10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, DC 20549 

FORM 10-Q

[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2016

OR

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________  to __________

Commission File Number: 000-51772 

Dextera Surgical Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	94-3287832
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
900 Saginaw Drive
Redwood City, California	94063
(Address of Principal Executive Offices)	(Zip Code)

(650) 364-9975

(Registrant's Telephone Number, Including Area Code)

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

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

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [x]

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

On February 6, 2017, there were 8,927,830 shares of common stock, par value $0.001 per share, of Dextera Surgical Inc. outstanding.

DEXTERA SURGICAL INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2016

INDEX

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements
a. Condensed Consolidated Balance Sheets at December 31, 2016, and June 30, 2016	3
b. Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2016 and 2015	4
c. Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended December 31, 2016 and 2015	5
d. Condensed Consolidated Statements of Cash Flows for the three and six months ended December 31, 2016 and 2015	6
e. Notes to Condensed Consolidated Financial Statements	7
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.   Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.   Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1A. Risk Factors	27
Item 6.    Exhibits	46
SIGNATURES	47

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEXTERA SURGICAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

	December 31, 2016			June 30, 2016
Assets
Current assets:
Cash and cash equivalents	$	5,103		$	3,626
Short-term investments		650			9,090
Accounts receivable, net		489			313
Inventories		1,505			1,063
Prepaid expenses and other current assets		108			318
Total current assets		7,855			14,410
Property and equipment, net		909			1,178
Restricted cash		104			104
Total assets	$	8,868		$	15,692
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,000		$	766
Accrued compensation		582			739
Other accrued liabilities		391			517
Current portion of deferred revenue		633			569
Total current liabilities		2,606			2,591
Deferred revenue, net of current portion		2,384			2,499
Note payable, net of discount		3,293			3,124
Other non-current liabilities		167			196
Total liabilities		8,450			8,410
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized; 191,474 shares issued and outstanding at December 31, 2016, and June 30, 2016		17,214			17,214
Common stock, $0.001 par value: 125,000,000 shares authorized; 8,934,452 shares issued and 8,927,830 shares outstanding at December 31, 2016, and June 30, 2016		9			9
Additional paid-in capital		197,079			196,355
Treasury stock at cost (6,622 shares at December 31, 2016, and June 30, 2016)		(596	)		(596	)
Accumulated comprehensive loss		—			(4	)
Accumulated deficit		(213,288	)		(205,696	)
Total stockholders' equity		418			7,282
Total liabilities and stockholders' equity	$	8,868		$	15,692

See accompanying notes to the condensed consolidated financial statements.

3

DEXTERA SURGICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Net revenue:
Product sales, net	$	695		$	683		$	1,122		$	1,420
License and development revenue		83			—			109			—
Royalty revenue		21			17			35			35
Total net revenue		799			700			1,266			1,455
Operating costs and expenses:
Cost of product sales		940			889			1,455			1,912
Research and development		1,400			1,630			3,168			3,246
Selling, general and administrative		1,960			2,161			3,979			4,818
Total operating costs and expenses		4,300			4,680			8,602			9,976
Loss from operations		(3,501	)		(3,980	)		(7,336	)		(8,521	)
Interest income		7			14			21			27
Interest expense		(137	)		(123	)		(270	)		(243	)
Other income (expense), net		(6	)		2			(7	)		8
Net loss	$	(3,637	)	$	(4,087	)	$	(7,592	)	$	(8,729	)
Basic and diluted net loss per share	$	(0.41	)	$	(0.46	)	$	(0.85	)	$	(0.98	)
Shares used in computing basic and diluted net loss per share		8,928			8,902			8,928			8,899

See accompanying notes to the condensed consolidated financial statements.

4

DEXTERA SURGICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Net loss	$	(3,637	)	$	(4,087	)	$	(7,592	)	$	(8,729	)
Changes in market value of investments:
Change in unrealized loss on short-term investments, net of tax		4			(9	)		4			(6	)
Comprehensive loss	$	(3,633	)	$	(4,096	)	$	(7,588	)	$	(8,735	)

See accompanying notes to the condensed consolidated financial statements.

5

DEXTERA SURGICAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six months ended
	December 31,
	2016			2015
Operating activities:
Net loss	$	(7,592	)	$	(8,729	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		316			543
Amortization of premiums on marketable securities		12			106
Stock-based compensation expense		724			400
Non-cash interest expense		169			143
Changes in operating assets and liabilities:
Accounts receivable, net		(176	)		(109	)
Prepaid expenses and other current assets		210			89
Inventories		(442	)		373
Accounts payable and other accrued liabilities		79			255
Deferred revenue		(51	)		—
Accrued compensation		(157	)		451
Net cash used in operating activities		(6,908	)		(6,478	)
Investing activities:
Purchases of property and equipment		(47	)		(136	)
Proceeds from maturities of investments		9,600			13,658
Purchases of investments		(1,168	)		(8,927	)
Net cash provided by investing activities		8,385			4,595
Net increase (decrease) in cash and cash equivalents		1,477			(1,883	)
Cash and cash equivalents at beginning of period		3,626			8,264
Cash and cash equivalents at end of period	$	5,103		$	6,381
Supplemental disclosure of cash flow information:
Interest paid	$	100		$	100

See accompanying notes to the condensed consolidated financial statements.

6

DEXTERA SURGICAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

 Dextera Surgical Inc. (the “Company”) was incorporated in the state of Delaware on October 15, 1997, as Vascular Innovations, Inc. On November 26, 2001, the Company changed its name to Cardica, Inc., and on June 19, 2016, changed its name to Dextera Surgical Inc. The Company is commercializing and developing the MicroCutter 5/80™ stapler based on its proprietary “staple-on-a-strip” technology intended for use by thoracic, pediatric, bariatric, colorectal and general surgeons. The MicroCutter 5/80, which is currently commercially available, is a cartridge-based stapler device with a 5 millimeter shaft diameter, 80 degrees of articulation, and a 30 millimeter staple line cleared for specified indications for use in the United States and in the European Union, or EU, for a broader range of specified indications of use.

In January 2016, the Company received FDA 510(k) clearance to use the MicroCutter 5/80 with a white reload and in July 2016, received FDA 510(k) clearance to use the MicroCutter 5/80 with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter 5/80 in surgical procedures in the small and large intestine and in the appendix. Following the 510(k) clearances, the Company conducted its evaluation of the MicroCutter 5/80, which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through initial market preference testing to validate the clinical benefits prior to broadening its commercial launch. The Company completed its market preference testing of the MicroCutter 5/80 with approximately 55 procedures and 200 staple cartridge deployments with reliable and consistent hemostasis (stopping of the blood flow). Following its successful evaluation of the MicroCutter 5/80, the Company expanded its commercial launch to a select group of customers in the U.S. and Europe. The Company is conducting the MicroCutter-Assisted Thoracic Surgery Hemostasis (“MATCH”) registry, a post-market surveillance registry, to evaluate the hemostasis and ease-of-use for the MicroCutter 5/80. This is a prospective, open-label, multi-center registry and the Company plans to enroll up to 120 patients requiring surgical stapling during a lobectomy (surgical removal of a lobe of an organ) or segmentectomy (surgical removal of a segment of a lung lobe) at leading centers in the U.S. and Europe.

The Company is also attempting to expand use of the MicroCutter 5/80 in the international market with selected regulatory filings. The Company submitted the application to Health Canada for regulatory approval of the MicroCutter XCHANGE 30 and the white cartridge reload and, in March 2016, received a medical device license to market in Canada. Although the Company is licensed to market the MicroCutter XCHANGE 30 with white reloads in Canada, the Company intends to wait until the Company files an amendment for the MicroCutter 5/80 with Health Canada for regulatory approval before it markets the MicroCutter 5/80 in Canada. In addition, in August 2013, the Company’s exclusive distributor in Japan, Century Medical, Inc., or Century, filed for regulatory approval of the MicroCutter XCHANGE 30 white and blue cartridge reloads with the Pharmaceuticals and Medical Devices Agency, or PMDA, in Japan and in April 2014, filed for approval for the MicroCutter XCHANGE 30 with TUV Rheinland Japan Ltd, a registered third-party agency in Japan, and received approvals in late 2014 for both reloads and stapler, to market in Japan. Also, in January 2015, Century submitted an application to PMDA relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a Vectra Liquid Crystal Polymer, or LCP, to IXEF Polyarylamide, or IXEF, and received approval in August 2015 to market in Japan. Though approvals of the MicroCutter XCHANGE 30 and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter 5/80 to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter 5/80 in Japan.

Historically, the Company generated product revenues primarily from the sale of automated anastomotic systems; however, the Company started generating revenues from the commercial sales of the microcutter products since its introduction in Europe in December 2012, and in the United States in March 2014, and through December 31, 2016, the Company generated $2.0 million of net product revenues from the commercial sales of the microcutter products.

For the six months ended December 31, 2016, the Company generated net revenue of $1.3 million, including $0.8 million from the sale of automated anastomotic systems, $0.3 million from commercial sales of the microcutter products, $0.1 million from license and development revenue and $35,000 of royalty revenue.

7

 Need for Additional Capital

Going Concern

The Company has incurred cumulative net losses of $213.3 million through December 31, 2016, and negative cash flows from operating activities and expects to incur losses for the next several years. As of December 31, 2016, the Company had approximately $5.8 million of cash, cash equivalents and short-term investments, and $4.0 million of debt principal outstanding.

The Company believes that the existing cash, cash equivalents and short-term investments will be sufficient to meet its anticipated cash needs to enable it to conduct its business substantially as currently conducted for at least the next three months, subject to the ultimate resolution of the following uncertainty.

In August 2016, Century asserted that the Company had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that the Company entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that the Company owes Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to $0.8 million as of December 31, 2016.

The Company does not agree with Century’s assertions as the Company believes that it had notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since August 2016, both the Company and Century have maintained their respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. The Company does not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of December 31, 2016. Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount ($0.7 million at December 31, 2016). If the Company is required to repay the $4.0 million loan from Century along with the related penalty interest prior to September 30, 2018, the Company will not have cash, cash equivalents and short-term investments sufficient to meet the Company’s cash needs, which would severely impair the Company’s ability to continue its business unless it is able to raise other funds to repay this debt.

The Company may be able to extend these time periods to the extent that it decreases its planned expenditures, or raises additional capital. The Company would need to further reduce expenses in advance of the date on which it would exhaust its cash, cash equivalents and short-term investments in the event that it is unable to complete a financing, strategic or commercial transaction in the near term to ensure that it has sufficient capital to meet its obligations and continue on a path designed to create and preserve stockholders’ value.

