Notes to Financial Statements
1. Organization and Capitalization
TransEnterix, Inc., formerly known as SafeStitch Medical, Inc., a Delaware corporation (
“
SafeStitch”) was
originally incorporated in August 1988 as NCS Ventures Corp., after which NCS Ventures Corp. name was changed to Cellular Technical Services Company, Inc. On September 4, 2007, Cellular Technical Services Company, Inc. acquired SafeStitch LLC, and, in January 2008, changed its name to SafeStitch Medical, Inc.
On September 3, 2013, SafeStitch and TransEnterix Surgical, Inc., a Delaware corporation formerly known as TransEnterix, Inc. (
“
TransEnterix Surgical”) 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 corporate name to TransEnterix, Inc.
As used herein, the term “Company” refers to the combination of SafeStitch and TransEnterix Surgical after giving effect to the Merger,
the term “SafeStitch” refers to the business of SafeStitch Medical, Inc. prior to the Merger, and the term “TransEnterix Surgical” refers to the business of TransEnterix Surgical, Inc. prior to the Merger.
Pursuant to the Merger Agreement, each share of TransEnterix Surgical’s capital stock issued and outstanding immediately preceding the Merger was converted into the right to receive
1.1533
shares
(“the Exchange Ratio”)
of SafeStitch’s common stock, par value $
0.001
per share , other than those shares of TransEnterix Surgical’s common stock held by non-accredited investors, which shares were instead converted into the right to receive an amount in cash per share of SafeStitch common stock equal to $
1.08
, without interest, which was the volume-weighted average price of a share of common stock on the OTCBB for the 60-trading day period ended on August 30, 2013 (one business day prior to the effective date of the Merger). Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, the Company
issued an aggregate of
105,549,746
shares of the Company’s common stock as Merger consideration and paid $293,000 to unaccredited investors in lieu of common stock. Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, the Company assumed all of TransEnterix Surgical’s options, whether vested or unvested, and warrants issued and outstanding immediately prior to the Merger at the same Exchange Ratio.
In connection with the Merger, the Company entered into a securities purchase agreement with certain private investors,
the majority of which were considered related parties as existing investors in SafeStitch and TransEnterix Surgical,
pursuant to which the investors agreed to purchase an aggregate of 7,569,704.4 shares of the Company’s Series B Convertible Preferred Stock for a purchase price of $
4.00
per share of Series B Preferred Stock, which was paid in cash, cancellation of certain indebtedness of TransEnterix
Surgical
or a combination thereof (the
“
Private Placement”). Each share of Series B Preferred Stock was automatically converted upon authorization of additional common shares into ten shares of our common stock, par value $
0.001
per share, on December 6, 2013.
The Company is a medical device company that is focused on the development and commercialization of a robotic assisted surgical system called the SurgiBot™ System (
“the
SurgiBot System”). The SurgiBot System utilizes flexible instruments through articulating channels controlled directly by the surgeon, with robotic assistance, at the patient’s bedside. The flexible nature of the SurgiBot System allows for multiple instruments to be introduced and deployed through a single site, thereby offering room for visualization and manipulation once in the body. The SurgiBot System also integrates three-dimensional, (
“
3-D”), high definition vision technology. The Company has also commercialized the SPIDER® Surgical System, (
“
the SPIDER System”) a manual laparoscopic system in the United States, Europe and the Middle East. The SPIDER System utilizes flexible instruments and articulating channels controlled directly by the surgeon, allowing for multiple instruments to be introduced via a single site. The product is U.S. Food and Drug Administration cleared. The Company sells its products through a direct sales force and international distributors.
Prior to the Merger, SafeStitch was focused on developing its Gastroplasty Device for the treatment of obesity and GERD.
The Company operates in one business segment.
2. Summary of Significant Accounting Policies
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis. The Company has accumulated a deficit of $
98.3
million, including a net loss of $
28.4
million for the year ended December 31, 2013, 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.
The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty. To meet its capital needs, the Company is considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and other funding transactions. There can be no assurance that the Company will be able to complete any such transaction on acceptable terms or otherwise. If the Company is unable to obtain the necessary capital, it will 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.
Consolidation
The
accompanying
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Isis Tele-Communications, Inc., which has no current operations, SafeStitch LLC, and TransEnterix Surgical, Inc. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (
“
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, the valuation of common stock for purposes of determining stock compensation expense, excess and obsolete inventory reserves, allowance for uncollectible accounts, and deferred tax asset valuation allowances.
Reverse Merger
On September 3, 2013, SafeStitch and TransEnterix Surgical, consummated the Merger whereby TransEnterix Surgical merged with a merger subsidiary of SafeStitch, with TransEnterix Surgical as the surviving entity in the Merger.
As a result of the Merger, TransEnterix Surgical became a wholly owned subsidiary of SafeStitch. On December 6, 2013, SafeStitch changed its corporate name to TransEnterix, Inc.
The Reverse Merger has been accounted for as a reverse acquisition under which TransEnterix Surgical was considered the acquirer of SafeStitch. As such, the financial statements of TransEnterix Surgical are treated as the historical financial statements of the combined company, with the results of SafeStitch being included from September 3, 2013.
As a result of the Reverse Merger with SafeStitch, historical common stock amounts and additional paid in capital have been retroactively adjusted using an Exchange Ratio of 1.1533.
Cash and Cash Equivalents, Restricted Cash, and Short-Term Investments
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.
Restricted cash consisting of a money market account used as collateral securing a letter of credit under the terms of the corporate office operating lease that commenced in 2010 was $
375,000
as of December 31, 2013 and 2012.
The Company’s investments consist of corporate bonds and are classified as available for sale. Investments classified as available for sale are measured at fair value, and net unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss) on the balance sheet until realized. Realized gains and losses on sales of investment securities are determined based on the specific-identification method and are recorded in interest and other income. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization and accretion is included in interest and other income.
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.
Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable, interest receivable, accounts payable, and certain accrued expenses at December 31, 2013 and 2012, approximate their fair values due to the short-term nature of these items. The Company’s debt balance approximates fair value as of December 31, 2013 and 2012.
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 had one customer who constituted
61
% of the Company’s net accounts receivable at December 31, 2013. The Company had two customers who constituted
42
% and
13
%, respectively, of the Company’s net accounts receivable at December 31, 2012. The Company had one customer who accounted for
37
% and
21
% of revenues in 2013 and 2012, respectively.
Inventory
Inventory, which includes material, labor and overhead costs, is stated at standard costs which approximates actual cost, determined on a first-in, first-out basis, not in excess of market value. Raw materials consist of purchased material as well as sub-assemblies for which some labor has been applied. The Company records reserves, when necessary, to reduce the carrying value of inventory to their 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.
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
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. No impairment existed at December 31, 2013 or 2012.
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
st
or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. No impairment existed at December 31, 2013.
Debt Issuance Costs
The Company capitalizes costs associated with the issuance of debt instruments and amortizes these costs to interest expense over the term of the related debt agreement using the effective yield amortization method. Unamortized debt issuance costs will be charged to operations when indebtedness under the related credit facility is repaid prior to maturity.
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, which may be different than the amount of consideration assumed in the pro forma financial statements. 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.
Impact of Recently Issued Accounting Standards
In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which updated the guidance in ASC Topic 740, Income Taxes. The amendments in ASU 2013-11 provide guidance for the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The guidance requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. This guidance is effective January 1, 2014. The Company does not expect adoption of this guidance to have a material impact on its consolidated results of operations and financial condition.
