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TRANSENTERIX INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 6, 2014

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included in this report. The following discussion contains forward-looking statements. See cautionary note regarding "Forward-Looking Statements" at the beginning of this report.

Overview

We are a medical device company that is focused on the development and future commercialization of a robotic assisted surgical system called the SurgiBot™ System (the "SurgiBot System"). 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. The flexible nature of the SurgiBot System would allow 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 integrates three-dimensional ("3-D") high definition vision technology. The Company has 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 that are controlled directly by the surgeon, allowing for multiple instruments to be introduced via a single site. The SPIDER System has been cleared by the U.S. Food and Drug Administration ("FDA"). The Company also manufactures multiple instruments that can be deployed using the SPIDER System currently, and which are being adapted for use with the SurgiBot System. In April 2014, we launched the Flex Ligating Shears ("FLS") which is an advanced energy device used with the Company's existing SPIDER Surgical System. The FLS device is designed to deliver controlled energy to effectively ligate and divide tissue. The Company intends to offer a similar device in the future for its SurgiBot System.

During the second quarter of 2014, we determined to cease internal development of the SafeStitch Gastroplasty Device. We are evaluating strategic alternatives for the former SafeStitch products.

We believe that future outcomes of minimally invasive surgery will be enhanced through our combination of more advanced tools and robotic functionality which are designed to: (i) empower surgeons with improved precision, dexterity and visualization; (ii) improve patient satisfaction and post-operative recovery; and (iii) provide a cost-effective robotic system, compared to existing alternatives today, for a potentially wide range of clinical applications.

Our strategy is to focus our resources on the development and future commercialization of the SurgiBot System. We are planning to make the product available subject to our obtaining the requisite regulatory and government clearances.

We believe that: • there are a number of hospitals and ambulatory surgery centers in the U.S. and internationally that could benefit from the addition of robotic-assisted minimally invasive surgery at a lower cost of entry than existing robotic surgery systems; • surgeons can benefit from the ease of use, 3-D visualization and precision of robotic assisted surgery while remaining patient-side within the sterile field, consistent with current laparoscopic surgery procedures; and • patients will continue to seek a minimally invasive option offering minimal scarring and fewer incisions for many common general abdominal and gynecologic surgeries. 18



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From our inception, we devoted a substantial percentage of our resources to research and development and start-up activities, consisting primarily of product design and development, clinical trials, manufacturing, recruiting qualified personnel and raising capital.

Since inception, we have been unprofitable. As of June 30, 2014, we had an accumulated deficit of $116.3 million.

We expect to continue to invest in research and development and related clinical trials, and increase selling, general and administrative expenses as we grow. As a result, we will need to generate significant revenue in order to achieve profitability

The Company operates in one business segment.

Recent Events

Stock Split

On March 31, 2014, we effectuated a reverse stock split of our 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, our 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, RSUs, warrants and earnings per share for prior periods has been retroactively adjusted to give effect to the Reverse Stock Split.

Public Offering

On April 14, 2014, we sold 12,500,000 shares of common stock at a public offering price of $4.00 per share for aggregate gross proceeds of $50.0 million in an underwritten firm commitment public offering. We granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,875,000 shares of common stock to cover over-allotments. Certain of our existing stockholders that are affiliated with certain of our directors purchased $10 million of common stock in the public offering. The common stock was offered and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-193235) registering an aggregate of $100 million of our designated securities (the "Shelf Registration Statement"). The Shelf Registration Statement was declared effective by the SEC on April 2, 2014. The closing of the public offering occurred on April 21, 2014. On April 30, 2014, the underwriters exercised a portion of their over-allotment option to acquire an additional 1,610,000 shares at the public offering price of $4.00 per share for aggregate additional gross proceeds of $6.4 million. The purchase of the over-allotment shares closed on May 5, 2014. Total proceeds were $52.5 million, net of issuance costs of $3.9 million.

In connection with the public offering, our common stock was eligible to be listed on the NYSE MKT and began trading on such exchange on April 15, 2014.

Results of Operations

Our results of operations include the acquired SafeStitch operations from the Merger date, September 3, 2013, forward.

Revenue

We derived sales from the SPIDER System and other distributed products through limited direct sales in the United States and international distributors. We record revenue 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 our products. Shipping and handling costs we incur are included in cost of goods sold.

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Research and Development

Research and development ("R&D") expenses primarily consist of engineering, product development and regulatory expenses incurred in the design, development, testing and enhancement of our products and legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products. In future periods, we expect R&D expenses to grow as we continue to invest in basic research, clinical trials, product development and intellectual property. R&D expenses are expensed as incurred.