In order to satisfy its longer term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one or more of its commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to its stockholders, particularly in light of the prices at which its common stock has been recently trading. In addition, if the Company raises additional funds through the sale of equity securities, new investors could have rights superior to its existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with its common stock and could contain covenants that would restrict its operations. Any product development, licensing, distribution or sale agreements that the Company enters into may require it to relinquish valuable rights, including with respect to commercialized products or products in development that the Company would otherwise seek to commercialize or develop itself. The Company may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Its need to raise capital may require it to accept terms that may harm its business or be disadvantageous to its current stockholders.

The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Its continuation as a going concern is contingent upon its ability to generate revenue and cash flow to meet its obligations on a timely basis and its ability to raise financing. The Company’s plans will be adversely impacted if it fails to raise financing. However, there can be no assurance that the Company will be able to raise such funds. Failure to obtain future funding on acceptable terms would adversely affect its ability to fund operations and continues as a going concern. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements which include the accounts of Dextera Surgical Inc. and its wholly-owned subsidiary in Germany. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair statement of balances and results have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

8

The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on October 12, 2016.

Reverse Stock Split

On February 16, 2016, the Company effected a one-for-ten reverse split of its outstanding common stock (the “Reverse Split”) which had the effect of reducing the number of outstanding shares of common stock from 89,344,777 to 8,934,452, effective February 17, 2016. Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the Company reclassified its consolidated balance sheets total par value of approximately $80,000 from common stock to additional paid-in capital for the reporting periods.

All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.

Recently Issued Accounting Standards

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ( “ASU”) 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which provides the FASB's guidance on certain cash flow statements items. ASU 2016-15 is effective for fiscal reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which amends the current guidance by replacing the incurred loss model with a forward-looking expected loss model. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," amending guidance in the new revenue standard on transition, collectability, noncash consideration and the presentation of sales taxes and other similar taxes. The amendments clarify that for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under the existing GAAP. The amendments also clarified the collectability assessment and expanded circumstances under which nonrefundable consideration may receive revenue recognition when collectability of the remainder is not probable. It clarified that the fair value of noncash consideration should be measured at contract inception for determining the transaction price. The amendments permit an entity to make a policy election to exclude from the transaction price sales taxes and similar taxes. The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU 2014-09, as amended by ASU 2015-14). The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," adding clarification, while retaining the core principles in the revenue guidance. For identifying performance obligations, the ASU clarifies when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. For licensing, the ASU clarifies how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether it recognizes revenue over time (“symbolic IP”) or at a point in time (“functional IP”).The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU 2014-09, as amended by ASU 2015-14). The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments.  This standard addresses several aspects of the accounting for share-based payment award transactions, including:  (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

9

In March 2016, the FASB issued an accounting standard update ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations under the new revenue recognition standard, ASU 2014-09 (Topic 606), Revenue from Contracts with Customers. It requires the entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or service before it is transferred to the customer. The amendment will be effective for annual reporting periods beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessee’s to recognize assets and liabilities for leases with lease terms of more than 12 months in the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2018. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability. The new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as noncurrent on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU No. 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which will be the Company’s fiscal year 2017 beginning July 1, 2016. The amendments may be applied prospectively to all deferred assets and liabilities, or retrospectively for all periods presented. Early adoption of the amendments is permitted. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In July 2015, the FASB issued an accounting standard update which requires an entity measuring inventory other than last-in, first-out (LIFO) or the retail inventory method to measure inventory at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its costs, the difference will be recognized as a loss in the statement of operations. The standard is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The Company will be evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers, which guidance in this update will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance when it becomes effective. ASU No. 2014-09 affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of ASU No. 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, which will be the Company’s fiscal year 2019 (beginning July 1, 2018). The FASB will permit companies to adopt the new standard early, but not before the original effective date of December 15, 2016. The Company is in the process of evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and has not yet determined the transition method.

10

Use of Estimates

      The preparation of financial statements in conformity with GAAP generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Significant estimates include the valuation of inventory, measurement of stock based compensation, valuation of financial instruments and revenue recognition. Actual results could materially differ from these estimates.

Revenue Recognition

The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company’s sales to distributors do not include price protection.

Payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved subject to satisfaction of all revenue recognition criteria at that time. Revenue generated from license fees and performing development services are recognized when they are earned and non-refundable upon receipt, over the period of performance, or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on a project are recorded as deferred revenue until such time as performance is rendered or the related development expenses, plus overhead costs for certain project activities, are incurred.

Inventories

Inventories are recorded at the lower of cost or market on a first-in, first-out basis. The Company periodically assesses the recoverability of all inventories, including materials, work-in-process and finished goods, to determine whether adjustments for impairment are required. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Further reduced demand may result in the need for additional inventory write-downs in the near term. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory.

Risks and Uncertainties

The Company depends upon a number of key suppliers, including single source suppliers, the loss of which would materially harm the Company’s business. Single source suppliers are relied upon for certain components and services used in manufacturing the Company’s products. The Company does not have long-term contracts with any of the suppliers; rather, purchase orders are submitted for each order. Because long-term contracts do not exist, none of the suppliers are required to provide the Company any guaranteed minimum quantities.

Foreign Currency Translation

The Company’s foreign operations are subject to exchange rate fluctuations and foreign currency costs. The functional currency of the German subsidiary is the United States dollar. Transactions and balances denominated in dollars are presented at their original amounts. Monetary assets and liabilities denominated in currencies other than the dollar are re-measured at the current exchange rate prevailing at the balance sheet date. All transaction gains or losses from the re-measurement of monetary assets and liabilities are included in the consolidated statements of operations within other income (expense).

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NOTE 2 - STOCKHOLDERS' EQUITY

Common Stock and Preferred Stock

In April 2014, the Company sold 3,737,500 shares of its common stock at $8.50 per share, and 191,474 shares of Series A Convertible Preferred Stock at $85 per share. The Series A convertible preferred stock is non-voting and is convertible into shares of common stock at a conversion rate of 10 shares of common stock for each share of Series A convertible preferred stock, provided that conversion will be prohibited if, as a result, the holder and their affiliates would own more than 9.98% of the total number of shares of the Company’s common stock then outstanding unless the holder gives the Company at least 61 days prior notice of an intent to convert into shares of common stock that would cause the holder to own more than 9.98% of the total number of shares of common stock then issued and outstanding. Net proceeds from the financing to the Company were approximately $44.6 million. For fiscal year ended June 30, 2014, the Company recorded a deemed dividend of $1.9 million related to beneficial conversion feature of series A convertible preferred stock. A one-time beneficial conversion charge was due to the difference between the common stock price and conversion price on the closing date of the Company’s public offering in April 2014.

Stock-Based Compensation

Stock-based compensation expense related to employee and director share-based compensation plans, including stock options and restricted stock units, or RSUs, pursuant to Accounting Standards Codification, or ASC, 718 “Compensation — Stock Compensation”. Stock-based compensation cost is measured on the grant date, based on the fair value-based measurement of the award and is recognized as an expense over the requisite service period which generally equals the vesting period of each grant. The Company recognizes compensation expense using the accelerated method and accounts for the non-employee share-based grants pursuant to ASC 505-50, Equity Based Payments to Non-Employees.

The Company selected the Black-Scholes option pricing model for determining the estimated fair value-based measurements of share-based awards. The use of the Black-Scholes model requires the use of assumptions including expected term, expected volatility, risk-free interest rate and expected dividends. The Company used the following assumptions in its fair value-based measurements:

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Risk-free interest rate	1.25%	–	1.98%		1.33	%	1.11%	-	1.98%	0.71%	-	1.50%
Dividend yield		—			—			—			—
Weighted-average expected term (in years)	4.80	–	4.83		4.98		4.80	-	4.83	4.24	-	4.98
Expected volatility	74.7%	-	77.5%		67.4	%	74.7%	-	77.5%	54.8%	-	67.4%

The Company estimates the expected life of options granted based on historical exercise and post-vest cancellation patterns, which the Company believes are representative of future behavior. The risk-free interest rate for the expected term of each option is based on a risk-free zero-coupon spot interest rate on the date of grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. The expected volatility is based on the Company’s historical stock price. The Company estimates forfeitures in calculating the expense related to stock-based compensation. The Company recorded stock-based compensation expenses for awards granted to employees under ASC 718 of $0.7 million and $0.4 million for the six months ended December 31, 2016 and 2015, respectively. The Company recorded stock-based compensation expenses for awards granted to non-employees under ASC 505-50 of $0 and $5,991 for the six months ended December 31, 2016 and 2015, respectively. Total compensation expense related to unvested awards not yet recognized is approximately $0.7 million at December 31, 2016, and is expected to be recognized over a weighted average period of 3.5 years.

      Included in the statement of operations are the following non-cash stock-based compensation expenses (in thousands):

	Three months ended				Six months ended
	December 31,				December 31,
	2016		2015		2016		2015
Cost of product sales	$	48	$	17	$	70	$	35
Research and development		121		30		189		72
Selling, general and administrative		257		218		465		293
Total	$	426	$	265	$	724	$	400

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NOTE 3 - NET LOSS PER SHARE

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, and without consideration of potential common shares.  Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period, plus dilutive potential common shares for the period determined using the treasury-stock method.  For purposes of this calculation, options and warrants to purchase stock and unvested restricted stock awards are considered to be potential common shares and are only included in the calculation of diluted net loss per share when their effect is dilutive.

In the years the preferred stock is outstanding, the two-class method is used to calculate basic and diluted earnings (loss) per common share since it is a participating security under ASC 260 Earnings per Share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common share after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Numerator:
Net loss	$	(3,637	)	$	(4,087	)	$	(7,592	)	$	(8,729	)
Denominator:
Denominator for basic and diluted net loss per share		8,928			8,902			8,928			8,899
Basic and diluted net loss per share	$	(0.41	)	$	(0.46	)	$	(0.85	)	$	(0.98	)

The following table sets forth the outstanding securities not included in the diluted net loss per common share calculation as of December 31, 2016 and 2015, because their effect would be antidilutive (in thousands):

	As of December 31,
	2016		2015
Options to purchase common stock		1,538		939
Unvested restricted stock awards		64		53
Shares reserved for issuance upon conversion of Series A Preferred		1,915		1,915
Total		3,517		2,907

NOTE 4 - FAIR VALUE MEASUREMENTS

      ASC 820, “Fair Value Measurements,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

Level 1 -	Quoted prices in active markets for identical assets or liabilities.
Level 2 -	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 -	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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The Company does not have any liabilities that are measured at fair value on a recurring basis. All assets that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. These assets measured at fair value are summarized below (in thousands):

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	2,025	$	—	$	—	$	2,025
Corporate debt securities		—		982		—		982
Commercial paper		—		600		—		600
Short-term investments:
Corporate debt securities		—		650		—		650
Total assets at fair value	$	2,025	$	2,232	$	—	$	4,257

	As of June 30, 2016
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	3,029	$	—	$	—	$	3,029
Short-term investments:
Commercial paper		—		999		—		999
Corporate debt securities		—		8,091		—		8,091
Total assets at fair value	$	3,029	$	9,090	$	—	$	12,119

Funds held in money market instruments are included in Level 1 as their fair values are based on market prices/quotes for identical assets in active markets.