Effective January 1, 2013, the Company adopted the amended guidance in ASC Topic 220, Comprehensive Income. The amended guidance requires entities to disclose additional information about reclassification adjustments, including (1) changes in accumulated other comprehensive income by component and (2) significant items reclassified out of accumulated other comprehensive income by presenting the amount reclassified and the individual income statement line items affected. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial position or results of operations.
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, our ability to raise additional capital, our ability to successfully develop, clinically test and commercialize our products, the timing and outcome of the regulatory review process for our products, changes in the health care and regulatory environments of the United States and other countries in which we intend to operate, our ability to attract and retain key management, marketing and scientific personnel, competition from new entrants, our ability to successfully prepare, file, prosecute, maintain, defend and enforce patent claims and other intellectual property rights, our ability to successfully transition from a research and development company to a marketing, sales and distribution concern, and our ability to identify and pursue development of additional products.
Property and Equipment
Property and equipment consists primarily of molds, 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:
|
|
Molds
|
|
3 years
|
|
|
Machinery and manufacturing equipment
|
|
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.
Intellectual Property
Intellectual property consists of purchased patent rights. Amortization is recorded using the straight-line method over the estimated useful life of the patents of 10 years. This method approximates the period over which the Company expects to receive the benefit from these assets.
Long-Lived Assets
The Company reviews its long-lived assets including property and equipment and purchased intellectual property, 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.
Preferred Stock Warrant Liability
In January and December 2012, TransEnterix Surgical entered into promissory notes with two lenders and issued preferred stock warrants to each lender in connection with the issuance of the promissory notes. At December 31, 2012, TransEnterix Surgical accounted for these freestanding warrants to purchase TransEnterix Surgical Series B-1 Convertible Preferred Stock as liabilities at fair value on the accompanying balance sheet. The warrants were subject to re-measurement at each balance sheet date prior to the Merger, and the change in fair value through the Merger date was recognized as other income (expense). TransEnterix Surgical used the Monte Carlo simulation method to value the warrants prior to the Merger which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of TransEnterix Surgical’s future expected stock prices and minimizes standard error. In connection with the Merger, the warrants, which previously were convertible into shares of TransEnterix Surgical Series B-1 Convertible Preferred Stock, were amended to be convertible into warrants to purchase the Company’s common stock. Upon conversion of the warrants upon the date of the Merger, the preferred stock warrant liability was reclassified into additional paid-in capital.
Significant assumptions used in the valuation of the preferred stock warrants liability December 31, 2012 were as follows:
|
Exercise price
|
|
$
|
0.29
|
|
|
Risk-free interest rate
|
|
|
1.78
|
%
|
|
Expected volatility
|
|
|
160
|
%
|
|
Expected life (years)
|
|
|
9
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
Revenue Recognition
Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery has occurred which is typically at shipping point, the fee is fixed or determinable and collectability is reasonably assured. Shipping and handling costs billed to customers are included in revenue.
Cost of Goods Sold
Cost of goods sold consists of materials, labor and overhead incurred internally to produce the products. Shipping and handling costs incurred by the Company are included in cost of goods sold.
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. 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.
The Company records as expense the fair value of stock-based compensation awards, including employee stock options. Compensation expense for stock-based compensation was $
941,245
and $
343,137
for the years ended December 31, 2013 and 2012, 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 income (loss)
Comprehensive income (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. The Company’s comprehensive net loss is equal to its net loss for all periods presented.
3. Cash, Cash Equivalents, Restricted Cash, and Short-term Investments
Cash, cash equivalents, restricted cash, and short-term investments consist of the following:
|
|
|
December 31
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
930
|
|
$
|
729
|
|
|
Money market
|
|
|
9,084
|
|
|
8,167
|
|
|
Total cash and cash equivalents
|
|
$
|
10,014
|
|
$
|
8,896
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
6,191
|
|
$
|
907
|
|
|
Total short-term investments
|
|
$
|
6,191
|
|
$
|
907
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted cash
|
|
$
|
375
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,580
|
|
$
|
10,178
|
|
4
. 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 equivalents and a preferred stock warrant liability, respectively. 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 following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, 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, 2013
|
|
|
|
|
(In thousands)
|
|
|
Description
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant Unobservable
Inputs
|
|
Total
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2013
|
|
|
Assets measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
10,014
|
|
$
|
-
|
|
$
|
-
|
|
$
|
10,014
|
|
|
Restricted Cash
|
|
|
375
|
|
|
-
|
|
|
-
|
|
|
375
|
|
|
Short term investments
|
|
|
-
|
|
$
|
6,191
|
|
|
-
|
|
$
|
6,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets measured at
fair value
|
|
$
|
10,389
|
|
$
|
6,191
|
|
$
|
-
|
|
$
|
16,580
|
|
|
|
|
December 31, 2012
|
|
|
|
|
(In thousands)
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
Significant Other
|
|
Significant
|
|
|
|
|
|
|
|
Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Total
|
|
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
8,896
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,896
|
|
|
Restricted Cash
|
|
|
375
|
|
|
-
|
|
|
-
|
|
|
375
|
|
|
Short term investments
|
|
|
-
|
|
|
907
|
|
|
-
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets measured at fair value
|
|
$
|
9,271
|
|
$
|
907
|
|
$
|
-
|
|
$
|
10,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Warrant Liability
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(109)
|
|
$
|
(109)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities measured at fair value
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(109)
|
|
$
|
(109)
|
|
The change in the fair value of the Level III preferred stock warrant liability is summarized below:
|
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
Fair value at beginning of year
|
|
$
|
109
|
|
$
|
-
|
|
|
Issuances
|
|
|
-
|
|
|
128
|
|
|
Change in fair value recorded in other income (expense)
|
|
|
1,800
|
|
|
(19)
|
|
|
Reclassification to additional paid-in capital upon the merger
|
|
|
(1,909)
|
|
|
-
|
|
|
Fair value at end of year
|
|
$
|
-
|
|
$
|
109
|
|
The Company utilized the Monte Carlo simulation to value the liability related to the preferred warrants, which requires significant unobservable, or Level 3, inputs. The Monte Carlo simulation is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard error.
5
. Investments
The aggregate fair values of investment securities along with unrealized gains and losses determined on an individual investment security basis are as follows:
|
|
|
(In thousands)
|
|
|
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized (Loss)
|
|
Fair Value
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
6,191
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
907
|
|
$
|
-
|
|
$
|
-
|
|
$
|
907
|
|
None of the securities have contractual maturities of more than one year and therefore do not have continuous unrealized losses greater than 12 months. Gross realized gains were $
0
and $
177
for the years ended December 31, 2013 and 2012, respectively.
6. Accounts Receivable, Net
The following table presents the components of accounts receivable:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross accounts receivable
|
|
$
|
220
|
|
$
|
586
|
|
|
Allowance for uncollectible accounts
|
|
|
(32)
|
|
|
(50)
|
|
|
Total accounts receivable, net
|
|
$
|
188
|
|
$
|
536
|
|
7. Inventories
The following table presents the components of inventories:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
896
|
|
$
|
708
|
|
|
Raw materials
|
|
|
-
|
|
|
784
|
|
|
Reserve for excess and obsolete inventory
|
|
|
(195)
|
|
|
(110)
|
|
|
Total inventories
|
|
$
|
701
|
|
$
|
1,382
|
|
During the year ended December 31, 2013, the reserve for excess and obsolete inventory was increased by approximately $803,000 primarily to reserve for raw materials that the Company no longer anticipates selling. Of this amount, approximately $718,000 was written-off and removed from inventory, resulting in an increase in the reserve for excess and obsolete inventory of approximately $85,000.