Sales and Marketing

Sales and marketing expenses include costs for sales and marketing personnel, travel, demonstration product, market development, physician training, tradeshows, marketing clinical studies and consulting expenses.

General and Administrative

General and administrative expenses consist of personnel costs related to the executive, finance and human resource functions, as well as professional service fees, legal fees, accounting fees, insurance costs, amortization of intellectual property and general corporate expenses. In future periods, we expect general and administrative expenses to increase to support our sales, marketing, research and development efforts.

Other Expense, Net

Other expense is primarily composed of interest expense on long-term debt.

Comparison of the Three Months Ended June 30, 2014 and 2013

Sales for the three months ended June 30, 2014 decreased to $0.1 million from $0.5 million for the three months ended June 30, 2013. The $0.4 million decrease was primarily due to lower sales volumes as a result of the reduction in our U.S. sales force headcount. We have chosen to focus resources on the SurgiBot System development and therefore away from continued investment in sales and marketing of the SPIDER System. The SPIDER System will remain on the market, and we will focus on serving existing customers.

Cost of goods sold for the three months ended June 30, 2014 decreased to $0.2 million from $1.2 million for the three months ended June 30, 2013. The $1.0 million decrease was primarily the result of our reduction in sales as we limit sales of our SPIDER System to our existing customers and the discontinuation of production of our SPIDER System and the transfer of employees from our manufacturing and quality departments to research and development and regulatory functions.

R&D expenses for the three months ended June 30, 2014 increased to $7.9 million compared to $2.2 million for the three months ended June 30, 2013. The $5.7 million increase resulted primarily from increased supplies expense of $1.8 million, increased contract engineering services and consulting of $1.4 million related to product development of our SurgiBot System, increased personnel related expenses of $1.1 million as we increased the headcount and transferred employees from our manufacturing and quality departments to research and development and regulatory functions, increased other expenses of $0.5 million, and increased stock compensation costs of $0.3 million. In addition, R&D expenses incurred for development of SafeStitch products in the second quarter of 2014 were $0.6 million.

Sales and marketing expenses were $0.5 million for the three months ended June 30, 2014 and 2013.

General and administrative expenses for the three months ended June 30, 2014 increased to $1.9 million compared to $0.7 million for the three months ended June 30, 2013. The $1.2 million increase was primarily due to increased legal, accounting and investor relation fees and other public company costs of $0.4 million, increased stock compensation costs of $0.4 million, increased personnel costs of $0.3 million, and increased insurance and other costs of $0.1 million.

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Other expense was $0.2 million for the three months ended June 30, 2014 and 2013.

Comparison of the Six Months Ended June 30, 2014 and 2013

Sales for the six months ended June 30, 2014 decreased to $0.2 million from $0.9 million for the six months ended June 30, 2013. The $0.7 million decrease was primarily due to lower sales volumes as a result of the reduction in our U.S. sales force headcount. We have chosen to focus resources on the SurgiBot System development and therefore away from continued investment in sales and marketing of the SPIDER System. The SPIDER System will remain on the market, and we will focus on serving existing customers.

Cost of goods sold for the six months ended June 30, 2014 decreased to $0.5 million from $2.0 million for the six months ended June 30, 2013. The $1.5 million decrease was primarily the result of our reduction in sales as we limit sales of our SPIDER System to our existing customers and the discontinuation of production of our SPIDER System and the transfer of employees from our manufacturing and quality departments to research and development and regulatory functions.

R&D expenses for the six months ended June 30, 2014 increased to $12.9 million compared to $4.9 million for the six months ended June 30, 2013. The $8.0 million increase resulted primarily from increased personnel related expenses of $2.0 million as we increased the headcount and transferred employees from our manufacturing and quality departments to research and development and regulatory functions, increased contract engineering services and consulting of $1.9 million related to product development of our SurgiBot System, increased supplies expense of $1.8 million, increased other expenses of $0.9 million, and increased stock compensation costs of $0.4 million. In addition, R&D expenses incurred for development of SafeStitch products for the six months ended June 30, 2014 were $1.0 million.

Sales and marketing expenses for the six months ended June 30, 2014 decreased to $0.9 million compared to $1.1 million for the six months ended June 30, 2013. The $0.2 million decrease was primarily related to lower personnel-related costs as we decreased our direct sales and marketing personnel.

General and administrative expenses for the six months ended June 30, 2014 increased to $3.5 million compared to $1.4 million for the six months ended June 30, 2013. The $2.1 million increase was primarily due to increased legal, accounting and investor relation fees and other public company costs of $0.6 million, increased personnel costs of $0.5 million, increased stock compensation costs of $0.5 million, and increased insurance and other costs of $0.3 million. In addition, general and administrative expenses incurred by SafeStitch for the six months ended June 30, 2014 were $0.2 million.