Corporate debt securities and commercial papers are valued primarily using market prices comparable securities, bid/ask quotes, interest rate yields, and prepayment spreads and are included in Level 2.

Cash balances of $1.5 million at December 31, 2016, and $0.6 million at June 30, 2016, were not included in the fair value hierarchy disclosure. As of December 31, 2016, the Company’s material financial assets and liabilities were reported at their current carrying values which approximate fair value given the short-term nature of less than a year, except for its note payable and deferred revenue relating to Intuitive Surgical amended license agreement. As of December 31, 2016, the Company’s note payable and deferred revenue were reported at its current carrying value which approximates fair value based on Level 3 unobservable inputs involving discounted cash flows and the estimated market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s credit risk (See “Note 8 - Note Payable”) and the relative estimated selling prices of deliverables of the license rights with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes (See “Note 7 – Distribution, License, Development And Commercialization Agreements”). 

 NOTE 5 – Available–for-Sale Securities

The Company held investments in marketable securities as of December 31, 2016, and June 30, 2016, with maturity dates of less than one year for short-term and greater than one year for long-term.

The Company’s investments consisted of the following (in thousands):

	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Corporate debt securities – Short-term	$	650	$	—	$	—	$	650
Total	$	650	$	—	$	—	$	650

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	As of June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Commercial paper – Short-term	$	999	$	—	$	—		$	999
Corporate debt securities – Short-term		8,095		—		(4	)		8,091
Total	$	9,094	$	—	$	(4	)	$	9,090

There are no gross unrealized losses at December 31, 2016. The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of June 30, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	June 30, 2016
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)
Total	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)

The Company reviews investments for other-than-temporary impairment. It was determined that unrealized losses at June 30, 2016, are temporary in nature, because the changes in market value for these securities resulted from the fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. The Company is unlikely to experience losses if these securities are held to maturity. In the event that the Company disposes of these securities before maturity, it is expected that any losses will be immaterial.

NOTE 6 - INVENTORIES

      Inventories consisted of the following (in thousands):

	December 31, 2016		June 30, 2016
Raw materials	$	785	$	698
Work in progress		284		133
Finished goods		436		232
Total	$	1,505	$	1,063

NOTE 7 – DISTRIBUTION, LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

Century

On September 2, 2011, the Company signed a distribution agreement (the “Distribution Agreement”) with Century with respect to distribution of the Company’s planned microcutter products in Japan. Under the terms of a secured note purchase agreement, Century agreed to loan the Company an aggregate of up to $4.0 million, with principal due in September 30, 2016, subject to certain conditions, which principal due date was extended by two years effective July 1, 2014. Under this facility, the Company received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. The note bears 5% annual interest which is payable quarterly in arrears through September 30, 2018, the maturity date when the total $4.0 million of principal becomes due. The timing of the repayment of the principal is subject to an uncertainty because in August 2016, Century asserted that the Company had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that the Company entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that the Company owes Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to $0.8 million as of December 31, 2016. Please see additional details related to this in Note 8.

In return for the loan commitment, the Company granted Century distribution rights to the Company’s planned microcutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for the microcutter product line. In August 2013, Century filed for regulatory approval of the MicroCutter XCHANGE 30 blue and white reloads with the Pharmaceuticals and Medical Devices Agency and in April 2014, filed for the MicroCutter XCHANGE 30 stapler with TUV Rheinland Japan Ltd, a registered third-party agency in Japan and received approvals in late 2014 for both reloads and stapler, to market in Japan. Also, in January 2015, Century submitted an application to PMDA, relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a LCP to an IXEF, and received approval in August 2015, to market in Japan. Though approvals of the MicroCutter XCHANGE 30 stapler and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter 5/80 to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter 5/80 in Japan. After approval for marketing in Japan, the Company would sell microcutter units to Century, who would then sell the microcutter devices to their customers in Japan.

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Proceeds from the note and granting the distribution rights were allocated to the note based on its aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cashflows using a discount rate of 18%, which the Company estimated a market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s. The remainder of the proceeds of $1.6 million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized over the term of the Distribution Agreement, beginning upon the first sale by Century of the microcutter products in Japan which had not occurred as of December 31, 2016.

The Company’s distribution agreement with Century pertaining to the PAS-Port system, originally dated June 16, 2003, was due to expire on July 31, 2014. Concurrently and in return for the amendment of the note, as discussed above, to extend the maturity date to September 30, 2018, the Company amended its distribution agreement with Century for the PAS-Port system, effective July 1, 2014, to, among other things, renew the contract for another five years, extending the expiration date to July 31, 2019. The note amendment was accounted for as the modification of the 2011 note agreement, as the value of the consideration provided by the Company in the form of additional distribution rights was estimated to be approximately equal to the reduction in the fair value of the note. Accordingly, the Company reduced the carrying value of the note of $3.1 million to its post-modification fair value of $2.6 million, and recorded the resulting incremental discount of $0.5 million as deferred revenue. The Company determined the fair value of the amended note using the discount rate of 18%, which the Company estimated as the market rate of borrowing as of the modification date that could be obtained by companies with credit risk similar to the Company’s. The incremental discount of $0.5 million will be amortized over the remaining term of the note using the effective interest rate method. The deferred revenue will be recognized over the term of the distribution agreement beginning upon the first sale by Century of the microcutter products in Japan.

As of December 31, 2016, and June 30, 2016, the balance of the loan was $3.3 million and $3.1 million net of debt issuance costs of $0.7 million and $0.9 million, respectively, and the distribution of the microcutter products had not begun for the respective periods.

      For the six months ended December 31, 2016 and 2015, sales of automated anastomosis systems to Century accounted for approximately 16% and 30%, of the Company’s total product sales. As of December 31, 2016, and June 30, 2016, Century accounted for approximately 10% and 33%, respectively, of the total accounts receivable balance.

Intuitive Surgical

On August 16, 2010, the Company entered into a license agreement with Intuitive Surgical Operations, Inc., or Intuitive Surgical, (the “License Agreement”) pursuant to which the Company granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use the Company’s intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of $9.0 million. The Company is also eligible to receive a contingent payment related to achieving a certain sales volume. Each party has the right to terminate the License Agreement in the event of the other party’s uncured material breach or bankruptcy. Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and except in the case of termination for the Company’s uncured material breach or insolvency, Intuitive Surgical’s payment obligations will continue as well. Under the License Agreement, Intuitive Surgical has rights to improvements in the Company’s technology and intellectual property over a specified period of time.

The Company determined that there were two substantive deliverables under the License Agreement representing separate units of accounting: license rights to technology that existed as of August 16, 2010, and license rights to technology that may be developed over the following three years. The $9.0 million upfront license payment and $1.0 million premium on the stock purchase by Intuitive Surgical were aggregated and allocated to the two units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes. Based upon the relative estimated selling prices of the deliverables, $9.0 million of the total consideration of $10.0 million was allocated to the license rights to technology that existed as of August 16, 2010, that has been recognized as revenue in the fiscal year ended June 30, 2011, and $1.0 million was allocated to technology that may be developed over the following three years that is being recognized as revenue ratably over that three year period. In total, the revenue recognized for the fiscal years ended June 30, 2016, 2015 and 2014, related to this arrangement were $0, $0 and $41,000, respectively. The Company has fully recognized such revenue, and as of June 30, 2016 and 2015, no deferred revenue related to this arrangement.

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On December 31, 2015, the Company and Intuitive Surgical amended the license agreement, which was initially signed in August 2010, to include, among other things, an agreement providing for a feasibility evaluation and potential development of a surgical stapling cartridge for use with Intuitive Surgical’s da Vinci Surgical Systems. Under the terms of the amendment, Intuitive Surgical paid a one-time, non-refundable and non-creditable payment of $2.0 million to extend its rights to improvements in the Company’s stapling technology and certain patents until August 16, 2018, and to provide for a feasibility evaluation period from December 31, 2015, to June 30, 2016. In addition, the amendment provides that each of the parties releases the other party from any claims they have or may have against the other party

The feasibility evaluation allowed Intuitive Surgical six months to test and evaluate the Company’s microcutter technology and it was completed successfully in August 2016, when Intuitive Surgical exercised its option to initiate a joint development program for an 8-millimeters-in-diameter surgical stapling cartridge for use with the da Vinci Surgical System. The Company and Intuitive Surgical entered into a joint development program in which Intuitive Surgical will be responsible for the development work on the stapler and the Company will be responsible for the development work on the stapler cartridge. Pursuant to the agreement, the Company will receive further funding for development of the cartridge and tooling as well as a unit-based royalty on commercial sales.

The Company determined that there were two substantive deliverables under the amended license agreement representing separate units of accounting: license rights to technology that existed as of December 30, 2015; and license rights to technology that may be developed over the following two years. The $2.0 million payment from the amended license agreement was aggregated and allocated to the two units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes, which approximates fair value based on Level 3 unobservable inputs. Based upon the relative estimated selling prices of the deliverables, $1.4 million of the total consideration of $2.0 million was allocated to the license rights to technology that existed as of December 30, 2015, that was recognized as revenue in the three months ended March 31, 2016, and $0.6 million was allocated to technology that may be developed over the following two years that was being recognized as revenue ratably over that two year period. As of December 31, 2016, the Company recognized a total of $1.5 million of license and development revenue and as of December 31, 2016, the Company had deferred revenue of $0.5 million related to this amended license agreement. Also, as of December 31, 2016, the Company recorded $0.1 million of license and development revenue related to this joint development program as the terms were fixed and determinable.