8
. Property and Equipment
Property and equipment consisted of the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and manufacturing equipment
|
|
$
|
2,453
|
|
$
|
2,722
|
|
|
Molds
|
|
|
-
|
|
|
1,228
|
|
|
Computer equipment
|
|
|
1,327
|
|
|
1,081
|
|
|
Furniture
|
|
|
287
|
|
|
286
|
|
|
Leasehold improvements
|
|
|
1,249
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
5,316
|
|
|
5,990
|
|
|
Accumulated depreciation and amortization
|
|
|
(3,452)
|
|
|
(4,223)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,864
|
|
$
|
1,767
|
|
Depreciation expense was $
982,616
and $
1,212,819
, for the years ended December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013, an impairment charge of $449,853 was incurred for a charge in the estimate of the useful lives for certain manufacturing property and equipment that the Company does not anticipate using in the future.
9. Intellectual Property
In 2009, the Company purchased certain patents from an affiliated company for $5 million in cash and concurrently terminated a license agreement related to the patents. Intellectual Property consisted of the following:
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands)
|
|
|
Patents
|
|
$
|
5,000
|
|
$
|
5,000
|
|
|
Accumulated amortization
|
|
|
(2,259)
|
|
|
(1,759)
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property, net
|
|
$
|
2,741
|
|
$
|
3,241
|
|
Amortization expense was $
500,004
for the years ended December 31, 2013 and 2012. At December 31, 2013, the estimated amortization expense for each of the five succeeding years is approximately $
500,000
per year.
The patent expiration dates begin in 2027.
10
. Debt Issuance Costs
In connection with the issuance of notes payable, TransEnterix
Surgical
incurred debt acquisition costs in the amount of $
109,133
and $
43,853
during the years ended December 31, 2011 and 2012, respectively. TransEnterix
Surgical
capitalizes these costs and is amortizing them over the life of the debt, using the straight-line method of amortization which approximates the effective-interest method. Amortization expense for the debt issuance costs was $
65,318
and $
28,285
for the years ended December 31, 2013 and 2012, respectively.
In January 2012, TransEnterix
Surgical
recorded $
63,030
of debt issuance costs related to the issuance to the lenders of warrants to purchase Series B-1 Convertible
Redeemable
Preferred Stock. The
preferred stock
warrants were issued in conjunction with a promissory note issued to the lenders. At that time, TransEnterix
Surgical
began amortizing the debt issuance costs over the four year term of the promissory note resulting in $
15,921
and $
10,539
of interest expense for the years ended December 31, 2013 and 2012, respectively.
In December 2012, TransEnterix
Surgical
recorded $
65,455
of debt issuance costs related to the issuance of warrants to purchase Series B-1 Convertible
Redeemable
Preferred Stock to lenders. The
preferred stock
warrants were issued in conjunction with a promissory note issued to the lender. At that time, TransEnterix
Surgical
began amortizing the debt issuance costs over the three year term of the promissory note resulting in $
21,601
and $
592
of interest expense for the year ended December 31, 2013 and 2012, respectively.
Total amortization expense
related to
issuance
of warrants
was $
37,522
and $
39,416
for the years ended December 31, 2013 and 2012, respectively. Total accumulated amortization for the warrant issuance costs was $
76,938
and $
39,416
at December 31, 2013 and 2012, respectively. Debt issuance costs,
net of amortization,
are recorded within other assets on the consolidated balance sheets.
11. Income Taxes
No income tax expense or benefit has been recorded for the years ended December 31, 2013 or December 31, 2012.
This is due to the establishment of a valuation allowance against the deferred tax assets generated during those periods.
The valuation allowance was recorded due to management’s assessment of the likelihood that said deferred tax assets will be realized in future periods.
Significant components of the Company’s deferred tax assets consist of the following at December 31 (in thousands):
|
|
|
2013
|
|
2012
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
71
|
|
$
|
41
|
|
|
Accrued expenses
|
|
|
331
|
|
|
77
|
|
|
Deferred Rent
|
|
|
14
|
|
|
30
|
|
|
Allowance for uncollectible accounts receivable
|
|
|
12
|
|
|
18
|
|
|
Valuation allowance
|
|
|
(428)
|
|
|
(166)
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,170
|
|
|
186
|
|
|
Contribution carryforward
|
|
|
2
|
|
|
—
|
|
|
Research credit carryforward
|
|
|
2,307
|
|
|
874
|
|
|
Fixed assets
|
|
|
235
|
|
|
141
|
|
|
Capitalized start up costs
|
|
|
4,676
|
|
|
2,180
|
|
|
Net operating loss carryforwards
|
|
|
38,286
|
|
|
22,820
|
|
|
|
|
|
46,676
|
|
|
26,201
|
|
|
Valuation allowance
|
|
|
(46,672)
|
|
|
(26,201)
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset
|
|
|
4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liability
|
|
|
|
|
|
|
|
|
Purchase accounting intangibles
|
|
|
(4)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
$
|
—
|
|
The Merger transaction described in Note 1 was in the form of a tax-free reorganization under Internal Revenue Code Sec. 368.
The transaction qualifies as a Business Combination under ASC 740.
The goodwill recorded under U.S. GAAP purchase accounting is not deductible for tax purposes.
At December 31, 2013 and 2012, the Company has provided a full valuation allowance against its net deferred assets, since realization of these benefits is
not more likely than not. The valuation allowance increased approximately $
20.7
million from the prior year. At December 31, 2013, the Company had federal and state net operating loss tax carryforwards of approximately $
104.7
million and $
75.6
million, respectively. These net operating loss carryforwards expire in various amounts starting in
2027
and
2022
, respectively. At December 31, 2013, the Company had federal research credit carryforwards in the amount of $
2.3
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.
On July 23, 2013, North Carolina enacted House Bill 998, which reduced the corporate income tax rate from
6.9
% in 2013 to
6
% in 2014 and to
5
% in 2015. As a result of the new enacted tax rate, the Company adjusted its deferred tax assets in 2013 by applying the lower rate, which resulted in a decrease to the deferred tax assets and a corresponding decrease to the valuation allowance of approximately $
0.4
million.
The Company has evaluated its tax positions to consider whether it has any unrecognized tax benefits. As of December 31, 2013 and 2012, the Company has not recorded any amounts associated with unrecognized tax benefits.
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2013, the Company had no accrued interest related to uncertain tax positions.
