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EX-31.2 - EX-31.2 - TRANSENTERIX INC.trxc-ex312_8.htm
EX-31.1 - EX-31.1 - TRANSENTERIX INC.trxc-ex311_9.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

 

FORM 10-Q

 

(Mark One)

x

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Quarterly Period ended June 30, 2016

or

o

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Transition Period from                      to                      

Commission File Number 0-19437

 

TRANSENTERIX, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

11-2962080

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

 

 

635 Davis Drive, Suite 300, Morrisville, NC

27560

(Address of principal executive offices)

(Zip code)

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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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

 

Large accelerated filer

o

Accelerated filer

x

 

 

 

 

Non-accelerated filer

o

Smaller reporting company

o

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

115,000,060 shares of the Company’s common stock, par value $0.001 per share, were outstanding as of August 1, 2016.

 

 

 

 


TRANSENTERIX, INC.

TABLE OF CONTENTS FOR FORM 10-Q

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

 

4

 

 

Consolidated Balance Sheets (unaudited)

 

5

 

 

Consolidated Statements of Stockholders’ Equity (unaudited)

 

6

 

 

Consolidated Statements of Cash Flows (unaudited)

 

7

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 3.

 

Defaults Upon Senior Securities

 

42

Item 4.

 

Mine Safety Disclosures

 

42

Item 5.

 

Other Information

 

42

Item 6.

 

Exhibits

 

43

 

 

 

 

 

 

 

SIGNATURES

 

44

 

 

2


FORWARD-LOOKING STATEMENTS

In addition to historical financial information, this report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “in the event that,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Financial Statements,”  “Notes to Consolidated Financial Statements “and “Risk Factors” in this report, as well as the disclosures made in the TransEnterix, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 3, 2016, and other filings we make with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law. References in this report to “we”, “our”, “us”, or the “Company” refer to TransEnterix, Inc. and the combined enterprise of SafeStitch Medical, Inc., TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l, TransEnterix Europe S.Á.R.L and TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Cadempino.

 

 

3


TransEnterix, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,364

 

 

$

6,579

 

 

$

14,749

 

 

$

14,063

 

Sales and marketing

 

 

1,306

 

 

 

373

 

 

 

2,989

 

 

 

748

 

General and administrative

 

 

2,895

 

 

 

1,990

 

 

 

5,134

 

 

 

3,845

 

Amortization of intangible assets

 

 

1,786

 

 

 

126

 

 

 

3,603

 

 

 

251

 

Change in fair value of contingent consideration

 

 

944

 

 

 

 

 

 

1,800

 

 

 

 

Inventory write-down related to restructuring

 

 

2,565

 

 

 

 

 

 

2,565

 

 

 

 

Restructuring and other charges

 

 

3,085

 

 

 

 

 

 

3,085

 

 

 

 

Goodwill impairment

 

 

61,784

 

 

 

 

 

 

61,784

 

 

 

 

Total Operating Expenses

 

 

80,729

 

 

 

9,068

 

 

 

95,709

 

 

 

18,907

 

Operating Loss

 

 

(80,729

)

 

 

(9,068

)

 

 

(95,709

)

 

 

(18,907

)

Other Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(489

)

 

 

(280

)

 

 

(1,067

)

 

 

(561

)

Other income

 

 

95

 

 

 

 

 

 

95

 

 

 

 

Total Other Expense, net

 

 

(394

)

 

 

(280

)

 

 

(972

)

 

 

(561

)

Loss before income taxes

 

$

(81,123

)

 

$

(9,348

)

 

$

(96,681

)

 

$

(19,468

)

Income tax benefit

 

 

992

 

 

 

 

 

 

3,637

 

 

 

 

Net loss

 

$

(80,131

)

 

$

(9,348

)

 

$

(93,044

)

 

$

(19,468

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gains

 

 

(2,286

)

 

 

 

 

 

1,510

 

 

 

Comprehensive loss

 

$

(82,417

)

 

$

(9,348

)

 

$

(91,534

)

 

$

(19,468

)

Net loss per share - basic and diluted

 

$

(0.70

)

 

$

(0.14

)

 

$

(0.85

)

 

$

(0.30

)

Weighted average common shares outstanding - basic and diluted

 

 

114,319

 

 

 

68,105

 

 

 

109,290

 

 

 

65,937

 

 

See accompanying notes to consolidated financial statements.

