over four years, and expire not more than 10 years after the date of grant. As part of the Merger, options outstanding under the 2006 Plan were adjusted by the Conversion Ratio, and remain in existence as options of TransEnterix.
During the years ended December 31, 2019 and 2018, the Company recognized approximately $11.5 million and $9.0 million, respectively, of stock-based compensation expense, including stock options and restricted stock units.
The Company recognizes as expense, the grant-date fair value of stock options and other stock based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. The Company uses the Black-Scholes-Merton model to estimate the fair value of its 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 the Company has been determined based upon the simplified method, because the Company does not have sufficient historical information regarding its options to derive the expected term. Under this approach, the expected term is the mid-point between the weighted average of vesting period and the contractual term. The risk-free interest rate is based on U.S. Treasury rates whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company estimates forfeitures based on the historical experience of the Company and adjusts the estimated forfeiture rate based upon actual experience.
The fair value of options granted were estimated using the Black-Scholes-Merton option pricing model based on the assumptions in the table below:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2019
|
|
2018
|
|
Expected dividend yield
|
0%
|
|
0%
|
|
Expected volatility
|
81% - 92%
|
|
73% - 75%
|
|
Risk-free interest rate
|
1.39% - 2.66%
|
|
2.35% - 3.02%
|
|
Expected life (in years)
|
5.5 - 6.1
|
|
5.5 - 6.1
|
The following table summarizes the Company’s stock option activity, including grants to non-employees, for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Options outstanding at December 31, 2018
|
1,529,964
|
|
|
$
|
31.45
|
|
|
7.82
|
|
Granted
|
623,272
|
|
|
29.79
|
|
|
|
|
Forfeited
|
(248,834
|
)
|
|
33.13
|
|
|
|
|
Cancelled
|
(43,525
|
)
|
|
38.67
|
|
|
|
|
Exercised
|
(29,919
|
)
|
|
18.00
|
|
|
|
|
Options Outstanding December 31, 2019
|
1,830,958
|
|
|
$
|
30.71
|
|
|
7.36
|
The following table summarizes information about stock options outstanding at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Exercisable at December 31, 2019
|
926,498
|
|
|
$
|
32.48
|
|
|
6.14
|
|
Vested or expected to vest at December 31, 2019
|
1,763,300
|
|
|
$
|
30.75
|
|
|
7.28
|
Stock options outstanding, exercisable, and vested or expected to vest at December 31, 2019 had no intrinsic value based on the closing market price of the Company’s common stock at December 31, 2019.
The total intrinsic value of options exercised during 2019 and 2018 was approximately $0.2 million and $9.3 million, respectively. Proceeds from options exercised during 2019 and 2018 were approximately $0.5 million and $7.1 million, respectively.
The Company granted 623,272 and 669,662 options to employees and non-employees during the years ended December 31, 2019 and 2018, respectively, with a weighted-average grant date fair value of $21.23 and $20.67, respectively.
As of December 31, 2019, the Company had future employee stock-based compensation expense of approximately $19.6 million related to unvested share awards, which is expected to be recognized over an estimated weighted-average period of 2.5 years.
|
|
|
|
15.
|
Restricted Stock Units
|
In 2018 and 2019, the Company issued Restricted Stock Units (“RSUs”) to certain employees which vest over three years. The RSUs vest on defined vesting dates, subject to the continuous service with the Company at the applicable vesting event. Vesting can be accelerated upon a change in control under the Plan if the RSUs are not assumed by the successor company, and will be accelerated for certain executive officers under existing employment agreements if any such executive officer has a termination of employment in connection with a change in control event. When vested, the RSUs represent the right to be issued the number of shares of the Company’s common stock that is equal to the number of RSUs granted. The fair value of each RSU is estimated based upon the closing price of the Company’s common stock on the grant date. Share-based compensation expense related to RSUs is recognized over the requisite service period as adjusted for estimated forfeitures.