The Company has analyzed its filing positions in all significant federal and state 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 2010, although carryforward attributes that were generated prior to 2010 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 statutory federal income tax rate of 34% are reconciled to the provision for income taxes as follows for the years ended December 31:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
Amount
|
|
Earnings
|
|
|
Amount
|
|
Earnings
|
|
|
United States federal tax statutory rate
|
|
$
|
(9,642)
|
|
|
34.0
|
%
|
|
$
|
(5,245)
|
|
|
34.0
|
%
|
|
State taxes (net of deferred benefit)
|
|
|
(662)
|
|
|
2.3
|
%
|
|
|
(469)
|
|
|
3.0
|
%
|
|
Non-deductible expenses
|
|
|
1,556
|
|
|
(5.5)
|
%
|
|
|
—
|
|
|
0.0
|
%
|
|
Change in valuation allowance
|
|
|
20,733
|
|
|
(73.1)
|
%
|
|
|
5,101
|
|
|
(33.1)
|
%
|
|
Adjustment for valuation allowance recorded as
part of purchase accounting
|
|
|
(11,785)
|
|
|
41.6
|
%
|
|
|
—
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(200)
|
|
|
0.7
|
%
|
|
|
613
|
|
|
(3.9)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
—
|
|
|
0.0
|
%
|
|
$
|
—
|
|
|
0.0
|
%
|
12. Related-Party Transactions
At December 31, 2012, Synecor, LLC owned
37
% of the common stock of TransEnterix
Surgical
. In addition, at December 31, 2012, Synecor, LLC and its shareholders and officers collectively owned approximately
85
% of the common stock of TransEnterix
Surgical
, as well as
17
% of the preferred stock of TransEnterix
Surgical. At December 31, 2013, Synecor, LLC and its shareholders and officers collectively owned approximately
12
% of the Company’s common stock.
Various research and development services were purchased from Synecor
LLC and its wholly owned subsidiary Synchrony Labs
LLC and totaled approximately $
90,000
and $
108,000
for the years ended December 31, 2013
and 2012, respectively
.
The Company’s directors Dr. Hsiao and Dr. Frost are each significant stockholders and/or directors of Non-Invasive Monitoring Systems, Inc. (“NIMS”), a publicly-traded medical device company, Tiger X Medical, Inc. (“Tiger X”) (formerly known as Cardo Medical, Inc.), a publicly-traded medical device company, and TigerMedia, Inc. (“TigerMedia) (formerly known as SearchMedia Holdings Limited), a publicly-traded media company operating primarily in China.
Director Richard Pfenniger is also a shareholder of NIMS. The Company’s Chief Legal Officer serves under a Board-approved cost sharing arrangement as Corporate Counsel of TigerMedia and as the Chief Legal Officer of each of NIMS and Tiger X. Additionally, the Company’s former Chief Financial Officer, also serves as the Chief Financial Officer and supervises the accounting staff of NIMS under a Board-approved cost sharing arrangement whereby the total salaries of the accounting staffs of the companies are shared. The Company has recorded reductions to general and administrative expenses for the years ended December 31, 2013 of $
55,000
, to account for the sharing of accounting and legal administrative costs under this arrangement. Aggregate accounts receivable from NIMS, Tiger X and TigerMedia were approximately $
14,000
as of December 31, 2013 and are included in other receivable – related party.
SafeStitch
entered into a
five
-year lease for office space in Miami, Florida with a company controlled by Dr. Frost.
The current rental payments under the Miami office lease, which commenced January 1, 2008 and expired on December 31, 2012, are approximately $
12,000
per month and are currently on a month-to-month basis. The Company recorded $
48,000
of rent expense related to the Miami lease for the year ended December 31, 2013.
13. Stock-Based Compensation
The Company’s stock-based compensation plans include the TransEnterix, Inc. 2007 Incentive Compensation Plan, previously named the
SafeStitch Medical, Inc. 2007 Incentive Compensation Plan (the “2007 Plan”),
as well as options outstanding under the TransEnterix, Inc. Stock Option Plan (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
1.1533
, and assumed by the Company concurrent with the closing of the Merger
.
The
2007 Plan
was approved by the majority of the SafeStitch’s stockholders on November 13, 2007. The 2007 Plan was amended on June 19, 2012 to increase the number of shares of common stock available for issuance to
5,000,000
and was amended
on October 29, 2013 to (a) increase the number of shares of common stock
authorized
for
issuance under the 2007
Plan from
5,000,000
shares of common stock
to
24,700,000
shares of common stock, (b) increase the per-person award limitations for options or stock appreciation rights from
1,000,000
to
2,500,000
shares
and
for restricted stock, deferred stock, performance shares and/or other stock-based awards from
500,000
to
1,000,000
shares, and
(c)
change
the name of the 2007 Plan to reflect
the change to the TransEnterix, Inc. 2007 Incentive Compensation Plan. Under the 2007 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 and, within any 12 month period. Additionally, no stock options or stock appreciation rights granted under the 2007 Plan may have a term exceeding ten years.
The 2006 Plan was adopted in September 2006 and provided for the granting of up to
400,000
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
5,550,264
. In 2011, the 2006 Plan was amended to increase the total options pool to
16,890,945
. 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 in the combined entity.
During the years ended December 31, 2013 and 2012, the Company recognized $
941,245
and $
343,137
, respectively, of stock-based compensation expense.
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. 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,
|
|
2013
|
|
2012
|
|
|
Expected dividend yield
|
|
|
0%
|
|
|
0%
|
|
|
Expected volatility
|
|
|
62%-63%
|
|
|
55% - 67%
|
|
|
Risk-free interest rate
|
|
|
1.64% - 1.98%
|
|
|
0.4% - 3.7%
|
|
|
Expected life (in years)
|
|
|
5.7 – 6.1
|
|
|
2.9 - 10.0
|
|
The Company is also required to estimate the fair value of the common stock underlying the stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying the stock-based awards for the common stock before the Company was public was estimated on each grant date by the Board of Directors, with input from management. The Board of Directors is comprised of a majority of non-employee directors with significant experience in the medical device industry. Given the absence of a public trading market of the Company’s common stock prior to the Merger, and in accordance with the American Institute of Certified Public Accountants Practice Guide,
Valuation of Privately- Held-Company Equity Securities Issued as Compensation
, the Board of Directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of the common stock, including among other things, the rights, preferences and privileges of the
redeemable
convertible preferred stock, business performance, present value of future cash flows, likelihood of achieving a liquidity event, illiquidity of the Company’s capital stock, management experience, stage of development, industry information and macroeconomic conditions. In addition, the Company’s Board of Directors utilized independent valuations performed by an unrelated third-party specialist to assist with the valuation of the common stock; however, the Company and the Board of Directors have assumed full responsibility for the estimates. The Board of Directors utilized the fair values of the common stock derived in the third-party valuations to set the exercise price for options granted during the year ended December 31, 2012, and also for options granted prior to the Merger in fiscal 2013.
The following table summarizes the Company’s stock option activity, including grants to non-employees, for the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
Number of
|
|
Average
|
|
Contractual
|
|
|
|
|
Shares
|
|
Exercise Price
|
|
Term (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2011
|
|
|
4,164,090
|
|
$
|
0.48
|
|
|
7.58
|
|
|
Granted
|
|
|
11,769,866
|
|
|
0.07
|
|
|
|
|
|
Cancelled
|
|
|
(2,962,834)
|
|
|
0.14
|
|
|
|
|
|
Exercised
|
|
|
(48,356)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2012
|
|
|
12,922,766
|
|
$
|
0.08
|
|
|
8.70
|
|
|
Options assumed through merger with SafeStitch
|
|
|
3,547,750
|
|
|
0.75
|
|
|
|
|
|
Granted
|
|
|
3,015,696
|
|
|
0.44
|
|
|
|
|
|
Cancelled
|
|
|
(30,643)
|
|
|
0.08
|
|
|
|
|
|
Exercised
|
|
|
(341,133)
|
|
|
0.16
|
|
|
|
|
|
Options outstanding at December 31, 2013
|
|
|
19,114,436
|
|
$
|
0.26
|
|
|
7.95
|
|
The following table summarizes information about stock options outstanding at December 31, 2013:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
Number of
|
|
Average
|
|
Contractual
|
|
|
|
|
Shares
|
|
Exercise Price
|
|
Term (Years)
|
|
|
Exercisable at December 31, 2013
|
|
|
10,031,605
|
|
$
|
0.30
|
|
|
7.23
|
|
|
Vested or expected to vest at December 31, 2013
|
|
|
18,788,438
|
|
$
|
0.26
|
|
|
7.94
|
|
The aggregate intrinsic value of stock options outstanding, exercisable, and vested or expected to vest at December 31, 2013 was approximately $24.8 million, $12.7 million, and $24.3 million, respectively. This amount is before applicable income taxes and represents the closing market price of the Company’s common stock at December 31, 2013 less the grant price, multiplied by the number of stock options that had a grant price that is less than the closing market price. This amount represents the amount that would have been received by the optionees had these stock options been exercised on that date.