Other expense was $0.5 million for the six months ended June 30, 2014 and 2013.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception we have incurred significant losses and, as of June 30, 2014, we had an accumulated deficit of $116.3 million. We have not yet achieved profitability and we cannot assure investors that we will achieve profitability with our existing capital resources. We expect to continue to fund research and development, sales and marketing and general and administrative expenses at similar to current or higher levels and, as a result, we will need to generate significant revenues to achieve profitability. Our principal sources of cash have been proceeds from public offerings of common stock, private placements of common and preferred stock and incurrence of debt. We expect existing cash balances will be sufficient to fund our operations and satisfy our other anticipated cash requirements for at least the next 12 months.

In January 2014, we filed the Shelf Registration Statement with the SEC which was declared effective on April 2, 2014. The Shelf Registration Statement allowed us to raise up to $100.0 million through the sale of debt securities, common stock, preferred stock, or warrants, or any combination thereof. On April 14, 2014, we sold 12,500,000 shares of common stock at a public offering price of $4.00 per share for aggregate gross proceeds of $50.0 million in an underwritten firm commitment public offering. We granted the underwriters an option, exercisable for 30 days, to purchase up to an additional 1,875,000 shares of Common Stock to

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cover over-allotments. Certain of our existing stockholders that are affiliated with certain of our directors purchased $10 million of common stock in the public offering. The common stock was offered and sold pursuant to the Shelf Registration Statement. The closing of the public offering occurred on April 21, 2014. On April 30, 2014, the underwriters exercised a portion of their over-allotment option to acquire an additional 1,610,000 shares at the public offering price of $4.00 per share for aggregate additional gross proceeds of $6.4 million. The purchase of the over-allotment shares closed on May 5, 2014. Total proceeds were $52.5 million, net of issuance costs of $3.9 million. Following such public offering (including the over-allotment), we currently have the ability to raise an additional $43.6 million from the Shelf Registration Statement.

At June 30, 2014, we had cash and cash equivalents of approximately $52.6 million. Our cash and cash equivalents increased by approximately $42.6 million during the six months ended June 30, 2014, primarily as a result of proceeds from the issuance of common stock, net of issuance costs, of $52.5 million, proceeds from the sale and maturities of investments of $6.2 million, offset by net cash used in operating activities of $13.4 million, purchases of property and equipment of $0.9 million, and payments on term debt of $1.9 million.

Cash Flows

Net Cash Used in Operating Activities

Net cash used in operating activities was $13.4 million during the six months ended June 30, 2014. This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation and amortization, stock-based compensation, plus the net change in operating assets and liabilities for the six months ended June 30, 2014, which consisted primarily of increases in accounts payable and accrued expenses and decreases in restricted cash, inventory and accounts receivable.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $5.3 million during the six months ended June 30, 2014. This amount reflected the net cash proceeds from the sale and maturities of investments of $6.2 million offset by cash paid for the purchases of property and equipment of $0.9 million.

Net Cash Provided by Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2014 of $50.6 million was primarily related to proceeds from the issuance of common stock, net of issuance costs, of $52.5 million, offset by payments on debt of $1.9 million.

Operating Capital and Capital Expenditure Requirements

During August 2013, TransEnterix Surgical issued promissory notes (the "Bridge Notes") in the aggregate principal amount of $2.0 million. 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 Silicon Valley Bank and Oxford Finance LLC loan and security agreement. The Bridge Notes were converted into Series B Preferred Stock at the effective time of the Merger.

On September 3, 2013, we consummated a private placement (the "Private Placement") transaction in which we issued and sold shares of our Series B Convertible Preferred Stock, par value $0.01 per share (the "Series B Preferred Stock") to finance our operations following the merger. The Private Placement was done pursuant to a Securities Purchase Agreement (the "Purchase Agreement") with accredited investors (the "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 7,544,704.4 shares of the Series B Preferred Stock, each share of which was convertible, subject to certain conditions, into two 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 indebtedness of TransEnterix Surgical or a combination thereof. In accordance with the Purchase Agreement, we issued and sold an additional 25,000 shares of Series B Preferred Stock on September 17, 2013. Proceeds from the issuance of the Series B Preferred Stock, net of issuance costs, were $28.2 million.