The following is a summary of the RSU activity for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
Outstanding
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Unvested December 31, 2017
|
338,055
|
|
|
$
|
14.95
|
|
|
Granted
|
170,403
|
|
|
28.66
|
|
|
Vested
|
(123,539
|
)
|
|
17.44
|
|
|
Forfeited
|
(2,821
|
)
|
|
17.71
|
|
|
Unvested December 31, 2018
|
382,098
|
|
|
$
|
20.24
|
|
|
Granted
|
192,987
|
|
|
31.42
|
|
|
Vested
|
(85,153
|
)
|
|
25.98
|
|
|
Forfeited
|
(46,005
|
)
|
|
21.38
|
|
|
Unvested December 31, 2019
|
443,927
|
|
|
$
|
23.88
|
|
As of December 31, 2019 and 2018, the Company recorded approximately $3.2 million and $2.9 million, respectively, in compensation expense for the RSUs. As of December 31, 2019, the unrecognized stock-based compensation expense related to unvested RSUs was approximately $5.5 million, which is expected to be recognized over a weighted average period of approximately 1.4 years.
On March 22, 2013, SafeStitch entered into a stock purchase agreement with approximately 17 investors (the “2013 PIPE Investors”) pursuant to which the 2013 PIPE Investors purchased an aggregate of approximately 186,092 shares of common stock at a price of $16.25 per share for aggregate consideration of approximately $3.0 million. Included in this private placement was the issuance of warrants to purchase approximately 93,046 common shares, representing one warrant for every two common shares purchased, with an exercise price of $21.45 per share and five years expiration. Among the 2013 PIPE Investors purchasing shares were related parties who purchased 98,462 shares and received 49,231 warrants. There were approximately 92,277 warrants outstanding that were assumed as of the Merger. During the years ended December 31, 2018 and 2017, 61,538 and 18,462, respectively of these warrants were exercised. During the year ended December 31, 2018, the remaining 7,354 warrants expired.
On January 17, 2012, TransEnterix Surgical entered into an original Loan Agreement with Silicon Valley Bank ("SVB") and Oxford Financial LLC (the "Prior Lenders"). Pursuant to such agreement, TransEnterix Surgical issued preferred stock warrants to the Prior Lenders on January 17, 2012 and December 21, 2012, respectively, to purchase shares of TransEnterix Surgical preferred stock. The preferred stock warrants expire ten years from the issue date. The preferred stock warrants were remeasured immediately prior to the Merger. As of the Merger, the preferred stock warrants converted to common stock warrants, adjusted based on a Merger exchange ratio of approximately 0.0887, and the preferred stock warrant liability was reclassified to additional paid-in capital. These warrants are exercisable for an aggregate of approximately 21,506 shares of common stock, with an exercise price of $18.85 per share. During the year ended December 31, 2013, 10,753 of these warrants were exercised in a cashless transaction for 8,674 shares of common stock. During the year ended December 31, 2018, the remaining 10,753 of these warrants were exercised in a cashless transaction for 8,065 shares of common stock.
On September 26, 2014, the Company entered into an amendment to the SVB Loan Agreement with the Prior Lenders. In connection with the first tranche borrowings under such amendment, the Company issued 2,948 common stock warrants to the Prior Lenders to purchase shares of the Company’s common stock, with an exercise price of $52.20 per share. The warrants expire seven years from their respective issue date. The Company concluded that the warrants are considered equity instruments. The warrants were recognized at the relative fair value on the issuance date as a debt discount and were amortized using the effective interest method from issuance to the maturity of the term loans. None of these warrants were exercised during the years ended December 31, 2019. During the year ended December 31, 2018, 2,145 of these warrants were exercised in a cashless transaction for 660 shares of common stock.