 

 

4


TransEnterix, Inc.

Consolidated Balance Sheets

(in thousands, except share amounts)

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,609

 

 

$

38,449

 

Accounts receivable, net

 

 

77

 

 

 

76

 

Inventories

 

 

4,247

 

 

 

3,923

 

Interest receivable

 

 

19

 

 

 

6

 

Other current assets

 

 

7,011

 

 

 

6,689

 

Total Current Assets

 

 

75,963

 

 

 

49,143

 

Restricted cash

 

 

289

 

 

 

 

Inventories, net of current portion

 

 

 

 

 

709

 

Property and equipment, net

 

 

4,743

 

 

 

4,408

 

Intellectual property, net

 

 

42,571

 

 

 

46,898

 

In-process research and development

 

 

16,811

 

 

 

16,511

 

Goodwill

 

 

69,756

 

 

 

130,869

 

Other long term assets

 

 

63

 

 

 

64

 

Total Assets

 

$

210,196

 

 

$

248,602

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,002

 

 

$

4,450

 

Accrued expenses

 

 

7,344

 

 

 

7,395

 

Contingent consideration – current portion

 

 

12,500

 

 

 

12,500

 

Notes payable - current portion

 

 

7,658

 

 

 

6,727

 

Total Current Liabilities

 

 

29,504

 

 

 

31,072

 

Long Term Liabilities

 

 

 

 

 

 

 

 

Contingent consideration – less current portion

 

 

12,800

 

 

 

11,000

 

Net deferred tax liabilities

 

 

12,920

 

 

 

16,263

 

Notes payable - less current portion, net of debt discount

 

 

9,080

 

 

 

12,990

 

Total Liabilities

 

 

64,304

 

 

 

71,325

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock $0.001 par value, 750,000,000 shares authorized at June 30, 2016

   and December 31, 2015; 115,000,003 and 100,180,872 shares issued at June 30,

   2016 and December 31, 2015, respectively; and 114,928,458 and 100,149,453

   shares outstanding at June 30, 2016 and December 31, 2015, respectively

 

 

115

 

 

 

100

 

Additional paid-in capital

 

 

423,544

 

 

 

363,280

 

Accumulated deficit

 

 

(275,908

)

 

 

(182,864

)

Treasury stock at cost, 71,545 and 31,419 shares at June 30, 2016 and

   December 31, 2015, respectively

 

 

(203

)

 

 

(73

)

Accumulated other comprehensive loss

 

 

(1,656

)

 

 

(3,166

)

Total Stockholders’ Equity

 

 

145,892

 

 

 

177,277

 

Total Liabilities and Stockholders’ Equity

 

$

210,196

 

 

$

248,602

 

 

See accompanying notes to consolidated financial statements.

 

 

5


TransEnterix, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance, December 31, 2015

 

 

100,180

 

 

$

100

 

 

 

(31

)

 

$

(73

)

 

$

363,280

 

 

$

(182,864

)

 

$

(3,166

)

 

$

177,277

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,477

 

 

 

 

 

 

 

 

 

2,477

 

Issuance of common stock, net of

   issuance costs

 

 

14,474

 

 

 

15

 

 

 

 

 

 

 

 

 

57,622

 

 

 

 

 

 

 

 

 

57,637

 

Exercise of stock options and restricted

   stock units

 

 

346

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

 

 

 

 

 

 

165

 

Return of common stock to pay

   withholding taxes on restricted stock

 

 

 

 

 

 

 

 

(41

)

 

 

(130

)

 

 

 

 

 

 

 

 

 

 

 

(130

)

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,510

 

 

 

1,510

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(93,044

)

 

 

 

 

 

(93,044

)

Balance, June 30, 2016

 

 

115,000

 

 

$

115

 

 

 

(72

)

 

$

(203

)

 

$

423,544

 

 

$

(275,908

)

 

$

(1,656

)

 

$

145,892

 

 

See accompanying notes to consolidated financial statements.