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In connection with the Merger, we assumed and became the borrower under TransEnterix Surgical's outstanding credit facility pursuant to the terms of the SVB-Oxford LSA, among the Company, Silicon Valley Bank, and Oxford Finance LLC, as lenders (the "Lenders"). 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 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, we are 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, we are 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, and 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 our assets 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 our 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 or chief technology officer upon vacancy; undergo a change in control; add or change business locations; and engage in businesses that are not related to our existing business.

Following the closing of the public offering (including the over-allotment), we currently have the ability to raise an additional $43.6 million from the Shelf Registration Statement. The timing and terms of any additional financing transactions, whether pursuant to this Shelf Registration Statement or otherwise, have not yet been determined. Any additional financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations as of December 31, 2013 (in millions): Less than Payment due by period Total 1 year 1 to 3 years 3 to 5 years Long-term debt obligation(1) $ 9.7$ 4.5 $ 5.2 $ - Operating leases $ 2.5$ 0.5 $ 1.7 $ 0.3



Total contractual obligations(2) $ 12.2$ 5.0 $ 6.9 $ 0.3

(1) Long-term debt obligations include future principal and interest payments

under the Amended Loan Agreement.

(2) On February 13, 2014, TransEnterix Surgical, Inc., a wholly owned subsidiary

of the Company, entered into a Robotic Development and Supply Agreement (the "Robotic Agreement") with Microline Surgical, Inc. ("Microline"). Under the Robotic Agreement, Microline is developing a flexible sealer product for exclusive use by the Company with the SurgiBot System in open, minimally invasive and laparoscopic surgery. Development of the contemplated products under the Robotic Agreement is ongoing. If such products are successfully developed and applicable regulatory approvals obtained, the Company will owe an aggregate of $1,400,000 to Microline in milestone fees. Actual payment of such milestone fees is substantially uncertain, dependent on product development activities. If the products are successfully developed and applicable regulatory approvals obtained, the Company is committed to product supply commitments set forth in the Robotic Agreement. Milestone fees under the Robotic Agreement are not included in the table above due to the substantial uncertainty of the success of the product development efforts.



Operating lease amounts include future minimum lease payments under all our non-cancelable operating leases with an initial term in excess of one year. We rent office space under an operating lease which expires in 2015, with options to extend the lease through 2021. On June 12, 2014, we extended the term of the lease for a period of 3 years and 2 months commencing May 1, 2015 and expiring on June 30, 2018, with an option to renew for an additional three years. We also rent space for a warehouse facility

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which expires in 2018, with options to extend the lease through 2024. This table does not include obligations for any lease extensions that have not been executed.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above under the headings "Results of Operations" and "Liquidity and Capital Resources" have been prepared in accordance with U.S. GAAP and should be read in conjunction with our consolidated financial statements and notes thereto appearing in the Annual Report on Form 10-K for the year ended December 31, 2013, filed by the Company with the SEC on March 5, 2014. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including identifiable intangible assets and goodwill, stock-based compensation, inventory, intellectual property and long-lived assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2013, filed by the Company with the SEC on March 5, 2014. Actual results may differ from these estimates under different assumptions and conditions.

While all accounting policies impact the financial statements, certain policies may be viewed as critical. Critical accounting policies are those that are both most important to the portrayal of financial condition and results of operations and that require management's most subjective or complex judgments and estimates. Our management believes the policies that fall within this category are the policies on accounting for identifiable intangible assets and goodwill, stock-based compensation, intellectual property and long-lived assets and inventory.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain intangible assets are amortized over 5 years. We periodically evaluate identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Indefinite-lived intangible assets, such as goodwill are not amortized. We test the carrying amounts of goodwill for recoverability on an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test.

Accounting for Stock-Based Compensation

We recognize as expense, the grant-date fair value of stock options and other stock based compensation issued to employees and non-employee directors over the requisite service periods, which are typically the vesting periods. We use the Black-Scholes-Merton model to estimate the fair value of our stock-based payments. The volatility assumption used in the Black-Scholes-Merton model is based on the calculated historical volatility based on an analysis of reported data for a peer group of companies. The expected term of options granted by the Company has been determined based upon the simplified method, because we do 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. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. We estimate forfeitures based on our historical experience and adjust the estimated forfeiture rate based upon actual experience.

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Intellectual Property and Long-Lived Assets

Intellectual property consists of purchased patent rights. Amortization is recorded using the straight-line method over the estimated useful life of the patents of ten years. We review our long-lived assets including purchased intellectual property and property and equipment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of our long-lived assets, we evaluate 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. Our 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.

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. We record 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.

Recent Accounting Pronouncements

See "Note 2. Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, filed by the Company with the SEC on March 5, 2014, for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss.


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