Cook Incorporated

In June 2007, the Company entered into, and in September 2007 and in June 2009 amended, a license, development and commercialization agreement with Cook Incorporated, to develop and commercialize a specialized device, which the Company refers to as the PFO Device, designed to close holes in the heart from genetic heart defects known as patent foramen ovales (“PFOs”). Under the agreement, Cook funded certain development activities and the Company and Cook jointly developed the PFO Device.  The Company’s significant deliverables under the arrangement were the license rights and the associated development activities.  These deliverables were determined to represent one unit of accounting as there was no stand-alone value to the license rights. If developed, Cook would receive an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO Device. The Company did not record any license and development revenue under this agreement for the six months ended December 31, 2016 or 2015.  Amounts paid but not yet earned on the project are recorded as deferred revenue until such time as the related development expenses for certain project activities are incurred.  A total of $0.4 million under this agreement had been recorded as deferred revenue as of December 31, 2016, and June 30, 2016. On January 6, 2010, the Company and Cook mutually agreed to suspend work on the PFO project and, accordingly, the Company does not anticipate receiving any additional payments or recording any additional revenue related to this agreement in the foreseeable future.

NOTE 8 – NOTE PAYABLE

In connection with the Distribution Agreement with Century (see Note 7), the Company entered into a secured note purchase agreement and a related security agreement pursuant to which Century agreed to loan to the Company up to an aggregate of $4.0 million, which amount was received in the fiscal year ended June 30, 2012, and the secured note purchase agreement was amended effective July 1, 2014, to extend the principal due date by two years.  Under this facility, the Company received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. This note bears 5% annual interest which is payable quarterly in arrears on the last business day of March, June, September and December of each year through September 30, 2018, the maturity date when the total $4.0 million of principal becomes due. The debt issuance discount of approximately $2.1 million is reflected as a reduction in long-term debt and is being amortized as interest expense over the term of the note using the effective interest method. The note is secured by substantially all of the Company's assets, including the Company’s intellectual property related to the PAS-Port® Proximal Anastomosis System, but excluding all other intellectual property, until the note is repaid. There are no covenants associated with this debt.

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In August 2016, Century asserted that the Company had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that the Company entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that the Company owes Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to $0.8 million as of December 31, 2016.

The Company does not agree with Century’s assertions as the Company believes it had notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since August 2016, both the Company and Century have maintained their respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. The Company does not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of December 31, 2016. Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount ($0.7 million at December 31, 2016).

As of December 31, 2016, and June 30, 2016, the balance of the loan was $3.3 million and $3.1 million net of debt issuance costs of $0.7 million and $0.9 million, respectively, and the distribution of the microcutter products had not begun for the respective periods.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Operating Lease

On November 11, 2010, the Company entered into an amendment to its facility lease (the “Lease Amendment”). Pursuant to the latest Lease Amendment, the term was extended through August 31, 2018 and the Company was granted an option to further extend the lease for a period of three years beyond August 31, 2018, with the annual rent payable by the Company during the such period to be equal to the annual rent for comparable buildings. Under the operating lease, the Company is required to maintain a letter of credit with a restricted cash balance at the Company’s bank. A certificate of deposit of $0.1 million was recorded as restricted cash in the condensed consolidated balance sheet as of December 31, 2016, and June 30, 2016, related to the letter of credit.

Future minimum lease payments under the Company’s non-cancelable operating leases having initial terms of a year or more as of December 31, 2016, including the Second Lease Amendment, are as follows (in thousands):

Fiscal year ending June 30,	Operating Leases
2017 (remaining six months)	$	503
2018		1,032
2019		173
Total minimum lease payments	$	1,708

 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenue, sufficiency of cash resources or other financial items, any statement of the plans and objectives of management for future operations, any statements concerning proposed new products or licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipate,” “estimate,” ”believe,” “potential,” or “continue” or variations or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth in Item 1A below, and for the reasons described elsewhere in this report. All forward-looking statements and reasons why results may differ included in this report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.

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The following discussion of our financial condition and results of operations should be read together with our financial statements and related notes included in Part I, Item 1 of this report, and with our financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended June 30, 2016, which was filed with the Securities and Exchange Commission on October12, 2016.

Overview

We are commercializing and developing our MicroCutter 5/80™ stapler based on our proprietary “staple-on-a-strip” technology for use by thoracic, pediatric, bariatric, colorectal and general surgeons. The MicroCutter 5/80, which is currently commercially available, is a cartridge-based stapler device with a 5 millimeter shaft diameter, 80 degrees of articulation, and a 30 millimeter staple line cleared for specified indications for use in the United States, and in the European Union, or EU, for a broader range of indications for use. In July 2015, we completed an assessment by an independent market research firm of the US market for the MicroCutter 5/80 which identified a potential market opportunity exceeding $250 million annually. In addition, we estimate that the commercially available MicroCutter 5/80, along with our additional potential products, if developed, would be suited for use in approximately 1.4 million procedures annually in the United States, involving, we estimate, over four million staple cartridge deployments, three million of which we believe would be deployed in laparoscopic procedures.

In January 2016, we received FDA 510(k) clearance to use the MicroCutter 5/80 with a white reload and in July 2016, received FDA 510(k) clearance to use the MicroCutter 5/80 with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter 5/80 in surgical procedures in the small and large intestine and in the appendix. Following the 510(k) clearances, we conducted our evaluation of the MicroCutter 5/80, which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through market preference testing to validate the clinical benefits prior to broadening our commercial launch. We completed our market preference testing of the MicroCutter 5/80 with approximately 55 procedures and 200 staple cartridge deployments with reliable and consistent hemostasis (stopping of the blood flow). Following our successful evaluation of the MicroCutter 5/80, we expanded our commercial launch to a select group of customers in the U.S. and Europe. We are conducting the MicroCutter-Assisted Thoracic Surgery Hemostasis (“MATCH”) registry, a post-market surveillance registry, to evaluate the hemostasis and ease-of-use for the MicroCutter 5/80. This is a prospective, open-label, multi-center registry and we plan to enroll up to 120 patients requiring surgical stapling during a lobectomy (surgical removal of a lobe of an organ) or segmentectomy (surgical removal of a segment of a lung lobe) at leading centers in the U.S. and Europe.

We are also attempting to expand use of our MicroCutter 5/80 in the international market with selected regulatory filings. We submitted our application to Health Canada for regulatory approval of our MicroCutter XCHANGE 30 and the white cartridge reload and, in March 2016, received a medical device license to market in Canada. Although we are licensed to market the MicroCutter XCHANGE 30 with white reloads in Canada, we intend to wait until we file an amendment for the MicroCutter 5/80 with Health Canada for regulatory approval before we market the MicroCutter 5/80 in Canada. In addition, in August 2013, our exclusive distributor in Japan, Century Medical, Inc., or Century, filed for regulatory approval of our white and blue cartridge reloads with the Pharmaceuticals and Medical Devices Agency, or PMDA, in Japan and in April 2014, filed for approval for the MicroCutter XCHANGE 30 with TUV Rheinland Japan Ltd, a registered third-party agency in Japan, and received approvals in late 2014 for both reloads and stapler, to market in Japan. Also, in January 2015, Century submitted an application to PMDA relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a Vectra Liquid Crystal Polymer, or LCP, to IXEF Polyarylamide, or IXEF, and received approval in August 2015 to market in Japan. Though approvals of the MicroCutter XCHANGE 30 and reloads for marketing in Japan have been obtained, Century intends to wait until we release the MicroCutter 5/80 to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter 5/80 in Japan. We believe that the MicroCutter 5/80 is differentiated in the market compared to currently marketed staplers due to its significantly reduced size and ability to articulate up to 80 degrees.

Prior to 2009, our business focused on the design, manufacture and marketing of proprietary automated anastomotic systems used by cardiac surgeons to perform coronary bypass surgery. Our C-Port® Distal Anastomosis Systems, or C-Port systems, are sold in the United States and Europe. The C-Port systems are used to perform a distal anastomosis, which is the connection between a bypass graft vessel and the target coronary artery. As of December 31, 2016, more than 15,100 C- Port systems had been sold in the United States and Europe. We also currently sell our PAS-Port® Proximal Anastomosis System, or PAS-Port system, in the United States, Europe and Japan. The PAS-Port system is used to perform a proximal anastomosis, which is the connection of a bypass graft vessel to the aorta or other source of blood. As of December 31, 2016, more than 45,800 PAS-Port systems had been sold in the United States, Europe and Japan.

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Historically, we have generated revenues primarily from the sale of automated anastomotic systems; however, we started generating revenues from the commercial sales of the microcutter products since its introduction in Europe in December 2012, and in the United States in March 2014, and through December 31, 2016, we have generated $2.0 million of net product revenues from the commercial sales of the microcutter products.

For the six months ended December 31, 2016, we generated net revenue of $1.3 million, including $0.8 million from the sales of automated anastomotic systems, $0.3 million from commercial sales of the microcutter products, $0.1 million of license and development revenue and $35,000 of royalty revenue, and incurred a net loss of $7.6 million.

Since our inception, we have incurred significant net losses, and we expect to continue to incur net losses for at least the next several years. We have not generated significant revenues from the microcutter products. To date, our C-Port and PAS-Port systems have had limited commercial adoption, and sales have not met the levels that we had anticipated. Revenues from product sales and milestone payments were not sufficient to support the operation of our business as we had planned. If we fail to raise additional funds and to obtain broader commercial adoption of our microcutter products or C-Port and PAS-Port systems, we may be required to delay, further reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs. We continue to sell our microcutter products only to a select number of key hospitals in the United States and through distributors in Europe, and intend to continue to do so until we broadly commercially launch our MicroCutter 5/80. We intend to continue to sell our automated anastomotic systems internationally through distributors and through independent sales representatives in the United States. As such, we anticipate that our automated anastomotic systems sales revenue will remain steady or slightly increase and our microcutter product sales revenue will increase in the next few quarters.

As of December 31, 2016, we had approximately $5.8 million of cash, cash equivalents and short-term investments, and $4.0 million of debt principal outstanding.

We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted for at least the next three months, subject to the ultimate resolution of the following uncertainty.

On September 2, 2011, in connection with signing a distribution agreement with Century, we entered into a secured note purchase agreement pursuant to which Century loaned us an aggregate of $4.0 million, with the principal originally due on September 30, 2016, subject to certain conditions. Effective on July 1, 2014, the principal due date was extended to September 30, 2018.  

In August 2016, Century asserted that we had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that we entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that we owe Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if we immediately repay the loan. Such interest would amount to $0.8 million as of December 31, 2016.