 

 

6


TransEnterix, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(93,044

)

 

$

(19,468

)

Adjustments to reconcile net loss to net cash and cash equivalents used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,052

 

 

 

517

 

Amortization of intangible assets

 

 

3,603

 

 

 

251

 

Amortization of debt discount and debt issuance costs

 

 

99

 

 

 

54

 

Stock-based compensation

 

 

2,477

 

 

 

1,667

 

Inventory write-down related to restructuring

 

 

2,565

 

 

 

 

Non-cash restructuring and other charges

 

 

2,551

 

 

 

 

Goodwill impairment

 

 

61,784

 

 

 

 

Deferred tax benefit

 

 

(3,657

)

 

 

 

Change in fair value of contingent consideration

 

 

1,800

 

 

 

 

Changes in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

125

 

Interest receivable

 

 

(13

)

 

 

 

Inventories

 

 

(3,983

)

 

 

 

Other current and long term assets

 

 

(213

)

 

 

150

 

Accounts payable

 

 

(2,497

)

 

 

(162

)

Accrued expenses

 

 

(60

)

 

 

490

 

Restricted cash

 

 

(290

)

 

 

250

 

Net cash and cash equivalents used in operating activities

 

 

(27,826

)

 

 

(16,126

)

Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(517

)

 

 

(311

)

Net cash and cash equivalents used in investing activities

 

 

(517

)

 

 

(311

)

Financing Activities

 

 

 

 

 

 

 

 

Payment of debt

 

 

(3,078

)

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

57,637

 

 

 

52,533

 

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

 

 

(130

)

 

 

 

Proceeds from exercise of stock options and warrants

 

 

165

 

 

 

250

 

Net cash and cash equivalents provided by financing activities

 

 

54,594

 

 

 

52,783

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(91

)

 

 

 

Net increase in cash and cash equivalents

 

 

26,160

 

 

 

36,346

 

Cash and cash equivalents, beginning of period

 

 

38,449

 

 

 

34,766

 

Cash and cash equivalents, end of period

 

$

64,609

 

 

$

71,112

 

Supplemental Disclosure for Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

713

 

 

$

375

 

Supplemental Schedule of Noncash Investing Activities

 

 

 

 

 

 

 

 

Transfer of inventory to property and equipment

 

$

1,823

 

 

$

 

 

See accompanying notes to consolidated financial statements.

 

 

7


TransEnterix, Inc.

Notes to Consolidated Financial Statements

 

 

1. Organization and Capitalization

TransEnterix, Inc. (the “Company”) is a medical device company that is pioneering the use of robotics to improve minimally invasive surgery by addressing the clinical challenges associated with current laparoscopic and robotic options. The Company is focused on the commercialization and further development of the ALF-X ® Surgical Robotic System (the “ALF-X System”), a multi-port robotic system that brings the advantages of robotic surgery to patients while enabling surgeons with innovative technology. The Company also developed the SurgiBot™ System, a single-port, robotically enhanced laparoscopic surgical platform. The ALF-X System has been granted a CE Mark in Europe for use in urology, general surgery, gynecology and thoracic surgery, but is not available for sale in the U.S. The SurgiBot System is not available for sale in any market.

The ALF-X System is a multi-port robotic surgery system which allows multiple arms to control robotic 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. The system replicates laparoscopic motion that is familiar to experienced surgeons, and features three-dimensional high definition (“3DHD”) vision technology. The ALF-X System also offers responsible economics to hospitals by offering robotic technology with reusable instruments with minimal additional costs per surgery.

The SurgiBot System is designed to utilize flexible instruments through articulating channels controlled directly by the surgeon, with robotic assistance, while the surgeon remains patient-side within the sterile field. In June 2015, the Company submitted a 510(k) application to the FDA for the SurgiBot System and worked with the FDA to provide additional information as requested. On April 19, 2016, the FDA notified the Company that the SurgiBot System did not meet the criteria for substantial equivalence based on the data and information submitted by TransEnterix in the 510(k) submission. As a result, the Company has reprioritized its near-term regulatory efforts to focus on the 510(k) submission for the ALF-X System. Consequently, in May 2016, the Company implemented a restructuring plan. The restructuring plan resulted in: 1) reducing the Company’s workforce; 2) abandoning certain equipment; 3) cancelling certain contracts; 4) writing off inventory related to the SurgiBot System; and 5) writing off certain patents.  See Note 14 to the consolidated financial statements for further details.

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.

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 which 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 (the “ALF-X Acquisition”), and changed the name of Vulcanos to TransEnterix Italia S.r.l (“TransEnterix Italia”). The acquisition included all of the assets, employees and contracts related to the
ALF-X System. See Note 3 for a description of the related transactions.