The following table summarizes the unvested stock option activity:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
Number of Shares
|
|
Fair Value
|
|
|
Unvested options at December 31, 2011
|
|
|
1,683,733
|
|
$
|
0.33
|
|
|
Granted
|
|
|
11,769,866
|
|
|
0.07
|
|
|
Vested
|
|
|
(3,612,025)
|
|
|
0.14
|
|
|
Forfeited
|
|
|
(1,303,895)
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options at December 31, 2012
|
|
|
8,537,679
|
|
$
|
0.08
|
|
|
Unvested options assumed through merger with SafeStitch
|
|
|
1,116,000
|
|
|
0.49
|
|
|
Granted
|
|
|
3,015,696
|
|
|
0.19
|
|
|
Vested
|
|
|
(3,559,092)
|
|
|
0.25
|
|
|
Forfeited
|
|
|
(27,452)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options at December 31, 2013
|
|
|
9,082,831
|
|
$
|
0.22
|
|
The Company granted
3,015,696
and
11,769,866
options to employees and nonemployees during the years ended December 31, 2013 and 2012, respectively, with a weighted-average grant date fair value of $
0.19
and $
0.07
, respectively. The total intrinsic value of options exercised during 2013 and 2012 was approximately $
347,593
and $
0
, respectively.
The total fair value of options vested during 2013 and 2012 was $
879,826
and $263,751, respectively. As of December 31, 2013, the Company had future employee stock-based compensation expense of $
1,790,930
related to unvested share awards, which is expected to be recognized over an estimated weighted-average period of 2.6 years.
14. Restricted Stock Units
In 2013, the Company issued Restricted Stock Units (“RSUs”) to certain employees which vest over three years. By their terms, the RSUs become immediately vested upon the earlier of (i) a change of control and (ii) defined vesting dates, subject to the continuous service with the Company at the applicable vesting event. When vested, the RSUs represents 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 and awards is recognized over the requisite service period as adjusted for estimated forfeitures.
The following is a summary of the RSU activity for the year ended December 31, 2013:
|
|
|
Number of
Restricted
Stock Units
Outstanding
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
|
Unvested, December 31, 2012
|
|
-
|
|
|
-
|
|
|
Granted
|
|
1,050,000
|
|
$
|
1.44
|
|
|
Vested
|
|
-
|
|
|
-
|
|
|
Unvested, December 31, 2013
|
|
1,050,000
|
|
$
|
1.44
|
|
As of December 31, 2013, the Company recorded $
121,169
in compensation expense for the RSUs. As of December 31, 2013, the unrecognized stock-based compensation expense related to unvested RSUs was approximately $1.4 million, which is expected to be recognized over a weighted average period of approximately 2.8 years. The weighted average grant date fair value of the RSUs granted in 2013 was $1.44.
15
. Warrants
On March 22, 2013, SafeStitch entered into a stock purchase agreement (the “2013 Stock Purchase Agreement”) with approximately
17
investors (the “2013 PIPE Investors”) pursuant to which the 2013 PIPE Investors agreed to purchase an aggregate of approximately 12,100,000 shares of common stock at a price of $
0.25
per share for aggregate consideration of approximately $
3.0
million. Included in this private placement was the issuance of PIPE Warrants to purchase approximately
6,048,000
common shares, representing one warrant for every two common shares purchased, with an exercise price of $
0.33
per share and five year expiration. Among the 2013 PIPE Investors purchasing Shares were related parties who purchased
6.4
million shares and received
3.2
million warrants.
There were approximately
6
million warrants outstanding that were assumed as of the Merger.
During the year ended December 31, 2013,
270,000
warrants were exercised.
On January 17, 2012, TransEnterix
Surgical
entered into the SVB-Oxford Loan and Security Agreement with Silicon Valley Bank (“SVB”) and Oxford Finance LLC (“Oxford”). Pursuant to this agreement, TransEnterix
Surgical
issued preferred stock warrants to SVB and Oxford on January 17, 2012 and December 21, 2012, respectively, to purchase shares of capital stock.
The warrants expire 10 years from the issue date.
The warrants were remeasured immediately prior to the Merger.
As a result of the remeasurement, the Company recorded approximately $
1.8
million of other expense in the accompanying statements of operations and other comprehensive income (loss). As of the Merger, the preferred stock warrants converted to common stock warrants, adjusted based on the Exchange Ratio of
1.1533
, and the preferred stock warrant liability was reclassified to additional paid-in capital.
These warrants are exercisable for an aggregate of approximately
1,397,939
shares of common stock. During the year ended December 31, 2013,
698,967
warrants were exercised
in a cashless transaction for
563,834
shares of common stock. The summary of warrant activity for the years ended December 31, 2012 and 2013 is as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
Average
|
|
|
|
|
|
|
|
|
Average
|
Remaining
|
|
Weighted
|
|
|
|
|
Number of
|
|
Exercise
|
Contractual
|
|
Average
|
|
|
|
|
Warrants
|
|
Price
|
Life (in years)
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2012
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
Granted
|
|
1,397,939
|
|
|
0.29
|
|
|
9.1
|
|
|
0.11
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Expired/cancelled
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
1,397,939
|
|
$
|
0.29
|
|
|
9.1
|
|
$
|
0.09
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants assumed in merger with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SafeStitch
|
|
5,998,000
|
|
|
0.33
|
|
|
4.3
|
|
|
0.23
|
|
|
Exercised
|
|
(968,969)
|
|
|
0.29
|
|
|
-
|
|
|
1.05
|
|
|
Expired/cancelled
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
6,426,970
|
|
$
|
0.29
|
|
|
4.7
|
|
$
|
0.35
|
|
The aggregate intrinsic value of the preferred stock warrants in the above table was $
8.7
million and $
0
at December 31, 2013 and 2012, 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 Company’s Series B-1 Preferred Stock as of the respective dates.
16. Notes Payable
On January 17, 2012, TransEnterix
Surgical
entered into a loan and security agreement (the “
SVB-Oxford LSA
”) with Silicon Valley Bank and Oxford Finance, LLC (collectively, “the Lenders”). The terms of the agreement provide for two term loans in aggregate of $
10,000,000
comprised of a $
4,000,000
term loan and a $
6,000,000
term loan. In connection with the Merger, the Company assumed and became the borrower under
TransEnterix Surgical’s
outstanding credit facility. The Second and Third Amendment to the
SVB-Oxford LSA
, dated as of September 3, 2013 and
October 31, 2013, respectively, amend the SVB-Oxford LSA
among the lenders and the Company (as so amended, the “Amended Loan Agreement”). The Amended Loan Agreement evidences a term loan, which will mature on
January 1, 2016
(the “Term Loan”). The following table presents the components of long-term debt:
As of December 31, 2013 future principal payments under the Company’s notes payable agreements are as follows:
|
Years ending December 31,
(In thousands)
|
|
|
|
|
|
2014
|
|
$
|
3,879
|
|
|
2015
|
|
|
4,232
|
|
|
2016
|
|
|
370
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,481
|
|
The Term Loan bears interest at a fixed rate equal to
8.75
%.