We do not agree with Century’s assertions as we believe that we notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since August 2016, both we and Century have maintained our respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. We do not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, we have not changed the classification of the note as a noncurrent liability as of December 31, 2016. Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, we have not accelerated amortization of the remaining note discount ($0.7 million at December 31, 2016). If we are required to repay our $4.0 million loan from Century along with the related penalty interest prior to September 30, 2018, we will not have cash, cash equivalents and short-term investments sufficient to meet our cash needs, which would severely impair our ability to continue our business unless we are able to raise other funds to repay this debt.

We may be able to extend these time periods to the extent that we decrease our planned expenditures, or raise additional capital. We have based our estimate as to the sufficiency of our cash resources on assumptions that may prove to be wrong, including assumptions with respect to the level of revenue from product sales and the cost of product development, and our assumptions related to the future resolution of Century’s assertion that the note was to be repaid in 2014. The sufficiency of our current cash resources and our need for additional capital, and the timing thereof, will depend on many factors, including the extent of our ongoing research and development programs and related costs, including costs related to continued development of the MicroCutter 5/80, our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof, market acceptance and adoption of our current products or any future products that we may develop or commercialize, our level of revenues, costs associated with our sales and marketing initiatives and manufacturing activities, costs and timing of obtaining and maintaining FDA, and other regulatory clearances or approvals for our products and potential additional products, securing, maintaining and enforcing intellectual property rights and the costs thereof, the effects of competing technological and market developments, and costs related to the potential repayment of our note to Century.

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In order to satisfy our longer term liquidity requirements, we may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one or more of our commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights superior to our existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders.

Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our continuation as a going concern is contingent upon our ability to generate revenue and cash flow to meet our obligations on a timely basis and our ability to raise financing. Our plans will be adversely impacted if we fail to raise financing. However, there can be no assurance that we will be able to raise such funds. Failure to obtain future funding on acceptable terms would adversely affect our ability to fund operations and continue as a going concern. These matters raise substantial doubt about our ability to continue in existence as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Agreements with Century

On September 2, 2011, we signed a distribution agreement, or the Distribution Agreement, with Century, with respect to distribution of our planned microcutter products in Japan.  Under the terms of a secured note purchase agreement entered into at the time of the Distribution Agreement, Century agreed to loan us an aggregate of up to $4.0 million, with principal due on September 30, 2016, subject to certain conditions, which principal due date was extended to September 30, 2018, effective July 1, 2014.   Under this facility, we received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. The note bears 5% annual interest which is payable quarterly in arrears on the last business day of March, June, September and December of each year through September 30, 2018, the maturity date when the total $4.0 million of principal becomes due. The timing of the repayment of the principal is subject to an uncertainty because in August 2016 Century asserted that we had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that we entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that we owe Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if we immediately repay the loan. Such interest would amount to $0.8 million as of December 31, 2016.

We do not agree with Century’s assertions as we believe that we notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since August 2016, both we and Century have maintained our respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. We do not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, we have not changed the classification of the note as a noncurrent liability as of December 31, 2016. Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, we have not accelerated amortization of the remaining note discount ($0.7 million at December 31, 2016). Please see additional details related to this uncertainty in the “Overview” above. In return for the loan commitment, we granted Century distribution rights to our planned microcutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for microcutter products. After approval for marketing in Japan, we would sell microcutter units to Century, which would then sell the microcutter devices to their customers in Japan.

Proceeds from the note and granting the distribution rights were allocated to the note based on their aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 18%, which we estimated was a market rate of borrowing that could be obtained by companies with credit risk similar to ours. The remainder of the proceeds of $1.6 million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized over the term of the Distribution Agreement, beginning upon the first sale by Century of microcutter products in Japan which had not occurred as of December 31, 2016.

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In addition, our distribution agreement with Century pertaining to the PAS-Port system, originally dated June 16, 2003, was last amended effective July 1, 2014. The last amendment, among other things, renewed the contract for another five years, extending the expiration date to July 31, 2019. The note amendment was accounted for as the modification of the 2011 note agreement, as the value of the consideration provided by us in the form of additional distribution rights was estimated to be approximately equal to the reduction in the fair value of the note. Accordingly, we reduced the carrying value of the note of $3.1 million to its post-modification fair value of $2.6 million, and recorded the resulting incremental discount of $0.5 million as deferred revenue. We determined the fair value of the amended note using the discount rate of 18%, which we estimated as the market rate of borrowing as of the modification date that could be obtained by companies with credit risk similar to us. The incremental discount of $0.5 million will be amortized over the remaining term of the note using the effective interest rate method. The deferred revenue will be recognized over the term of the distribution agreement beginning upon the first sale by Century of the microcutter products in Japan.

Agreements with Intuitive Surgical

On August 16, 2010, we entered into a license agreement, or License Agreement, with Intuitive Surgical Operations, Inc., or Intuitive Surgical, pursuant to which we granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use our intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of $9.0 million. We are also eligible to receive a contingent payment if sales of any products incorporating our patent rights achieve a specified level of net sales within a specified period after the date of the License Agreement, as well as single-digit royalties on sales by Intuitive Surgical, its affiliates or its sublicensees of specified stapler and clip applier products covered by our patent rights as well as on sales of certain other products covered by our patent rights that may be developed in the future, if any.  Each party has the right to terminate the License Agreement in the event of the other party’s uncured material breach or bankruptcy.  Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and, except in the case of termination for our uncured material breach or insolvency, Intuitive Surgical’s payment obligations will continue as well.  Under the License Agreement, Intuitive Surgical has rights to improvements in our technology and intellectual property over a specified period of time.

In addition, on the same date, we entered into a stock purchase agreement with Intuitive Surgical pursuant to which Intuitive Surgical paid $3.0 million to purchase from us an aggregate of 124,954 shares of our common stock, or the Stock Issuance. The net proceeds recorded to stockholders’ equity based upon the fair value of our common stock on August 16, 2010, were approximately $2.0 million after offering expenses.  From the premium paid of $1.0 million and the upfront license fee payment of $9.0 million, $0, $0 and $41,000 have been recorded as license and development revenue for the fiscal years ended June 30, 2016, 2015 and 2014, respectively. We have fully recognized such revenue, and as of June 30, 2016 and 2015, there was no deferred revenue related to this arrangement. There were no underwriters or placement agents involved with the Stock Issuance, and no underwriting discounts or commissions or similar fees were payable in connection with the Stock Issuance.

On December 31, 2015, we and Intuitive Surgical amended the license agreement, which was initially signed in August 2010, to include, among other things, an agreement providing for a feasibility evaluation and potential development of a surgical stapling cartridge for use with Intuitive Surgical’s da Vinci Surgical Systems. Under the terms of the amendment, Intuitive Surgical paid a one-time, non-refundable and non-creditable payment of $2.0 million to extend its rights to improvements in our stapling technology and certain patents until August 16, 2018, and to provide for a feasibility evaluation period from December 31, 2015 to June 30, 2016. In addition, the amendment provides that each of the parties releases the other party from any claims they have or may have against the other party.

The feasibility evaluation allowed Intuitive Surgical six months to test and evaluate our microcutter technology and it was completed successfully in August 2016, when Intuitive Surgical exercised its option to initiate a joint development program for an 8-millimeters-in-diameter surgical stapling cartridge for use with the da Vinci Surgical System. We and Intuitive Surgical entered into a joint development program in which Intuitive Surgical will be responsible for the development work on the stapler and we will be responsible for the development work on the stapler cartridge. Pursuant to the agreement, we will receive further funding for development of the cartridge and tooling as well as a unit-based royalty on commercial sales.

We determined that there were two substantive deliverables under the amended license agreement representing separate units of accounting: license rights to technology that existed as of December 30, 2015; and license rights to technology that may be developed over the following two years. We aggregated the $2.0 million payment from the amended license agreement and allocated to the two units of accounting based upon the relative estimated selling prices of the deliverables. We determined the relative estimated selling prices of the deliverables using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes, which approximates fair value based on Level 3 unobservable inputs. Based upon the relative estimated selling prices of the deliverables, we allocated $1.4 million of the total consideration of $2.0 million to the license rights to technology that existed as of December 30, 2015, that was recognized as revenue in the three months ended March 31, 2016, and allocated $0.6 million to technology that may be developed over the following two years that was being recognized as revenue ratably over that two year period. As of December 31, 2016, we recognized a total of $1.5 million of license and development revenue and as of December 31, 2016, and we had deferred revenue of $0.5 million related to this amended license agreement. Also, as of December 31, 2016, we recorded $0.1 million of license and development revenue related to this joint development program as the terms were fixed and determinable.

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates.

There were no significant changes to our critical accounting policies and significant judgments and estimates as set forth in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission on October 12, 2016.

Reverse Stock Split

On February 16, 2016, we effected a one-for-ten reverse split of our outstanding common stock (the “Reverse Split”) and to reduce the number of outstanding shares of common stock from 89,344,777 to 8,934,452. Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, we reclassified our consolidated balance sheets total par value of approximately $80,000 from common stock to additional paid-in capital for the reporting periods.

All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.

 Results of Operations

Comparison of the three and six months ended December 31, 2016 and 2015

Net Revenue. Total net revenue was $0.8 million and $1.3 million for the three and six months ended December 31, 2016, compared to $0.7 million and $1.5 million for the same periods in 2015. Product sales for the three months ended December 31, 2016 and 2015 were constant at $0.7 million. For the six months ended December 31, 2016, product sales decreased by $0.3 million, or 21%, to $1.1 million, compared to $1.4 million for the same period in 2015. The decrease in products sales was primarily due to lower automated anastomotic systems sales of $0.3 million, offset in part by a slight increase of $50,000 in microcutter product sales.

License and development revenue from our agreement with Intuitive Surgical and royalty revenue increased to $0.1 million for the three and six months ended December 31, 2016, compared to $17,000 and $35,000 of royalty revenue for the same periods in 2015. The increase for the three months ended December 31, 2016, was primarily attributable to the $26,000 of revenue recognized on the $2.0 million received under the Intuitive Surgical amended license agreement, and $57,000 related to the joint development program. The increase for the six months ended December 31, 2016, was primarily attributable to the $52,000 of revenue recognized on the $2.0 million received under the Intuitive Surgical amended license agreement, and $57,000 related to the joint development program.