As used herein, the term “Company” refers to the combination of SafeStitch and TransEnterix Surgical after giving effect to the Merger, and includes TransEnterix International, TransEnterix Italia, TransEnterix Europe S.Á.R.L, and TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Cadempino after giving effect to the ALF-X Acquisition, the term “SafeStitch” refers to the historic business of SafeStitch Medical, Inc. prior to the Merger, and the term “TransEnterix Surgical” refers to the historic business of TransEnterix Surgical, Inc. prior to the Merger.

The Company operates in one business segment.

 

 

8


2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments, consisting only of normal recurring adjustments, except as otherwise indicated, necessary for a fair statement of its financial position, results of operations, and cash flows of the Company for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.  The accompanying Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries, SafeStitch LLC, TransEnterix Surgical, Inc., TransEnterix International, Inc., TransEnterix Italia S.r.l., TransEnterix Europe S.Á.R.L and TransEnterix Europe S.Á.R.L, Bertrange, Swiss Branch, Cadempino. All inter-company accounts and transactions have been eliminated in consolidation.

 

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, stock compensation expense, excess and obsolete inventory reserves, and deferred tax asset valuation allowances.

Reverse Stock Split

On March 31, 2014, the Company effectuated a reverse stock split of its issued and outstanding shares of common stock at a ratio of 1 for 5 (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the Company’s issued and outstanding stock decreased from 244,276,923 to 48,855,255 shares of common stock, all with a par value of $0.001. All information related to common stock, stock options, restricted stock units, warrants and earnings per share for prior periods has been retroactively adjusted to give effect to the Reverse Stock Split.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents and investments with original maturities of between 91 days and one year to be short-term investments. In order to manage exposure to credit risk, the Company invests in high-quality investments rated at least A2 by Moody’s Investors Service or A by Standard & Poor.

Fair Value of Financial Instruments

The carrying values of cash equivalents, accounts receivable, interest receivable, accounts payable, and certain accrued expenses at June 30, 2016 and December 31, 2015, approximate their fair values due to the short-term nature of these items. The Company’s notes payable balance approximates fair value as of June 30, 2016 and December 31, 2015, as the Company’s notes payable were amended and modified in the third quarter of 2015.

9


2. Summary of Significant Accounting Policies (Continued)

Concentrations and Credit Risk

The Company’s principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and investments 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 cash deposits may at times exceed the FDIC 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 net revenue to customers and distributors 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 but has not experienced significant losses to date. The Company had one customer who constituted 100% of the Company’s net accounts receivable at June 30, 2016 and December 31, 2015.

Accounts Receivable

Accounts receivable are recorded at net realizable value, which includes an allowance for estimated uncollectable accounts. The allowance for uncollectible accounts was determined based on historical collection experience.

Inventories

Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method. 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 next 12 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 7 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 research and development 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 research and development is recorded using the straight-line method over the estimated useful life of 7 years. This method approximates the period over which the Company expects to receive the benefit from these assets. See Note 10 for additional information related to the write-off of purchased patents in connection with the restructuring plan executed in May 2016.  No impairment existed at December 31, 2015.

Indefinite-lived intangible assets, such as goodwill, are not amortized. The Company tests the carrying amounts of goodwill for recoverability on an annual basis at December 31 or when events or changes in circumstances indicate evidence a potential impairment exists, using a fair value based test. 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. See Note 10 for additional information related to goodwill impairment recorded during the second quarter of 2016. No impairment existed at December 31, 2015.

10


2. Summary of Significant Accounting Policies (Continued)

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 was acquired on September 21, 2015. No impairment existed at June 30, 2016 and December 31, 2015.

Property and Equipment

Property and equipment consists primarily of machinery, manufacturing equipment, computer equipment, furniture, and leasehold improvements, which are recorded at cost.

Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

 

Machinery and manufacturing equipment

 

3-5 years

Computer equipment

 

3 years

Furniture

 

5 years

Leasehold improvements

 

Lesser of lease term or 3 to 10 years

 

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future estimated undiscounted net cash flows will be less than the carrying amount of the assets. If such estimated cash flows are less than the carrying amount of the long-lived assets, then such assets are written down to their fair value. The Company’s estimates of anticipated cash flows and the remaining estimated useful lives of long-lived assets could be reduced in the future, resulting in a reduction to the carrying amount of long-lived assets.