Commencing August 2013, the Amended Loan Agreement provides for the amortization of principal in the form of level monthly payments of principal and interest. The Term Loan will be required to be prepaid if the Term Loan is accelerated following an event of default. In addition, the Company is permitted to prepay the Term Loan in full at any time upon 10 days’ written notice to the Lenders. Upon the earliest to occur of the maturity date, acceleration of the Term Loan, or prepayment of the Term Loan, the Company is required to make a final payment equal to the original principal amount of the Term Loan multiplied by
3.33
% (the “Final Payment Fee”). Any prepayment, whether mandatory or voluntary, must include the Final Payment Fee, interest at the default rate (which is the rate otherwise applicable plus
5
%) with respect to any amounts past due, the Lenders’ expenses, and all other obligations that are due and payable to the Lenders.
The Amended Loan Agreement is secured by a security interest in substantially all assets of the Company and any future subsidiaries, other than intellectual property. The Amended Loan Agreement contains customary representations, tested on a continual basis that, subject to exceptions, restrict the Company’s ability to do the following things: declare dividends or redeem or repurchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness; engage in mergers, acquisitions, and asset sales; transact with affiliates; fail to appoint a chief executive officer, chief financial officer, and chief technology officer upon vacancy; undergo a change in control; add or change business locations; and engage in businesses that are not related to the Company’s existing business.
In conjunction with the
SVB-Oxford LSA
, TransEnterix Surgical issued the Lenders warrants to purchase
1,397,939
shares of the Company’s Series B-1 Convertible Preferred Stock. The warrants were issued on January 17, 2012 and December 12, 2012 with an initial exercise price of $
0.29
per share and expire on January 16, 2022. The warrants were recorded at fair value as a liability on the Company’s balance sheet on the date of issuance and are revalued as of each balance sheet date.
The warrants converted to common stock warrants on the Merger date, adjusted based on the Exchange Ratio of 1.1533, and the preferred stock warrant liability was reclassified to additional paid-in capital (see Note 15 Warrants).
17. 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 and warrants and conversion of preferred stock. In computing diluted net loss per share for the years ended December 31, 2013 and 2012, no adjustment has been made to the weighted average outstanding common shares as the assumed exercise of outstanding options and warrants and conversion of preferred stock would be anti-dilutive.
Potential common shares not included in calculating diluted net loss per share are as follows:
|
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
Stock options
|
|
19,114,436
|
|
12,922,766
|
|
|
Stock warrants
|
|
6,426,968
|
|
1,397,939
|
|
|
Nonvested Restricted stock units
|
|
1,050,000
|
|
|
|
|
Total
|
|
26,591,404
|
|
14,320,705
|
|
18. Closing of Merger and Financing Transaction
On September 3, 2013, the Company consummated the Merger in which a wholly owned subsidiary of SafeStitch merged with TransEnterix Surgical, pursuant to the Merger Agreement. Under the terms of the Merger Agreement, TransEnterix Surgical remained as the surviving corporation and as a wholly-owned subsidiary SafeStitch.
Pursuant to the Merger Agreement, each share of TransEnterix Surgical’s capital stock issued and outstanding immediately preceding the Merger was converted into the right to receive
1.1533
shares of the Company’s common stock, par value $
0.001
per share , other than those shares of TransEnterix Surgical’s common stock held by non-accredited investors, which shares were instead converted into the right to receive an amount in cash per share of SafeStitch common stock equal to $
1.08
, without interest, which was the volume-weighted average price of a share of common stock on the OTCBB for the 60-trading day period ended on August 30, 2013 (one business day prior to the effective date of the Merger).
Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, the Company issued an aggregate of
105,549,746
shares of the Company’s common stock as Merger consideration and paid $ 293,000 to unaccredited investors in lieu of common stock.
Additionally, pursuant to the Merger Agreement, upon consummation of the Merger, the Company assumed all of TransEnterix Surgical’s options, whether vested or unvested, and warrants issued and outstanding immediately prior to the Merger at the same Exchange Ratio.
During July 2013, TransEnterix
Surgical
issued promissory notes (the “Bridge Notes”)
to related parties consisting of existing investors of TransEnterix Surgical,
in the aggregate principal amount of $
2.0
million, as contemplated by the Merger Agreement. The Bridge Notes bore interest at a rate of
8
% per annum. The Bridge Notes were not secured by any collateral and were subordinated in right of payment to the loan evidenced by the Loan and Security Agreement dated as of January 17, 2012, among Oxford, SVB and TransEnterix
Surgical
. The Bridge Notes were converted into Series B preferred stock at the effective time of the Merger.
Concurrent with the closing of the Merger, and in accordance with the terms of a Securities Purchase Agreement, the Company issued 7,544,704 .4 shares of Series B Preferred Stock, each share of which is convertible, subject to certain conditions, into ten (10) shares of common stock, for a purchase price of $
4.00
per share of Series B Preferred Stock, which was paid in cash, cancellation of certain Bridge Notes of TransEnterix
Surgical
or a combination thereof.
The majority of the Series B Preferred Stock was issued to related parties who were existing stockholders of SafeStitch and TransEnterix Surgical.
Pursuant to the Securities Purchase Agreement, the Company issued and sold an additional
25,000
shares of Series B Preferred Stock within the period provided in the Securities Purchase Agreement resulting in gross proceeds to the Company of approximately $100,000.
Each share of Series B Preferred Stock was converted into ten shares of our common stock, par value $
0.001
per share, on December 6, 2013.
At the closing of the Merger, each outstanding share of capital stock of TransEnterix
Surgical
was cancelled and extinguished and converted into the right to receive a portion of the Merger consideration in accordance with the Merger Agreement. The Bridge Notes were terminated at the closing of the Merger, and the holders of such Bridge Notes received Merger consideration in accordance with the Merger Agreement.
The Merger effectuated on September 3, 2013 qualified as a tax-free reorganization under Section 368 of the Internal Revenue Code. As a result of the Merger, the utilization of certain tax attributes of the Company may be limited in future periods under the rules prescribed under Section 382 of the Internal Revenue Code.
The Company’s assets and liabilities are presented at their preliminary estimated fair values, with the excess of the purchase price over the sum of these fair values presented as goodwill.
The following table summarizes the purchase price (in thousands):
|
Common shares outstanding at the date of merger
|
|
61,749
|
|
Closing price per share
|
$
|
1.52
|
|
|
$
|
93,858
|
|
Cash consideration
|
|
293
|
|
Total purchase price
|
$
|
94,151
|
The purchase price was allocated to the net assets acquired utilizing the methodology prescribed in ASC 805. The Company recorded goodwill of $
93.9
million after recording net assets acquired at fair value as presented in the following table.
