TRANSENTERIX

Moderator: Mark Klausner
November 6, 2014
7:30 am CT

For opening remarks and introductions I will now turn the call over to Mark Klausner of Westwicke Partners. Mr. Klausner, please go ahead.

I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our Web site. To access the webcast please visit the events link in the IR section of our Web site transenterix.com.

Before we begin I would like to caution listeners that certain information discussed by management during this conference call are forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business.

The company undertakes no obligation to update information provided on this call. For a discussion of risks and uncertainties associated with TransEnterix’s business I encourage you to review the company’s filings with the Securities and Exchange Commission including the annual report on Form 10-K for the year ended December 31, 2013 and the Form 10-Q for the quarter ended September 30, 2014 expected to be filed on or about November 7, 2014.

With that it’s my pleasure to turn the call over to TransEnterix’s President and Chief Executive Officer Todd Pope.

Then I will briefly wrap up the call and open up the line to take any questions. I would like to start with an update on our SurgiBot development. As we announced this morning in our press release we now expect to submit our 510(k) for the SurgiBot system in the middle of 2015 later than originally anticipated.

As most of you know the SurgiBot has many components and a high degree of system integration. Modification to any component often requires a further cycle of testing and validation. And this has contributed to the extension of our submission timeline.

The process of preparing our SurgiBot 510(k) includes building fully integrated systems along with the complete suite of surgical instruments and disposables, performing functional testing and conducting verification and validation activities along with preclinical labs and GLP survival studies.

While we were disappointed that we were not able to meet our original year end submission goal we have made significant progress during the quarter in many of these critical areas. Since our last call we have manufactured fully integrated SurgiBot systems and over 300 disposables and have completed our functional testing.

While we passed the majority of these tests some of the results required minor modifications prior to manufacturing units for our remaining FDA submission activities. We also have conducted successful preclinical surgical procedures with these units.

The long lead time activities for our FDA submission are under way and the bulk of our resources are focused on building the remaining SurgiBot systems and disposable units required for the verification and validation testing.

This submission remains our top priority as a company and we are confident we will be in a position for a mid 2015 filing. We expect the FDA review cycle to be six to nine months and we plan to be on the market shortly after clearance.

I will now hand the call over to Joe who will walk you through the numbers.

The historical results being discussed are those of TransEnterix’s through September 3, 2013 and of the merged entity thereafter. We reported revenue of $61,000 in the third quarter of 2014 in comparison to revenue in the prior year period of $362,000.

The decrease in revenue was attributable to lower sales volumes of SPIDER Surgical Systems as we continue to focus resources on the SurgiBot system development. Costs of goods sold was $202,000 in the third quarter a decrease from $2.1 million in the prior year’s quarter.

The decrease in costs of goods sold is primarily the result of lower revenues, the discontinuation of production of our SPIDER system and the reclassification of most of our manufacturing and quality expenditures to research and development expense. Research and development expenses were $9.1 million in the third quarter of 2014 compared with $2.9 million in the third quarter of 2013.

The increase in R&D spend resulted primarily from increased investment in SurgiBot development including development materials, increased contract engineering services and consulting, the reclassification of most of our manufacturing and quality expenditures to R&D expense and increased stock-based compensation costs.

In comparison to the second quarter of 2014 R&D expenses increased $1.2 million as we increased our activities relating to our FDA submission. Sales and marketing expenses remained relatively flat at $456,000 for the third quarter in comparison to $438,000 in the prior year period.

General and administrative expenses were $1.6 million in the third quarter of 2014 as compared to $1.3 million in the prior year period. The increase in expenses was due primarily to increased stock-based compensation costs and increased costs associated with being a public company offset by decreased compensation costs.

Net loss was $11.5 million in the third quarter of 2014 compared to a net loss of $11.3 million in the third quarter of 2013. On a per share basis net loss was 18 cents in the third quarter of 2014 based on a fully diluted share count of 63.1 million shares compared to $1.06 in the prior year period based on a fully diluted share count of 10.6 million             shares.

Turning to the balance sheet we finished the quarter with $44.3 million in cash and cash equivalents. During the quarter we strengthened our balance sheet by securing up to $25 million in growth capital from Oxford Finance and Silicon Valley Bank.

We are pleased to have been able to expand our previous loan agreement to provide us with additional operating capital. During the third quarter of 2014 our cash declined by $8.2 million reflecting $11.6 million in cash burn including $716,000 in property and equipment investment and a $3.3 million net increase in debt. We are being diligent and strategic with our capital and have taken steps to reduce cash burn.

I’ll now hand the call back to Todd.

The surgeons surveyed expressed a specific interest in having a robotic platform that keeps them patient side in the sterile field and builds upon their laparoscopic training and experience.