For the three months ended December 31, 2016 and 2015, sales of automated anastomosis systems to Century in Japan accounted for approximately 17% and 39%, respectively, of our total product sales, and for the six months ended December 31, 2016 and 2015, approximately 16% and 30% , respectively, of our total product sales.For the three months ended December 31, 2016 and 2015, sales of automated anastomosis systems to Herz-Und Diabeteszentrum in Germany accounted for approximately 11% and 11%, respectively, of our total product sales, and for the six months ended December 31, 2016 and 2015, approximately 14% and 11%, respectively, of our product sales.

Cost of Product Sales. Cost of product sales consists primarily of material, labor and overhead costs. Cost of product sales increased slightly by $51,000, or 6%, for the three months ended December 31, 2016, compared to the same period in 2015, remaining at approximately $0.9 million. Cost of product sale for the six months ended December 31, 2016, decreased by $0.5 million, or 24%, to $1.4 million, compared to $1.9 million for the same period in 2015. The decrease in cost of product sales for the six months ended December 31, 2016, was primarily driven by the lower number of units sold for automated anastomotic systems.

We anticipate that cost of product sales will increase in absolute terms in the next few quarters, as sales grow and will fall as a percentage of sales as economies of scale are realized.

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Research and Development Expense. Research and development expense relates primarily to the development of our microcutter product line and largely consists of personnel costs within our product development, regulatory and clinical groups and the costs for tooling used to facilitate research and development. Research and development expense decreased by $0.2 million, or 14%, to $1.4 million for the three months ended December 31, 2016, compared to $1.6 million for the same period in 2015. Research and development expense decreased by $0.1 million, or 2%, to $3.1 million for the six months ended December 31, 2016, compared to $3.2 million for the same period in 2015. The decreases for both periods were primarily attributable to a decrease in materials purchases and lower clinical study expenses as the MicroCutter XCHANGE 30 expanded vascular indications use clinical study was completed, offset in part by higher non-cash stock compensation expenses due to market volatility, adjustments for terminated employees and issuance of restricted stock units in lieu of fiscal year 2016 bonus cash payout.

We anticipate that research and development expenses will increase slightly in absolute terms in the next few quarters due to clinical trial, product testing, recruiting and tooling expenses related to the microcutter products development.

Selling, General and Administrative Expense. Selling, general and administrative expenses decreased by $0.2 million, or 9%, to $2.0 million for the three months ended December 31, 2016, compared to $2.2 million for the same period in 2015. The decrease was attributable to a decrease in professional outside services of $0.3 million relating to product marketing and legal services, partially offset by higher salaries and non-cash stock compensation expenses of $0.1 million.

Selling, general and administrative expenses decreased by $0.8 million, or 17%, to $4.0 million for the six months ended December 31, 2016, compared to $4.8 million for the same period in 2015. The decrease was attributable to a decrease in professional outside services of $0.8 million relating to product marketing and legal services, a decrease in salaries and benefits expenses of $0.3 million due to severance pay, a decrease in other expenses of $0.1 million, partially offset by higher non-cash stock compensation expenses of $0.2 million due to market volatility, adjustments for terminated employees and issuance of restricted stock units in lieu of fiscal year 2016 bonus cash payout and higher demo expenses of $0.2 million.

 We expect selling, general and administrative expense to increase slightly in absolute terms in the next few quarters as we increase our sales and marketing team to commercialize our microcutter products.

Interest Expense. Interest expense was $0.1 million and $0.3 million for the three and six months ended December 31, 2016, compared to $0.1 million and $0.2 million for the same periods in 2015. The increase of $0.1 million for the six months ended December 31, 2016, was primarily due to higher imputed interest expenses relating to Century’s note as it approaches its due date. We expect interest expense to increase in future periods as the notes payable to Century are scheduled to mature on September 30, 2018, and the debt discount is accreted using the effective interest method.

Off-Balance Sheet Arrangements

      As of December 31, 2016, we did not have any off-balance sheet arrangements, including structured finance, special purpose or variable interest entities.

Liquidity and Capital Resources

As of December 31, 2016, our accumulated deficit was $213.3 million and we had cash, cash equivalents and short-term investments of $5.8 million, with $4.0 million debt principal outstanding. As of June 30, 2016, we had cash, cash equivalents, and short-term investments of $12.7 million, with $4.0 million debt principal outstanding. We currently invest our cash, cash equivalents and short-term investments primarily in money market funds, commercial paper and corporate debt securities. Since inception, we have financed our operations primarily through private and public sales of convertible preferred stock, long-term notes payable, public and private sales of common stock, warrants to purchase common stock and license or collaboration agreements

On September 2, 2011, we entered into a Distribution Agreement with Century, with respect to distribution of our planned microcutter products in Japan.  Additionally, Century loaned us $4.0 million. In 2014, the loan was extended by two years to September 30, 2018. In return for the loan commitment, we granted Century distribution rights to our planned microcutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for the microcutter product line. After approval for marketing in Japan, we would sell microcutter products to Century, who would then sell them to their customers in Japan.

Under this facility, we received $4.0 million in 2011. The note, as amended, bears 5% annual interest which is payable quarterly in arrears on the last business day of March, June, September and December of each year through September 30, 2018, the maturity date when the total $4.0 million of principal becomes due. Proceeds from the note and granting the distribution rights were allocated to the note based on its aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 18%, which we estimated approximated a market rate of return on debt financing that could be obtained by companies with credit risk similar to us. The remainder of the proceeds of $1.6 million, and the additional $0.5 million due to the two years extension, were allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized on a straight-line basis over the term of the Distribution Agreement, beginning upon the first sale by Century of the microcutter products in Japan which had not occurred as of December 31, 2016. In 2015, Century received approvals to market the MicroCutter XCHANGE 30 and reloads, but intends to wait until we release the MicroCutter 5/80 to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter 5/80 in Japan.

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In August 2016, Century asserted that we had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that we entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that we owe Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if we immediately repay the loan. Such interest would amount to $0.8 million as of December 31, 2016. We do not agree with Century’s assertions and are currently in discussions with Century to resolve this matter.

Summary cash flow data is as follows (in thousands):

	Six months ended
	December 31,
	2016			2015
Net cash used in operating activities	$	(6,908	)	$	(6,478	)
Net cash provided by investing activities		8,385			4,595

      Our net use of cash in operating activities for the six months ended December 31, 2016, was primarily attributable to our net loss adjusted for non-cash items primarily due to the development of the microcutter product line, an increase in accounts receivable of $0.2 million mainly related to $0.1 million products sold to a customer in Germany and $0.1 million license and development receivable relating to Intuitive Surgical joint development program, a decrease of accrued compensation of $0.2 million relating to severance expenses and an increase in inventories of $0.4 million due to inventory management relating to product shortage for the MicroCutter 5/80 units, offset in part by an increase in accounts payable and accrued liabilities of $0.1 million, and a decrease in prepaid expenses and other current assets of $0.2 million mainly relating to the amortization of our annual insurance premiums which were recently renewed.. Our net use of cash in operating activities for the six months ended December 31, 2015, was primarily attributable to our net loss adjusted for non-cash items primarily due to the development of the microcutter product line and the improvements of the MicroCutter XCHANGE 30 and an increase in accounts receivable of $0.1 million due to higher product sales, offset by an increase in accrued compensation of $0.5 million relating to severance expenses, an increase in accounts payable and accrued liabilities of $0.3 million in part relating to clinical expenses for the expanded indications for use in vascular structures, and a decrease in inventories of $0.4 million due to lower sales production.

      Net cash provided by investing activities for the six months ended December 31, 2016, was mainly due to the net maturities of investments of $8.4 million. Net cash provided by investing activities for the six months ended December 31, 2015, was mainly due to the net maturities of investments of $4.7 million, offset by capital equipment purchases of $0.1 million mainly related to our microcutter design changes which required tooling modifications.

We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted through at least the next three months, subject to the ultimate resolution of the uncertainty related to the timing of repayment of the outstanding loan to Century. As discussed above, if we are required to repay our $4.0 million loan from Century along with the related penalty interest prior to September 30, 2018, we will not have cash, cash equivalents and short-term investments sufficient to meet our cash needs, which would severely impair our ability to continue our business unless we are able to raise other funds to repay this debt. We would be able to extend these time periods to the extent that we decrease our planned expenditures, or raise additional capital. We have based our estimate on assumptions that may prove to be wrong, including assumptions with respect to the level of revenue from product sales, and the cost of product development, including the process for obtaining FDA approval for the commercial use of our microcutter products in the United States and internationally, and we could exhaust our available financial resources sooner than we currently expect.

Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our continuation as a going concern is contingent upon our ability to raise financing. Our plans may be adversely impacted if we fail to raise financing. We may resort to contingency plans to make these needed cost reductions upon determination that funds will not be available in a timely matter. These contingency plans include consolidating certain functions or disposing of non-core or underperforming assets. However, there can be no assurance that we will be able to raise such funds. Failure to obtain future funding on acceptable terms would adversely affect our ability to fund operations and continue as a going concern. These matters raise substantial doubt about our ability to continue in existence as a going concern.

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The sufficiency of our current cash resources and our need for additional capital, and the timing thereof, will depend upon numerous factors. These factors include, but are not limited to, the following:

● the extent to which we are able to raise additional capital in any equity, debt or licensing transaction;

● market acceptance of our MicroCutter 5/80 in Europe and in the United States once we improve the supply chain to enable the broader commercial launch;

● the extent of our ongoing enhancements of the MicroCutter 5/80, including alterations and post-commercialization improvements based on early adopter experience with this newly commercial product;

● the extent of our ongoing research and development programs and related costs, including costs related to the development of additional products and features in our planned microcutter product line;

● our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof;

● market acceptance and adoption of our future products that we may commercialize;

● our level of revenues;

● costs associated with our sales and marketing initiatives and manufacturing activities;

● costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products;

● securing, maintaining and enforcing intellectual property rights and the costs thereof;

● the effects of competing technological and market developments; and

● the timing of repayment of the principal of our $4.0 million loan to Century, and whether we are required to pay the penalty interest (which would amount to $0.8 million as of December 31, 2016).