The following table summarizes the allocation of the purchase price to the net assets acquired (in thousands):
|
Cash and cash equivalents
|
|
$
|
597
|
|
|
Accounts receivable
|
|
|
54
|
|
|
Inventory
|
|
|
50
|
|
|
Other current assets
|
|
|
53
|
|
|
Property and equipment
|
|
|
185
|
|
|
Other long-term asset
|
|
|
2
|
|
|
Intangible assets
|
|
|
10
|
|
|
Goodwill
|
|
|
93,842
|
|
|
Total assets acquired
|
|
$
|
94,793
|
|
|
Accounts payable and other liabilities
|
|
|
642
|
|
|
Total purchase price
|
|
$
|
94,151
|
|
The Company allocated $
10,000
of the purchase price to identifiable intangible assets of trade names that met the separability and contractual legal criterion of ASC 805. The trade names will be amortized using the straight-line method over
5
years.
The results of operations of SafeStitch have been included in the
Company’s
consolidated financial statements from the date of the
Merger
. The following pro forma results of operations assume the acquisition of SafeStitch as of the beginning of 2012. The pro forma results for the year ended December 31, 2013 presented below reflect our historical data and the historical data of the SafeStitch business. The pro forma results of operations presented below may not be indicative of the results the Company would have achieved had the Company completed the
Merger
on January 1, 2013, or that the Company may achieve in the future.
|
|
|
Year ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
|
|
|
(In thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,456
|
|
$
|
2,150
|
|
|
Net loss
|
|
|
(30,420)
|
|
|
(22,149)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
(0.17)
|
|
$
|
(0.13)
|
|
19
. Stockholders’ Equity (Deficit)
TransEnterix Surgical
Common and Preferred Stock
On July 12, 2006, TransEnterix
Surgical
had
11,533,000
shares of common stock authorized. On December 27, 2007, TransEnterix
Surgical
authorized an additional
2,883,250
shares of common stock for a total of
14,416,250
authorized shares. On October 2, 2009, TransEnterix
Surgical
authorized an additional
24,219,300
shares of common stock for a total of
38,635,550
authorized shares. On November 30, 2011 TransEnterix
Surgical
authorized an additional
88,227,450
shares of common stock for a total of
126,863,000
authorized shares. In January 2012 TransEnterix
Surgical
authorized an additional
3,459,900
shares of common stock for a total of
130,322,900
authorized shares. As of December 31, 2012,
5,391,095
shares of common stock were issued at $
0.001
par value per share and were outstanding. Each holder of common stock was entitled to one vote for each share held thereof. In connection with the Merger, the TransEnterix
Surgical
common stock was converted to common stock
of the Company.
On December 27, 2007, TransEnterix
Surgical
had
6,500,000
shares of preferred stock authorized. On October 2, 2009, TransEnterix
Surgical
authorized an additional
15,234,402
shares of preferred stock for a total of
21,734,402
authorized shares. On November 30, 2011, TransEnterix
Surgical
authorized an additional
40,958,843
shares of preferred stock for a total of
62,693,245
authorized shares. In January 2012, TransEnterix
Surgical
authorized an additional
3,000,000
shares of preferred stock for a total of
65,693,245
shares. In connection with the Merger, the TransEnterix
Surgical
preferred stock was converted to common stock
of the Company.
On December 31, 2007, TransEnterix
Surgical
completed the issuance of
3,143,749
shares of Series A
Redeemable Convertible (“Series A”)
Preferred Stock at $
3.49
per preferred share. In March 2008, TransEnterix
Surgical
completed a second closing of Preferred Stock and had
3,373,882
shares of Series A Preferred Stock at $
3.49
per preferred share issued and outstanding as of December 31, 2008. On February 18, 2009, TransEnterix
Surgical
completed the final closing of Series A Preferred Stock and had
5,734,402
shares of Preferred Stock at $
3.49
per preferred share issued and outstanding as of December 31, 2011. During 2012,
38,141
shares of Series A Preferred Stock were converted to common stock. At December 31, 2012 TransEnterix
Surgical
had
5,696,261
shares of Series A Preferred Stock at $
3.49
per preferred share issued and outstanding. In connection with the Merger, the TransEnterix
Surgical
Series A Preferred Stock was converted to common stock
of the Company.
On October 6, 2009, TransEnterix
Surgical
completed the issuance of
11,504,298
shares of Series B
Redeemable Convertible (“Series B”)
Preferred Stock at $
3.49
per preferred share. On November 30, 2011, TransEnterix
Surgical
completed the closing of Series B-1
Reedemable Convertible (“Series B-1”)
Preferred Stock and had
45,121,691
shares of Preferred Stock at $
0.33
per preferred share issued and outstanding as of December 31, 2011. In January 2012, TransEnterix
Surgical
completed a second closing of Series B-1 Preferred Stock. During 2012,
49,998
shares of TransEnterix Surgical’s Series B Preferred Stock were converted to common stock. TransEnterix
Surgical
had
45,998,220
shares of Series B-1 Preferred Stock at $
0.33
per share issued and outstanding at December 31, 2012. In connection with the Merger, the TransEnterix
Surgical
Series B-1 Preferred Stock was converted to common stock
of the Company.
TransEnterix
Surgical
recorded the shares of redeemable convertible preferred stock at their fair values at issuance, net of issuance costs. These shares have been presented outside of permanent equity due to the redemption feature. The carrying value of
TransEnterix Surgical’s
redeemable convertible preferred stock was increased by periodic accretion using the effective interest method so that the carrying amount will equal the redemption value at the redemption date.
Voting Rights
The holders of TransEnterix
Surgical
common stock and preferred stock shall vote together and not as separate classes, except as otherwise provided by law or agreed to contractually. Each holder of preferred stock was entitled to the number of votes equal to the number of shares of common stock, into which the shares of preferred stock held by such holder could be converted immediately after the close of business on the record date fixed for a stockholders meeting or the effective date of a written consent. The holders of shares of preferred stock were entitled to vote on all matters on which the common stock was entitled to vote and act by written consent in the same manner as the common stock.
Holders of preferred stock were entitled to notice of any stockholders meeting in accordance with the bylaws of TransEnterix
Surgical
. Fractional votes were not, however, permitted and any fractional voting rights were disregarded.
Dividends
In any calendar year, the holders of outstanding shares of preferred stock were entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available therefore, at the dividends rate specified for such shares of preferred stock payable in preference and priority to any declaration or payment of any distribution on Common stock of TransEnterix
Surgical
in such calendar year. No distributions were to be made with respect to the common stock until all declared dividends on preferred stock had been paid or set aside for payment to the preferred stock holders. Payments of any dividends to the holders of the Preferred Stock were to be made on a pro rata basis. The right to receive dividends on shares of preferred stock were not to be cumulative, and no right to such dividends were to accrue to holders of preferred stock by reason of the fact that dividends on said shares were not paid or declared in any calendar year. No dividends were declared during the years ended December 31, 2013 and 2012.
Liquidation
In the event of a liquidation, dissolution, or winding up of TransEnterix
Surgical
, either voluntary or involuntary, the holders of Series B-1 Preferred Stock and Series B Preferred Stock were entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of TransEnterix
Surgical
to the holders of Series A Preferred Stock and the holders of common stock by reason of their ownership of such stock, an amount per share for each share of preferred stock held by them equal to the sum of the liquidation
preference for the Series B-1 Preferred Stock and the Series B Preferred Stock, respectively and (ii) all declared and unpaid dividends on such shares of preferred stock. If upon liquidation, the assets of TransEnterix
Surgical
were insufficient to permit the payments to such stock holders, then the entire assets of TransEnterix
Surgical
legally available for distributions were to be distributed with equal priority and pro rata among the holders of Series B-1 Preferred Stock and the Series B Preferred Stock in proportion to the full amounts to which they would otherwise be entitled.