On August 14, 2015, in connection with an amendment to the SVB Loan Agreement and first tranche borrowings thereunder, the Company issued 8,684 common stock warrants to the Prior Lenders to purchase shares of the Company’s common stock, with an exercise price of $40.30 per share. The warrants expire seven years from their respective issue date. The Company concluded that the warrants are considered equity instruments. The warrants were recognized at the relative fair value on the issuance date as a debt discount and were amortized using the effective interest method from issuance to the maturity of the note. None of these warrants were exercised during the years ended December 31, 2019. During the year ended December 31, 2018, 5,211 of these warrants were exercised in a cashless transaction for 2,426 shares of common stock.
On April 28, 2017, the Company sold 24.9 million Units, each consisting of approximately 0.077 shares of the Company's Common Stock, a Series A Warrant to purchase approximately 0.077 shares of Common Stock with an exercise price of $13.00 per share, and a Series B Warrant to purchase approximately 0.058 shares of Common Stock with an exercise price of $13.00 per share 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. As such, all of the Series A Warrants were exercised prior to the expiration date. 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 exercise prices and the number of shares issuable upon exercise of each of the 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 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. As a result of this adjustment feature and after giving effect to the Company’s reverse stock split at a ratio of one-for-thirteen shares effective December 11, 2019, or the Reverse Stock Split, the exercise price of all outstanding Series B Warrants has been adjusted to $1.39 per share and the number of shares of common stock reserved for and issuable upon the exercise of outstanding Series B Warrants has been adjusted to 1,963,451 underlying warrant shares as of December 31, 2019.
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 the 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. During the years ended December 31, 2018 and 2017, 542,478 and 684,131, respectively, Series B Warrants were exercised. There were no Series B Warrants exercised during the year ended December 31, 2019.
On May 10, 2017, in connection with the entry into the Innovatus Loan Agreement, the Company issued warrants to Innovatus to purchase shares of the Company’s common stock. The warrants are issued on the funding date of each tranche and will expire five (5) years from such issue date. The warrants issued in connection with funding of the first tranche will entitle Innovatus to purchase up to 95,750 shares of the Company’s common stock at an exercise price of $13.00 per share. None of these warrants were exercised as of December 31, 2019.
On September 12, 2017, the Company entered into a service agreement with a third party vendor. In connection with the service agreement, the Company issued 73,076 common stock warrants (“Service Warrants”) to purchase shares of the Company’s common stock, with an exercise price of $13.00 per share. The Service Warrants vest as follow: (a) twenty-five percent (25%) on the date of execution of the services agreement; (b) fifty percent (50%) upon completion of hiring the sales team; and (c) the remaining twenty-five percent (25%) upon achieving cumulative product revenue of $15.0 million. The Service Warrants expire ten years from their issue date. The Company concluded that the Service Warrants are considered equity instruments. The fair value of the Service Warrants on the issuance date was determined using a Black-Scholes Merton model. The fair value of the remaining Service Warrants was updated each reporting period and the expense was recorded over the service period. The initial expense of $0.6 million and additional expense of $0.3 million was recognized during the year ended December 31, 2017. In February 2018, the Company terminated its relationship with the vendor and accelerated the full vesting of the Service Warrants in accordance with the service agreement. The remaining expense of $0.3 million was recognized during the year ended December 31, 2018. During the year ended December 31, 2019 and 2018, 15,385 and 50,000 of these warrants were exercised, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrant Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
Weighted
Average
Fair Value
|
|
Outstanding at Outstanding at December 31, 2017
|
1,012,513
|
|
|
$
|
14.04
|
|
|
4.5
|
|
$
|
5.07
|
|
|
Exercised
|
(672,125
|
)
|
|
14.17
|
|
|
0
|
|
—
|
|
|
Expired
|
(7,354
|
)
|
|
21.45
|
|
|
0
|
|
—
|
|
|
Outstanding at Outstanding at December 31, 2018
|
333,034
|
|
|
$
|
13.39
|
|
|
3.7
|
|
$
|
3.38
|
|
|
Exercised
|
(15,385
|
)
|
|
13.00
|
|
|
0
|
|
—
|
|
|
Reserved for future issuance
|
1,753,523
|
|
|
1.39
|
|
|
2.2
|
|
1.22
|
|
|
Outstanding at Outstanding at December 31, 2019
|
2,071,172
|
|
|
$
|
2.05
|
|
|
2.4
|
|
$
|
1.34
|
|
The aggregate intrinsic value of the common stock warrants in the above table was $0.2 million and $5.3 million at December 31, 2019 and 2018, respectively. The aggregate intrinsic value is before applicable income taxes and is calculated based on the difference between the exercise price of the warrants and the estimated fair market value of the applicable stock as of the respective dates.