Contingent Consideration

Contingent consideration is recorded as a liability and is the estimate of the fair value of potential milestone payments related to business acquisitions. Contingent consideration is measured at fair value using a discounted cash flow model utilizing significant unobservable inputs including the probability of achieving each of the potential milestones 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 is updated by reflecting the changes in fair value in our statement of operations and comprehensive loss.

Translation of Foreign Currencies

The functional currency of the Company’s foreign subsidiaries is Euros. 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.

11


2. Summary of Significant Accounting Policies (Continued)

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 statement 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 six months ended June 30, 2016 and 2015 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. 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.

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 historical lack of profitability; the Company’s ability to raise additional capital; its ability to successfully integrate the ALF-X System into its business; 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, Italy, other countries in the European Union, and other countries in which the Company intends to operate; its ability to attract and retain key management, marketing and scientific personnel; competition from new entrants; 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.

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 and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. Research and development costs are expensed as incurred.

Stock-Based Compensation

The Company follows ASC 718 (“Stock Compensation”) and ASC 505-50 (“Equity-Based Payments to Non-employees”), which provide 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. For awards granted to non-employees, the Company determines the fair value of the stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

12


2. Summary of Significant Accounting Policies (Continued)

The Company recognizes compensation expense for stock-based awards based on estimated fair values on the date of grant for awards granted to employees. 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 $2,477,000 and $1,667,000 for the six months ended June 30, 2016 and 2015, 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.

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 56% of the Company’s total consolidated assets are located within the U.S. as of June 30, 2016. The remaining assets are mostly located in Europe and are primarily related to the Company’s facility in Italy, and include goodwill, intellectual property, in-process research and development, other current assets and inventory of $93.2 million at June 30, 2016, associated with the ALF-X Acquisition in September 2015. Total assets outside of the U.S. excluding goodwill amounted to 35% of total consolidated assets at June 30, 2016.

Impact of Recently Issued Accounting Standards

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Along with other income tax cash flows, excess tax benefits will be classified as operating activities, and cash paid by an employer when directly withholding shares for tax withholding purposes will be classified as financing activities. Entities may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. For public companies, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, however, an entity that elects early adoption must adopt all amendments under the new standard in the same period. The Company is currently in the process of evaluating the impact of the amended guidance on our consolidated financial statements.

Except as noted above, there have been no significant changes to our assessment of the impact of recently issued accounting standards included in Note 2 of Notes to Consolidated Financial Statements in our Fiscal 2015 Form 10-K.

Reclassifications

As a result of a recent acquisition, certain financial statement captions have been added and we have reclassified certain prior-period amounts on our consolidated statement of operations and comprehensive loss to conform to the presentation for the current period. Such reclassifications have no effect on previously reported total assets, liabilities, stockholders’ equity or net loss.

 

 

13


3. Acquisition of ALF-X 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 known as the ALF-X System and changed the name of the acquired company from Vulcanos S.r.l. to TransEnterix Italia S.r.l.

Under the terms of the Purchase Agreement, the consideration consisted of the issuance of 15,543,413 shares of the Company’s common stock (the “Securities Consideration”) and approximately $25.0 million U.S. Dollars and €27.5 million Euro in cash consideration (the “Cash Consideration”). The Securities Consideration was issued in full at the closing of the ALF-X Acquisition; the Cash Consideration was or will be paid in four tranches, as follows:

(1) $25.0 million of the Cash Consideration was paid at closing;

(2) The second tranche of the Cash Consideration (the “Second Tranche”) of €10.0 million shall be payable after the achievement of both of the following milestones (i) the earlier of approval from the FDA for the ALF-X System or December 31, 2016, and (ii) the Company having cash on hand of at least $50.0 million, or successfully completing a financing, raising at least $50.0 million in gross proceeds; with payment of simple interest at a rate of 9.0% per annum between the achievement of the first milestone event and the payment date;

(3) The third tranche of the Cash Consideration (the “Third Tranche”) of €15.0 million shall be payable upon achievement of trailing revenues from sales or services contracts of the ALF-X System of at least €25.0 million over a calendar quarter; and

(4) The fourth tranche of the Cash Consideration of €2.5 million shall be payable by December 31, 2016 as reimbursement for certain debt payments made by SOFAR under an existing SOFAR loan agreement.