After payment or setting aside for payment to the holders of Series B-1 Preferred Stock and Series B Preferred Stock, the holders of Series A Preferred Stock were entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of TransEnterix
Surgical
to the holders of common stock by reason of their ownership of such stock, an amount per share for each share of preferred stock held by them equal to the sum of the liquidation preference for the Series A Preferred Stock and (ii) all declared and unpaid dividends on such shares of preferred stock. If upon liquidation, the assets of TransEnterix
Surgical
are insufficient to permit the payments to such stock holders, then the assets of TransEnterix
Surgical
legally available for distributions to the holders of Series A Preferred Stock after payment of the full amount payable to the holders of Series B-1 Preferred Stock and Series B Preferred Stock were to be distributed with equal priority and pro rata among the holders of Series A Preferred Stock in proportion to the full amounts to which they would otherwise be entitled.
After the payment or setting aside for payment to the holders of preferred stock of the full amounts to holders of Preferred Series B-1, Preferred Series B, and Preferred Series A Stock, the remaining assets of TransEnterix
Surgical
legally available for distribution were to be distributed pro rata to the holders of the Series B-1 Preferred Stock, Series B Preferred Stock, and common stock of TransEnterix
Surgical
in proportion to the number of shares of common stock held by them, with the share of Series B-1 Preferred Stock and Series B Preferred Stock being treated for this purpose as if they had been converted to shares of common stock at the then applicable Conversion Rate, as defined in
TransEnterix Surgical’s
Articles of Incorporation.
Conversion
Each share of Preferred Stock was convertible, at the option of the holder, at any time after the date of issuance at the office of TransEnterix
Surgical
or any transfer agent for the preferred stock, into that number of fully paid nonassessable shares of common stock determined by dividing the original issue price for the relevant series of preferred stock by the conversion price for such shares in said series. The conversion price for the Preferred Stock Series A and B shall mean $
3.49
, and Series B-1 shall mean $
0.33
, and was subject to adjustment from time to time for recapitalizations.
In connection with the Merger, the TransEnterix Surgical Series A, Series B and Series B-1 Preferred Stock was converted to common stock of the Company.
Redemption
At the written request of any holder of preferred stock delivered to TransEnterix
Surgical
on or after the fifth anniversary of the date of the filing of the amended and restated Certificate of Incorporation (November 30, 2016), TransEnterix
Surgica
l shall redeem up to 25% of the shares of preferred stock then held by such holder within 20 days after receiving such notification and up to another
25
% of the shares of preferred stock then held by the holder on each of the first three anniversaries of such initial redemption request. The redemption price was equal to the original issuance price plus all declared but unpaid dividends.
Carrying Value
The preferred stock was initially recorded by TransEnterix
Surgical
at the total proceeds received upon issuance, less the issuance costs. The difference between the total proceeds and the total redemption value at the redemption date is charged first to paid-in capital, if any, and then to the accumulated deficit over the period from issuance until redemption first becomes available. The amount of accretion during each period is determined by using the effective interest rate method. Accretion amounted to approximately $
40,000
and $
106,300
for the years ended December 31, 2013 and 2012, respectively.
The Company
In connection with the Merger, the Company entered into a securities purchase agreement with accredited investors pursuant to which the investors agreed to purchase an aggregate of 7,569,704.4 shares of the Company’s Series B Convertible Preferred Stock for a purchase price of $
4.00
per share of Series B Preferred Stock, which was paid in cash, cancellation of certain indebtedness of TransEnterix Surgical or a combination thereof. Each share of Series B Preferred Stock was converted into ten shares of our common stock, par value $
0.001
per share, on December 6, 2013 amounting to
75,697,044
shares of common stock.
On December 6, 2013, the Company increased the number of shares of common stock authorized from 225,000,000 to 750,000,000.
As of December 31, 2013, 25,000,000 shares of preferred stock are authorized, no shares are issued and outstanding.
2
0. Agreement with Creighton University
On May 26, 2006, SafeStitch entered into an exclusive license and development agreement (the “Creighton Agreement”) with Creighton University (“Creighton”), granting the Company a worldwide exclusive (even as to the university) license, with rights to sublicense, to all the Company’s product candidates and associated know-how based on Creighton technology, including the exclusive right to manufacture, use and sell the product candidates.
Pursuant to the Creighton Agreement, the Company is obligated to pay Creighton, on a quarterly basis, a royalty of
1.5
% of the revenue collected worldwide from the sale of any product licensed under the Creighton Agreement, less certain amounts including, without limitation, chargebacks, credits, taxes, duties and discounts or rebates. Also pursuant to the Creighton Agreement, the Company agreed to invest, in the aggregate, at least $
2.5
million over
36
months, beginning May 26, 2006, towards development of any licensed product. This $2.5 million investment obligation excluded the first $
150,000
of costs related to the prosecution of patents, which the Company invested outside of the Creighton Agreement. The Company is further obligated to pay to Creighton an amount equal to
20
% of certain of the Company’s research and development expenditures as reimbursement for the use of Creighton’s facilities. Failure to comply with the payment obligations above will result in all rights in the licensed patents and know-how reverting back to Creighton. As of December 31, 2013, the Company had satisfied the $2.5 million investment obligation and the facility reimbursement obligation described above.
Pursuant to the Creighton Agreement, SafeStitch is entitled to exercise its own business judgment and sole and absolute discretion over the marketing, sale, distribution, promotion and other commercial exploitation of any licensed products, provided that, if the Company has not commercially exploited or commenced development of a licensed patent and its associated know-how by the seventh anniversary of the later of the date of the Creighton Agreement or the date such technology is disclosed to and accepted by SafeStitch, then the licensed patent and associated know-how shall revert back to the university, with no rights retained by the Company, and the university will have the right to seek a third party with whom to commercialize such patent and associated know-how, unless the Company purchases one or more one-year extensions. The Company is in compliance with these requirements.
21. Commitments and Contingencies
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, with an option to renew for an additional six years. 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. Rent expense was approximately $
360,000
for each of the years ended December 31, 2013 and 2012. As of December 31, 2013, the Company’s approximate future minimum payments for its operating lease obligations are as follows:
|
Years ending December 31,
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2014
|
|
$
|
498
|
|
|
2015
|
|
|
218
|
|
|
2016
|
|
|
117
|
|
|
2017
|
|
|
121
|
|
|
2018
|
|
|
124
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,078
|
|
TransEnterix
Surgical
leases its manufacturing facility under a one-year lease from third parties. Rent expense under this lease was $
54,533
and $
51,455
for the years ended December 31, 2013 and 2012, respectively.
SafeStitch leases various office space on a month to month basis. Rent expense under these leases was $
55,301
for the year ended December 31, 2013, including $
48,000
to a company controlled by a shareholder.
The Company is obligated to pay royalties to Creighton on the sales of products licensed from Creighton pursuant to an exclusive license and development agreement (see Note 20). The Company is also obligated under an agreement with Dr. Parviz Amid to pay a
1.5
% royalty for the first three years and then a
4
% royalty on the following seven years to Dr. Amid on the net sales of any product developed with Dr. Amid’s assistance, including the AMID HFD, for a period of ten years from the first commercial sale of such product. Royalties were incurred in the amount of $
1,300
during the year ended December 31, 2012 and no royalties were incurred during the year ended December 31, 2013.
The Company has placed orders with various suppliers for the purchase of certain tooling, inventory and contract engineering and research services. Each of these orders has a duration or expected completion within the next twelve months. The Company currently has no material commitments with terms beyond twelve months.