|
|
|
|
17.
|
Purchase Agreement and Offerings
|
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 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 (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, 2,153,846 shares of the Company’s common stock (the “Firm Commitment Offering”). In addition, the Company granted the Underwriter a 30-day option to purchase 323,077 of additional shares of common stock. The 30-day option was not exercised.
The following table summarizes the total sales under the ATM Offering and Firm Commitment Offering for the period indicated (in thousands except for share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firm Commitment
|
|
|
|
|
ATM Offering
|
|
Offering
|
|
|
|
|
For the year ended
|
|
For the year ended
|
|
Total
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
Total shares of common stock sold
|
1,374,686
|
|
2,153,846
|
|
3,528,532
|
|
Average price per share
|
$
|
5.23
|
|
|
$
|
8.73
|
|
|
$
|
7.37
|
|
|
Gross proceeds
|
$
|
7,193
|
|
|
$
|
18,796
|
|
|
$
|
25,989
|
|
|
Commissions earned by Cantor
|
212
|
|
|
—
|
|
|
212
|
|
|
Net Proceeds
|
$
|
6,981
|
|
|
$
|
18,796
|
|
|
$
|
25,777
|
|
On December 28, 2018, the Company entered into an At-the-Market Equity Offering Sales Agreement (the “2018 Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated ("Stifel") as sales agent, pursuant to which the Company could sell through Stifel, from time to time, up to $75.0 million in shares of common stock in an at-the-market offering. The Company was to pay Stifel 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 Stifel Sales Agreement.
On April 28, 2017, the Company sold 24.9 million units, each consisting of approximately 0.077 shares of the Company’s common stock, a Series A warrant to purchase approximately 0.077 shares of Common Stock with an exercise price of $13.00 per share,
and a Series B warrant to purchase approximately 0.058 shares of common stock with an exercise price of $13.00 per Unit for aggregate gross proceeds of $24.9 million in an underwritten firm commitment public offering. Net proceeds after issuance costs were $23.2 million, assuming no exercise of the warrants. The closing of the public offering occurred on May 3, 2017.
18. Restructuring
During the fourth quarter of 2019, the Company announced the implementation of a restructuring plan to reduce operating expenses as the Company continues the global market development of the Senhance platform. Under the restructuring plan, the Company reduced headcount primarily in the sales and marketing functions and determined that the carrying value of its inventory exceeded the net realizable value due to a decrease in expected sales. The restructuring charges amounted to $8.8 million, of which $7.4 million was an inventory write down and was included in cost of product revenue and $1.4 million related to employee severance costs and was included as restructuring and other charges in the consolidated statements of operations and comprehensive loss, for the year ended December 31, 2019. Future payments under the restructuring plan are expected to conclude in 2020 and total $0.9 million. During the year ended December 31, 2019, the activity related to the Company's restructuring liability, which is included in accrued expenses in the consolidated balance sheet, was as follows:
|
|
|
|
|
|
|
|
|
|
|
Restructuring Liability
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2018
|
|
$
|
—
|
|
|
Amount charged to operating expenses
|
|
1,374
|
|
|
Cash payments
|
|
(492
|
)
|
|
Balance at December 31, 2019
|
|
$
|
882
|
|
19. 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. No adjustments have been made to the weighted average outstanding common shares figures for the years ended December 31, 2019 or 2018 as the assumed exercise of outstanding options, warrants and restricted stock units would be anti-dilutive.