As part of our controlled commercial launch of the MicroCutter XCHANGE 30 in Europe and in the United States, we made our first sales in December 2012 and March 2014, respectively. We have agreements for the microcutter product line with four distributors in Europe. In addition, in August 2014, we established a subsidiary in Germany, Cardica, GmbH, and changed it to Dextera Surgical GmbH, to facilitate direct sale of the microcutter product. We intend to broaden our launch of the MicroCutter 5/80 before continuing our efforts to develop other planned microcutter products. We cannot predict when, if ever, we will generate significant commercial revenue from the sale of the MicroCutter 5/80 or any other planned microcutter products. Because we do not anticipate that we will generate sufficient product sales to achieve profitability for at least the next few years, if at all, we will need to raise substantial additional capital to finance our operations in the future.  Until we can generate significant continuing revenue, if ever, we expect to satisfy our future cash needs with public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. To raise capital, we may seek to sell additional equity or debt securities, obtain a credit facility or enter into product development, license or distribution agreements with third parties or divest one or more of our commercialized products or products in development.  However, we cannot be certain that additional funding of any kind will be available on acceptable terms, or at all. The sale of additional equity or convertible debt securities could result in significant dilution to our stockholders, particularly in light of the prices at which our common stock has been recently trading. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We may not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders. If adequate funds are not available or revenue from product sales do not increase, we would be required to reduce our workforce, delay, reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs in advance of the date on which we would exhaust our cash, cash equivalents and short-term investments, to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve stockholder value.

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Contractual Obligations

Our future contractual obligations at December 31, 2016, were as follows (in thousands):

Contractual Obligations	Total		Less than		1 – 3 years		3 – 5 years		More than
			1 year						5 years
Operating lease	$	1,708	$	1,017	$	691	$	—	$	—
Note payable, including interest(1)		4,349		200		4,149		—		—
Purchase commitments		776		776		—		—		—
Total	$	6,833	$	1,993	$	4,840	$	—	$	—

(1) Timing of repayment of the note payable is based on its contractual maturity of September 30, 2018. See “Liquidity and Capital Resources,” for a discussion of Century’s demand for earlier payment.

This compares to our future contractual obligations as of June 30, 2016, of $7.0 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      During the three months ended December 31, 2016, there were no material changes to our market risk disclosures as set forth in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission on October 12, 2016.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

      Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended) were effective as of December 31, 2016.

Changes in Internal Control over Financial Reporting

      There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

      A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our internal control over financial reporting, including our disclosure controls and procedures, are designed to provide reasonable, not absolute, assurance that the objectives of our internal control over financial reporting, including our disclosure control system, are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our internal control over financial reporting, including our disclosure controls and procedures, were effective to provide reasonable assurance that the objectives of our internal control over financial reporting, including our disclosure control system, were met. We continue to implement, improve and refine our disclosure controls and procedures and our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

      We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. The risks described below are not the only ones we face. Additional risks not currently known to us or that we currently believe are immaterial may also significantly impair our business operations. Although we have revised the text of some of the risk factors set forth below, the underlying risks have not changed materially from the risks described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, other than the ones that we have marked with an asterisk (*).

Risks Related to Our Finances and Capital Requirements

We require substantial additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts and could cause us to cease operations. We cannot be certain that funds will be available and, if they are not available, we may not be able to continue as a going concern which may result in actions that could adversely impact our stockholders.

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Our development efforts have consumed substantial capital to date. As of December 31, 2016, we had approximately $5.8 million of cash, cash equivalents and short-term investments, and $4.0 million of debt principal outstanding. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs to enable us to conduct our business substantially as currently conducted for at least the next three months, subject to the ultimate resolution of the following uncertainty.

On September 2, 2011, in connection with signing a distribution agreement with Century, we entered into a secured note purchase agreement pursuant to which Century loaned us an aggregate of $4.0 million, with the principal originally due on September 30, 2016, subject to certain conditions. Effective on July 1, 2014, the principal due date was extended to September 30, 2018.  

In August 2016, Century asserted that we had an obligation to repay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that we entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further has asserted that we owe Century penalty interest at the incremental rate of 7% per annum, but has offered to waive it if we immediately repay the loan. Such interest would amount to $0.8 million as of December 31, 2016.

We do not agree with Century’s assertions as we believe that we notified Century of the financing that occurred in April 2014 and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since August 2016, both we and Century have maintained our respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. We do not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, we have not changed the classification of the note as a noncurrent liability as of December 31, 2016. Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, we have not accelerated amortization of the remaining note discount ($0.7 million at December 31, 2016). If we are required to repay our $4.0 million loan from Century along with the related penalty interest prior to September 30, 2018, we will not have cash, cash equivalents and short-term investments sufficient to meet our cash needs, which would severely impair our ability to continue our business unless we are able to raise other funds to repay this debt.

We may be able to extend these time periods to the extent that we decrease our planned expenditures, or raise additional capital. We have based our estimate as to the sufficiency of our cash resources on assumptions that may prove to be wrong.

Because we do not anticipate that we will generate sufficient product sales to achieve profitability for the next several years, if at all, we will need to raise substantial additional capital to finance our operations in the future. To raise capital, we may seek to sell additional equity or debt securities, obtain a credit facility or enter into product development, license or distribution agreements with third parties or divest one or more of our commercialized products or products in development. However, we cannot be certain that additional funding of any kind will be available on acceptable terms, or at all. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our Series A preferred stock and common stock and could contain covenants that would restrict our operations. Any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights, including with respect to commercialized products or products in development that we would otherwise seek to commercialize or develop ourselves. We may not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. Our need to raise capital may require us to accept terms that may harm our business or be disadvantageous to our current stockholders. If adequate funds are not available or revenue from product sales do not increase, we would be required to further reduce our workforce, delay, reduce the scope of or eliminate our commercialization efforts with respect to one or more of our products or one or more of our research and development programs. Failure to raise additional capital may result in our ceasing to be publicly traded or ceasing operations.

We have a history of net losses, which we expect to continue for the foreseeable future, and we are unable to predict the extent of future losses or when we will become profitable, if at all.

We have incurred annual net losses since our inception in October 1997.  As of December 31, 2016, our accumulated deficit was approximately $213.3 million. We expect to incur substantial additional losses until we can achieve significant commercial sales of our products, which depend upon a number of factors, including increased commercial sales of our C-Port and PAS-Port systems, as well as increased sales of our commercially launched microcutter products in Europe and in the United States.

      Our ability to become and remain profitable depends upon our ability to generate significantly higher product sales. Our ability to generate significant and sustained revenue depends upon a number of factors, including:

● achievement of broad acceptance for the MicroCutter 5/80 in Europe and in the United States, as well as any future products that we may commercialize;

● achievement of international and U.S. regulatory clearance or approval for additional products; and

● successful sales, manufacturing, marketing and distribution of our products.

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Historically, we have generated revenues primarily from the sale of automated anastomotic systems; however, we started generating revenues from the commercial sales of the MicroCutter XCHANGE 30 in Europe in December 2012, and in the United States in March 2014, and through December 31, 2016, we have generated $2.0 million of net product revenues from the commercial sales of microcutter products. Sales of our products, license and development and royalty activities generated revenues of only $1.3 million and $1.5 million for the six month periods ended December 31, 2016 and 2015, respectively. Sales of our products, license and development and royalty activities generated revenues of $4.1 million, $3.0 million and $3.6 million for fiscal years 2016, 2015 and 2014, respectively. We will continue to sell our automated anastomotic systems internationally through distributors and through independent sales representatives in the United States. As such, we do not anticipate that we will generate significantly higher products sales in the next few quarters.

Our cost of product sales were 130% and 135% of our net product sales for the six month periods ended December 31, 2016 and 2015, respectively, and 154%, 145% and 136% of our net product sales for fiscal years 2016, 2015 and 2014, respectively. We expect higher cost of product sales relative to revenue from product sales for the foreseeable future due to costs associated with commercializing our MicroCutter 5/80. If, over the long term, we are unable to reduce our cost of producing goods and expenses relative to our net revenue, we will not achieve profitability even if we are able to generate significant product sales. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.

Our independent registered public accounting firm has indicated that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.

Our audited financial statements for the fiscal year ended June 30, 2016, were prepared on a basis that our business would continue as a going concern in accordance with United States generally accepted accounting principles. This basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, our independent registered public accounting firm has indicated in their audit report on our fiscal 2016 financial statements that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern. We will be forced to delay or reduce the scope of our microcutter development program and/or limit or cease our operations if we are unable to raise substantial additional funding to meet our working capital needs. However, we cannot guarantee that we will be able to obtain sufficient additional funding or that such funding, if available, will be obtainable on terms satisfactory to us. In the event that these plans cannot be effectively realized, there can be no assurance that we will be able to continue as a going concern.

Existing lenders may have rights to our assets that are senior to our stockholders.

      An existing debt arrangement with our current distributor and lender Century under which, as of December 31, 2016, $4.0 million of principal is outstanding, as well as potential future arrangements with other lenders, allow or may allow these lenders to have priority over our stockholders to our assets, including our intellectual property should we be in default of our obligations to the lenders. The proceeds of any sale or liquidation of our assets under these circumstances would be applied first to any of our debt obligations.

Our quarterly operating results and stock price may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. The revenue we generate, if any, and our operating results will be affected by numerous factors, many of which are beyond our control, including:

● the trading volume of our stock;

● the extent to which we are able to raise additional capital in any equity, debt or licensing transaction;

● market acceptance of our MicroCutter 5/80 in Europe and the United States once we improve the supply chain to enable the broader commercial launch;

● the extent of our ongoing enhancements of the MicroCutter 5/80, including alterations and post-commercialization improvements based on early adopter experience with this newly commercial product;

● the extent of our ongoing research and development programs and related costs, including costs related to the development of additional products and features in our planned microcutter product line;

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● our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof;

● market acceptance and adoption of future products that we may commercialize;

● our level of revenues;

● costs associated with our sales and marketing initiatives and manufacturing activities;

● costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products;

● securing, maintaining and enforcing intellectual property rights and the costs thereof;

● the effects of competing technological and market developments; and

● the timing of repayment of the principal of our $4.0 million loan to Century, and whether we are required to pay the penalty interest (which would amount to $0.8 million as of December 31, 2016).

   Quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

Risks Related to Our Business

The current unit costs for our products are very high, and if we are not able to bring them down we will suffer from price competition and may not become profitable.

The current unit costs for our products, based on limited manufacturing volumes, are very high and for the MicroCutter 5/80 are in excess of revenues per unit. Our cost of product sales were 130% and 135% of our net product sales for the six month periods ended December 31, 2016 and 2015, respectively, and 154%, 145% and 136% of our net product sales for fiscal years 2016, 2015 and 2014, respectively. It will be necessary to achieve economies of scale to become profitable. Certain of our manufacturing processes are labor intensive, and achieving significant cost reductions will depend in part upon reducing the time required to complete these processes. We cannot assure you that we will be able to achieve cost reductions in the manufacture of our products and, without these cost reductions, our business may never achieve profitability.