Additionally all of the surgeons surveyed expressed dissatisfaction with the existing laparoscopic tools and the experience of traditional laparoscopy. The greatest challenges cited were difficult ergonomics, reliance on assistants, challenge in utilizing multiple instruments and a camera during long operations and the continued need for greater precision and control during key portions of the procedure.

This market feedback validates our product strategy that there is a need for a differentiated surgical platform which brings real improvement to laparoscopy with acceptable cost and OR time, provides patients with an attractive minimally invasive option and enhances not changes how surgery is currently performed.

Our FDA 510(k) submission remains our top priority. The learnings we have gone through over the past quarter have been beneficial and we are confident with the adjustments we have made to our timeline. We look forward to sharing additional details regarding our progress on upcoming calls. And with that I’d like to turn it over to the operator to take your questions.

We’ll go first today to Glenn Novarro with RBC Capital Markets.

Now as those tests results came in, it was evident that some modifications were required. And we’re in the process now of making those changes. You have to implement them throughout the whole system and then put them back on test. And we’re working those into our revised schedule.

You know, in the quarter specifically we made a lot of progress. You know, the SurgiBot system is fully built. Our functional testing is complete. And we’ve conducted additional preclinical surgical procedures during the quarter. So we’ve made a lot of progress on building the system and the disposables required for the V&V testing for our 510(k) submission.

And I think the last thing that you asked that we haven’t addressed yet is these changes really are not major or noticeable changes. These are when you take a system like we have, you put it together and you run it through the myriad of tests that you have often times you have to make slight modifications. Then you have to rerun the tests so there’s not changes to your question that would be noticeable to an operator when they see or work on the system.

I mean is it software? Is it hardware? Is it when you put everything together and you’re squeezing the handle it was sticky? Or I mean can you give us anymore concrete feeling for this so we get a sense of the magnitude of the issues?

And you do V&V on both your product and your processes. So when we put those both together they were I would say smaller items that we’ve noticed that we feel like we need to go back and make modifications on which we’re doing. So it was really more involved with the integration of all of the parts and processes not any major issue that was a show stopper.

You know, we put this new timeline together with information based on not only the last year but this last quarter. And, you know, what we’re providing you with an updated submission goal of mid 2015 we have solid confidence in that.

We wanted to go to a group that is being approached more readily over the last year and talked about a lot which is more of the general surgeon community. And most importantly we wanted to get general surgeons that have had exposure to robotics.

You know, they’ve done cases not just seen it from afar. So when we went and talked to them it was a different, you know, group. I mean obviously all of them are doing laparoscopic surgery today. So I think it gave us a kind of different window on some of the feedback on technologies, what they think about robotics, what they think about different procedure applications.

And frankly we’re bringing a few things that are new concepts about a robotic platform that is within the sterile field, that is patient side, that keeps their hands on the instruments, provides some tactile feel. We wanted to get a lot of feedback on what their thoughts were about that. So I think that’s, you know, why the focus of these questions and certainly this group of surgeons were different.

And I guess the other question I had is can you review with us also the milestones that you have in place with your most recent financing with Oxford and Silicon Valley Bank relative to being able to tap into Tranche 2 and Tranche 3? I think there’s a September timeline here associated with an offering and a filing of the product with the FDA.

We feel like we have cash that’ll get us through the end of next year so that will take us beyond the filing date of the 510(k). And for the SVB milestones the first is that we file by next September so we feel comfortable and that will be a $5 million tranche.

There is an interest-only period of the first 12 months which is through next September which if we are to get clearance by the end of October of next year would extend the interest-only period by six months. And then the remaining $10 million of capital we have accessible to us is to obtain trailing six months of revenue of $10 million by September of 2017.

And that building process will wind down here, you know, in the next series of months in advance of the filing so it’ll draw down slightly. But the way I would think about it is our cash burn is going to fluctuate between eight and $10 million a quarter between now and the end of next year.

And to your question that’s both with, you know, the unit and the instruments and the tools that we also build. So we felt good about that and really any issues that we had were not particularly highlighted in one of those areas.

It really was and it was just more of a systems integration issue across. As far as, you know, particular tools we did continue to make progress out in the field with our ligating shears. We feel the feedback we’re getting from that continues to be great.

You know, advance energy is a very large global market and the ability to go in and get the right angles when you’re using that instrumentation to go after particular tissue is very important. And in the past since all of those instruments have been rigid, extra ports were required to get the right angle.

Having a fully flexible device like that has proven to be very beneficial. We got some very good press as we talked about at the (IFSO) meeting in Montreal and we continue to have some papers and posters come out on that. Our clinical experience has been very positive so we look forward to also having that product ready for the SurgiBot upon launch of the SurgiBot.

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