Potential common shares not included in calculating diluted net loss per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2019
|
|
2018
|
|
Stock options
|
1,830,958
|
|
|
1,529,964
|
|
|
Stock warrants
|
2,071,172
|
|
|
333,034
|
|
|
Nonvested restricted stock units
|
443,927
|
|
|
382,098
|
|
|
Total
|
4,346,057
|
|
|
2,245,096
|
|
|
|
|
|
20.
|
Related Person Transactions
|
A member of the Company’s Board of Directors is an executive officer of Synecor, LLC. Various research and development services were purchased by the Company from Synecor, LLC and its wholly owned subsidiary Synchrony Labs LLC. These purchases were approved by the Audit Committee and totaled approximately $0 and $24,000 for the years ended December 31, 2019 and 2018, respectively.
A member of the Company's Board of Directors is an executive officer of Sofar S.p.A. Various equipment was purchased by the Company from Sofar S.p.A. and totaled approximately $26,000 and $0 for the years ended December 31, 2019 and 2018, respectively.
In March 2018, TransEnterix Europe entered into a Service Supply Agreement with 1 Med S.A. for certain regulatory consulting services. Andrea Biffi, a current member of the Company’s Board of Directors, owns a non-controlling interest in 1 Med S.A. Expenses under the Service Supply Agreement were approximately $12,000 and $71,000 for the years ended December 31, 2019 and 2018, respectively.
|
|
|
|
21.
|
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 286,360 shares of the Company’s common stock with an aggregate fair market value of €5.0 million. As of December 31, 2019, the fair value of the contingent consideration was $1.1 million.
Legal Proceedings
When determining the estimated probable loss or range of losses, significant judgment is required to be exercised in order to estimate the amount and timing of the loss to be recorded. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties’ settlement posture and their evaluation of the strength or weakness of their case against the Company. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from currently pending legal matters will be material to the Company’s results of operations or financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in one or more of these matters could materially and adversely affect the Company’s financial condition, results of operations or cash flows in any particular reporting period.
No liability or related charge was recorded to earnings in the Company’s consolidated financial statements for legal contingencies for the years ended December 31, 2019 and 2018.
Operating Leases
On November 2, 2009, TransEnterix Surgical entered into an operating lease for its corporate offices for a period of five years commencing in April 2010. On June 12, 2014, the Company entered into a lease amendment extending the term of the lease for a period of 3 years and 2 months commencing on May 1, 2015 and expiring on June 30, 2018, with an option to renew for an additional three years. On January 8, 2018, the Company entered into a lease amendment extending the term of the lease for a period of eighteen months commencing on July 1, 2018 and expiring on December 31, 2019, with an option to renew for an additional five years. On June 10, 2019, the Company entered into a lease amendment extending the term of the lease for an additional twelve months commencing on January 1, 2020 and expiring on December 31, 2020, with no option to renew. On October 25, 2013, the Company entered into an operating lease for its warehouse for a period of four years and four months commencing in January 2014, with an option to renew for an additional six years. On December 27, 2017, the Company entered into an agreement to terminate this lease effective January 31, 2018. On May 12, 2016, TransEnterix Italia entered into an operating lease for research and development and demonstration facilities for a period of six years commencing in July 2016. On April 15, 2019, TransEnterix Israel entered into an operating lease for research and development facilities for a period of five years commencing in April 2019. On April 25, 2018, TransEnterix Japan entered into an operating lease for office space for a period of five years commencing in April 2018. On July 1, 2018, TransEnterix Europe S.à.R.L entered into an operating lease for office space for a period of five years commencing in July 2018. Rent expense was approximately $1.4 million and $1.2 million for the years ended December 31, 2019 and 2018, respectively.