The Third Tranche will be payable even if the Second Tranche is not then payable. In addition, the Second Tranche and 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 ALF-X System, or (iii) the Company acquires a business that offers alternative products that are directly competitive with the ALF-X System.

Under the Purchase Agreement, 10% of the Securities Consideration is being held in escrow to support SOFAR’s representations and warranties under the Purchase Agreement. The Company and SOFAR also entered into a Security Agreement, which provides that 10% of the membership interests of TransEnterix Italia have a lien placed thereon by and in favor of SOFAR to support the Company’s representations and warranties under the Purchase Agreement. The escrow period and security interest period are each twenty-four months after the closing of the ALF-X Acquisition.

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.

In connection with the ALF-X Acquisition, the Company also entered into a Registration Rights Agreement, dated as of September 21, 2015, with SOFAR, pursuant to which the Company agreed to register the Securities Consideration shares for resale following the end of the lock-up periods described below. The resale Registration Statement has been filed and is effective, pending lapse of the lock-up restrictions.

In connection with the ALF-X Acquisition, SOFAR entered into a Lock-Up Agreement with the Company pursuant to which SOFAR agreed, subject to certain exceptions, not to sell, transfer or otherwise convey any of the Securities Consideration for one year following the Closing Date. The Lock-up Agreement provides that SOFAR may sell, transfer or convey: (i) no more than 50% of the Securities Consideration during the period commencing on the one-year anniversary of the Closing Date and ending on the eighteen-month anniversary of the Closing Date; and (ii) no more than 75% of the Securities Consideration during the period commencing on the eighteen-month anniversary of the Closing Date and ending on the two-year anniversary of the Closing Date. The restrictions on transfer contained in the Lock-up Agreement cease to apply to the Securities Consideration following the second anniversary of the Closing Date, or earlier upon certain other conditions.

The ALF-X Acquisition was accounted for as a business combination utilizing the methodology prescribed in ASC 805. The purchase price for the ALF-X Acquisition has been allocated to the assets acquired and liabilities assumed based on their estimated fair values.

14


3. Acquisition of ALF-X Surgical Robotic System (Continued)

The ALF-X Acquisition-date fair value of the consideration is as follows (in thousands, except for per share amounts):

 

Common shares issued

 

 

15,543

 

Closing price per share

 

$

2.81

 

 

 

$

43,677

 

Cash consideration

 

 

25,000

 

Contingent consideration

 

 

23,900

 

Total consideration

 

$

92,577

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on September 21, 2015, the date of acquisition (in thousands):

 

Accounts receivable

 

$

78

 

Inventories

 

 

2,800

 

Current deferred tax asset

 

 

526

 

Other current assets

 

 

4,180

 

Property and equipment

 

 

1,384

 

Intellectual property

 

 

48,500

 

In-process research and development

 

 

17,100

 

Goodwill

 

 

38,348

 

Total assets acquired

 

$

112,916

 

Accounts payable and other liabilities

 

 

1,915

 

Long-term deferred tax liabilities

 

 

18,424

 

Net assets acquired

 

$

92,577

 

 

The Company allocated $48.5 million of the purchase price to identifiable intangible assets of intellectual property that met the separability and contractual legal criterion of ASC 805. The intellectual property will be amortized using the straight-line method over 7 years.

IPR&D is principally the estimated fair value of the ALF-X System 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 among the various 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 operations of TransEnterix Italia with the Company’s existing operations. The goodwill is not deductible for income tax purposes.

All legal, consulting and other costs related to the acquisition, aggregating approximately $4.2 million, have been expensed as incurred and are included in operating expenses in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2015. The results of operations for TransEnterix Italia are included in the Company’s consolidated statements of operations and comprehensive loss for the period from the September 21, 2015 acquisition date.

 

 

 

4. Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash consist of the following:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Cash

 

$

5,511

 

 

$

1,666

 

Money market

 

 

59,098

 

 

 

36,783

 

Total cash and cash equivalents

 

$

64,609

 

 

$

38,449

 

Restricted cash

 

$

289

 

 

$

 

Total

 

$

64,898

 

 

$

 

 

 

 

15


5. Fair Value

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 available for sale securities classified as cash and cash equivalents, restricted cash and contingent consideration. 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.

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, inventories, interest receivable, accounts payable, and certain accrued expenses at June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015, as they were modified in the third quarter of 2015.

The following are the major categories of assets measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

 

 

June 30, 2016

 

 

 

(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

 

$

64,609

 

 

$

 

 

$

 

 

$

64,609

 

Restricted cash

 

 

289

 

 

 

 

 

 

 

 

 

289

 

Total Assets measured at fair value

 

$

64,898

 

 

$

 

 

$

 

 

$

64,898

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

25,300

 

 

$

25,300

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

25,300

 

 

$

25,300

 

16


5. Fair Value (Continued)

 

 

 

December 31, 2015

 

 

 

(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

 

$

38,449

 

 

$

 

 

$

 

 

$

38,449

 

Total Assets measured at fair value

 

$

38,449

 

 

$

 

 

$

 

 

$

38,449

 

Liabilities measured at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

23,500

 

 

$

23,500

 

Total liabilities measured at fair value

 

$

 

 

$

 

 

$

23,500

 

 

$

23,500

 

 

The Company’s financial liabilities consisted of contingent consideration potentially payable to SOFAR related to the ALF-X 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 change in fair value of the contingent consideration of $1,800,000 for the six months ended June 30, 2016 was primarily due to the effect of the passage of time on the fair value measurement and the impact of foreign currency exchange rates. Adjustments associated with the change in fair value of contingent consideration are included in the Company’s consolidated statements of operations and comprehensive loss.

The following table presents quantitative information about the inputs and valuation methodologies used for the Company’s fair value measurements classified in Level 3 as of September 21, 2015, December 31, 2015, and June 30, 2016:

 

 

 

Valuation

Methodology

 

Significant

Unobservable Input

 

Weighted Average

(range, if

applicable)

Contingent  consideration

 

Probability weighted

income approach

 

Milestone dates

 

2016 to 2017

 

 

 

 

Discount rate

Probability of occurrence

 

7.5% to 9.0%

100%

 

The following table summarizes the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs for the six months ended June 30, 2016:

 

 

 

Fair Value Measurement at

Reporting Date (Level 3)

 

 

 

(In thousands)

 

 

 

(unaudited)

 

Balance at December 31, 2015

 

$

23,500

 

Change in fair value

 

 

1,800

 

Balance at June 30, 2016

 

$

25,300

 

Current portion

 

 

12,500

 

Long-term portion

 

 

12,800

 

Balance at June 30, 2016

 

$

25,300

 

 

 

6. Accounts Receivable, Net

The following table presents the components of accounts receivable:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Gross accounts receivable

 

$

77

 

 

$

76

 

Allowance for uncollectible accounts

 

 

 

 

 

 

Total accounts receivable, net

 

$

77

 

 

$

76

 

 

17


 

7. Inventories

The components of inventories are as follows:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Finished goods

 

$

4,247

 

 

$

2,704

 

Raw materials

 

 

 

 

 

1,928

 

Total inventories

 

$

4,247

 

 

$

4,632

 

Short-term portion

 

$

4,247

 

 

$

3,923

 

Long-term portion

 

 

 

 

 

709

 

Total inventories

 

$

4,247

 

 

$

4,632

 

 

As disclosed in Note 14, the Company executed a restructuring plan in May 2016 and wrote down inventory related to the SurgiBot System.  The write down of inventory of $2.6 million is included in the accompanying consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2016.  There were no such write-downs for the three and six month periods ended June 30, 2015.  

 

 

8. Other Current Assets

The following table presents the components of other current assets:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Advances to vendors

 

$

5,007

 

 

$

5,403

 

Prepaid expenses

 

 

1,075

 

 

 

750

 

Other receivables

 

 

929

 

 

 

536

 

Total

 

$

7,011

 

 

$

6,689

 

 

 

9. Property and Equipment

Property and equipment consisted of the following:

 

 

 

June 30,

2016

 

 

December 31,

2015

 

 

 

(In thousands)

 

 

 

(unaudited)

 

 

 

 

 

Machinery and manufacturing equipment

 

$

6,367

 

 

$

5,846

 

Computer equipment

 

 

1,986

 

 

 

1,875

 

Furniture

 

 

384

 

 

 

374

 

Leasehold improvements

 

 

1,717

 

 

 

1,700

 

Total property and equipment

 

 

10,454

 

 

 

9,795

 

Accumulated depreciation and amortization

 

 

(5,711

)

 

 

(5,387

)

Property and equipment, net