License and Supply Agreements
As discussed in Note 3, in September 2015, the Company completed the Senhance Acquisition. As part of this transaction, the Company assumed certain license and supply agreements. Commitments under these agreements amount to approximately $5.5 million in 2020, $0.6 million in 2021, $0.6 million in 2022, $0.6 million in 2023, $0.6 million in 2024, and $1.1 million thereafter until termination in 2027.
The Company has placed orders with various suppliers for the purchase of certain tooling, supplies and contract engineering and research services. Each of these orders has a duration or expected completion within the next twelve months.
22. Subsequent Events
Series B Warrant Exchange
On February 24, 2020, the Company entered into a Series B Warrants Exchange Agreement (the “Exchange Agreement”) with holders of its Series B Warrants. Under the terms of the Exchange Agreement, each Series B Warrant was canceled in exchange for 0.61 shares of common stock. The Warrant holders participating in the exchange held 3,373,900 of the 3,638,780 Series B Warrants then outstanding, and received an aggregate of 2,040,757 shares of common stock, leaving 264,880 Series B Warrants outstanding to acquire 160,226 shares of common stock. The number of shares of common stock subject to the outstanding Series B Warrants increased to 292,178 shares as a result of the adjustment made following the 2020 Public Offering.
Lincoln Park Capital Purchase Agreement
On February 10, 2020, the Company entered into a Purchase Agreement with Lincoln Park Capital Fund, LLC, an Illinois limited liability company, pursuant to which the Company has the right to sell to Lincoln Park up to an aggregate of $25,000,000 in shares of common stock over the 36-month term of the Purchase Agreement, subject to certain limitations and conditions set forth in the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Lincoln Park 343,171 shares of common stock as commitment shares on February 10, 2020. No shares have been sold to Lincoln Park under the Purchase Agreement to date.
Public Offering of Securities
On March 10, 2020, the Company closed an underwritten public offering (the "2020 Public Offering") with Ladenburg Thalmann & Co. Inc. as underwriter and sold an aggregate of 14,121,766 Class A Units at a public offering price of $0.68 per Class A Unit and 7,937,057 Class B Units at a public offering price of $0.68 per Class B Unit. Each Class A Unit consists of one share of the Company’s common stock, one warrant to purchase one share of common stock that expires on the first anniversary of the date of issuance (collectively, the “Series C Warrants”), and one warrant to purchase one share of common stock that expires on the fifth anniversary of the date of issuance (collectively, the “Series D Warrants”). Each Class B Unit consists of one share of Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), convertible into one share of common stock, a Series C Warrant to purchase one share of Common Stock and a Series D Warrant to purchase one share of Common Stock. The Class A Units and Class B Units have no stand-alone rights and were not certificated or issued as stand-alone securities. The shares of common stock, Series A Preferred Stock, Series C Warrants and Series D Warrants are immediately separable. In addition, the underwriter for the public offering exercised an overallotment option allowing them to purchase 3,308,823 Series C Warrants and 3,308,823 Series D Warrants.
The net proceeds to the Company from the 2020 Public Offering were approximately $13.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
At-The-Market Offering
The following table summarizes the total sales under the 2019 Sales Agreement for the period commencing January 1, 2020 through the date of this filing (in thousands except for per share amounts):
|
|
|
|
|
|
|
|
Total shares of common stock sold
|
6,688
|
|
|
Average price per share
|
$
|
1.73
|
|
|
Gross proceeds
|
$
|
11,558
|
|
|
Commissions earned by Cantor
|
$
|
347
|
|
|
Net Proceeds
|
$
|
11,211
|
|
Restructuring
During March 2020, the Company continued the restructuring efforts with additional headcount reductions which resulted in $0.8 million related to severance costs. These 2020 severance costs are primarily expected to be paid in 2020 and 2021.