      We have considered, and will continue to consider as appropriate, manufacturing in-house certain components currently provided by third parties, as well as implementing new production processes. Manufacturing yields or costs may be adversely affected by the transition to in-house production or to new production processes, when and if these efforts are undertaken, which would materially and adversely affect our business, financial condition and results of operations.

We are dependent upon the commercial success of our MicroCutter 5/80 in Europe and in the United States which, if not successful, could prevent us from successfully commercializing our other potential future products.

We have expended significant time, money and effort in the development of our microcutter product line and, in particular, our MicroCutter 5/80. If we are not successful in improving the performance of the MicroCutter 5/80 and achieving market adoption of the MicroCutter 5/80 in Europe and the United States, we may never generate substantial revenue from this product line, and our business, financial condition and results of operations would be materially and adversely affected, and we may be forced to cease operations. We anticipate that our ability to increase our revenue significantly will depend on the continued adoption of the MicroCutter 5/80 in Europe, and adoption of the MicroCutter 5/80 in the United States, and our ability to expand our microcutter product line.

A number of factors will influence our ability to gain clinical adoption of the MicroCutter 5/80 and any future microcutter products:

● in many surgical specialties, the use of laparoscopic and open surgical stapling devices is routine in clinical practice and an accepted standard of care. Two large companies, Johnson & Johnson and Covidien, now part of Medtronic, dominate the market for surgical stapling devices. For our products to be clinically adopted, they must show benefits that are significant enough for surgeons to communicate their preference and to overcome any constraints on their hospitals’ ability to purchase competing products, such as purchasing contracts, to buy one of our stapling products to replace a competing device;

● our microcutter products must demonstrate the degree of reliability that surgeons have experienced with products that they have been using for years;

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● market acceptance of our products also depends on our ability to demonstrate consistent quality and safety of our products;

● if physicians are not able to use our microcutter products properly, or use them on tissue thicknesses for which they are not designed, adoption of our microcutter products may be negatively impacted;

● any recalls may impact physicians’ and hospitals’ perception of our products;

● we will need to demonstrate the cost-effectiveness of our products, including against branded, patent protected products, as well as any generic stapling products similar to currently commercially available products following expiration of patents on our competitors’ products;

● our ability to reduce our costs of manufacturing the MicroCutter 5/80;

● our ability to increase our sales force; and

● our ability to address the need for improvements in response to feedback from physicians, if any.

We cannot predict when, if ever, we will generate significant commercial revenue from the sale of the MicroCutter 5/80 or any other potential future products or anticipated features in our microcutter product line. If we fail to achieve significant growth in market adoption of the MicroCutter 5/80, our ability to develop our other planned microcutter products, if at all, will be delayed, which would further harm our business.

We are dependent upon the success of our C-Port and PAS-Port systems to generate revenue in the near term, and sales of our C-Port and PAS-Port systems have not met the levels that we had anticipated and if we are unable to increase sales of our C-Port and PAS-Port systems, our business will be harmed.

We have expended significant time, money and effort in the development of our current commercial products used by cardiac surgeons to perform coronary bypass surgery, the C-Port and the PAS-Port systems. We commenced sales of our C-Port xA system in December 2006 (after introduction of our original C-Port system in January 2006) and our C-Port Flex A in April 2007. We commenced U.S. sales of our PAS-Port system in September 2008. To date, our anastomosis products have not gained, and we cannot assure you that our anastomosis products or any other products that we may develop will gain, any significant degree of market acceptance among physicians or patients. We believe that recommendations by physicians will be essential for market acceptance of our products; however, we cannot assure you that significant recommendations will be obtained. Physicians will not recommend our products unless they conclude, based on clinical data and other factors, that the products represent a safe and acceptable alternative to other available options. In particular, physicians may elect not to recommend using our anastomosis products in surgical procedures until such time, if ever, as we successfully demonstrate with long-term data that our products result in patency rates comparable to or better than those achieved with hand-sewn anastomoses, and we resolve any technical limitations that may arise. Further, if physicians have negative experiences with our anastomosis products in surgical procedures, whether due to the fault of our anastomosis products or the physician, the adoption of these products could be negatively impacted.

To date we have generated revenues almost exclusively from the sale of automated anastomotic systems, and have generated minimal revenues from the commercial sales of the microcutter products since its December 2012 introduction in Europe and March 2014 introduction in the United States, and do not expect to generate substantial revenue in the near term. Consequently, if we are not successful in increasing commercial adoption of our C-Port and PAS-Port systems, we may never generate substantial revenue, our business, financial condition and results of operations would be materially and adversely affected, and we may be forced to cease operations.   

The limitations on the indications for use for the MicroCutter 5/80 will limit our promotional activities, which could inhibit our success in commercializing the MicroCutter 5/80 and could expose us to potential off-label risks or adverse events, including fines, penalties, injunctions or product liability claims if our products are used off-label or we are determined to be promoting the use of our products for unapproved or “off-label” uses.

Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of the off-label use of our products. Healthcare providers may use our products off-label, as the FDA and foreign regulatory authorities do not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA or foreign regulatory authority determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could result in substantial damage awards against us and harm our reputation.

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We have limited clinical data regarding the safety and efficacy of the MicroCutter 5/80. Any data that is generated in the future may not be positive or consistent with our existing data, which would affect market acceptance and the rate at which the MicroCutter 5/80, and any future microcutter products, are adopted.

The success of our microcutter products depends on their acceptance by the surgical community as safe and effective.  Even if the data collected from future clinical studies or clinical experience indicates positive results, each surgeon’s actual experience with our devices outside the clinical study setting may vary. Clinical studies conducted with our initial microcutter products may involve procedures performed by thoracic, bariatric, colorectal and general surgeons who are technically proficient, high-volume surgeons. Consequently, both short- and long-term results reported in these studies may be significantly more favorable than typical results of practicing surgeons, which could negatively impact rates of adoption of the microcutter if launched.  In addition, any adverse experiences of surgeons using the microcutter products, or adverse outcomes to patients, may deter surgeons from using our products and negatively impact product adoption.

If the FDA determines that our C-Port systems or PAS-Port systems do not perform as anticipated, or if the FDA identifies new concerns related to the safety and effectiveness of these products, we may be required to withdraw these products, which could harm our business.

As a condition of its U.S market clearance, the C-Port system is subject to a mandatory Post Market Surveillance order under Section 522 of the Federal Food Drug and Cosmetic Act (which we refer to as the 522 order) to demonstrate graft patency outcomes and technical failure rate in a clinical study.  Should the FDA decide that the C-Port system does not perform as anticipated, or if the FDA identifies new concerns related to the safety and effectiveness of the product, or if the FDA determines that the requirements of the 522 order are otherwise unmet, we may be required to withdraw the C-Port system from the market and may be subject to other enforcement action, which could harm our business.

Our C-Port and PAS-Port systems were designed for use with venous grafts. In addition, we have studied the use of the C-Port systems with venous grafts and arterial grafts. Using the C-Port systems with arterial grafts may not yield patency rates or material adverse cardiac event rates comparable to those found in our clinical trials using venous grafts, which could negatively affect market acceptance of our C-Port systems. In addition, the clips and staples deployed by our products are made of 316L medical-grade stainless steel, to which some patients are allergic. These allergies, especially if not previously diagnosed or unknown, may result in adverse reactions that negatively affect the patency of the anastomoses or the healing of the implants and may therefore adversely affect outcomes, particularly when compared to anastomoses performed with other materials, such as sutures. Additionally, in the event a surgeon, during the course of surgery, determines that it is necessary to convert to a hand-sewn anastomosis and to remove an anastomosis created by one of our products, the removal of the implants may result in more damage to the target vessel (such as the aorta or coronary artery) than would typically be encountered during removal of a hand-sewn anastomosis. Moreover, the removal may damage the target vessel to an extent that could further complicate construction of a replacement hand-sewn or automated anastomosis, which could be detrimental to patient outcome. These or other issues, if experienced, could limit physician adoption of our products.

Even if the data collected from future clinical studies or clinical experience indicates positive results, each physician’s actual experience with our devices outside the clinical study setting may vary. Clinical studies conducted with the C-Port and PAS-Port systems have involved procedures performed by physicians who are technically proficient, high-volume users of the C-Port and PAS-Port systems. Consequently, both short- and long-term results reported in these studies may be significantly more favorable than typical results of practicing physicians, which could negatively impact rates of adoption of the C-Port and PAS-Port systems.

If we are unable to establish sales and marketing capabilities or enter into and maintain arrangements with third parties to market and sell our products, our business may be harmed. 

We have limited experience as a company in the sale, marketing and distribution of our products. To commercialize the MicroCutter 5/80 in the United States, we have completed our market preference testing of the MicroCutter 5/80 and will need to build a sales force. Century is responsible for marketing and commercialization of cardiac and microcutter products in Japan. To promote our current and future products in the United States, Canada and Europe, we must develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. Competition for qualified sales personnel is intense. Developing a sales force is expensive and time consuming and could delay any product launch. We may be unable to establish and manage an effective sales force in a timely or cost-effective manner, if at all, and any sales force we do establish may not be capable of generating sufficient demand for our products. We have entered into arrangements with third parties to perform sales and marketing services, which may result in lower product sales than if we directly marketed and sold our products. We expect to rely on third-party distributors or independent sales representatives for substantially all of our sales. If we are unable to establish adequate sales and marketing capabilities, independently or with others, we may not be able to generate significant revenue and may not become profitable.

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Our products require training to use, and if physicians are not willing to undergo that training, or if they undergo the training but do not use our products properly, or for other reasons, our products may not gain any significant degree of market acceptance and a lack of market acceptance would have a material adverse effect on our business.

Widespread use of our products will require the training of numerous physicians, and the time required to complete training could result in a delay or dampening of market acceptance. Even if the safety and efficacy of our products is established, physicians may use our products improperly due to unfamiliarity with the products, or may use the MicroCutter 5/80 on tissues with thicknesses greater than the specifications for the MicroCutter 5/80. If this were to happen, the MicroCutter 5/80 may not function as desired for the physicians and could be reported as a problem with the MicroCutter 5/80 rather than the physicians using it improperly, which could damage the reputation of the MicroCutter 5/80 and cause other physicians to consider the MicroCutter 5/80 to be not a safe product. Further, physicians may elect not to use our products for a number of other reasons beyond our control, including inadequate or no reimbursement from health care payors, physicians’ reluctance to use products that have not been proven through time in the market, the introduction of competing devices by our competitors and pricing for our products. Failure of our products to achieve any significant market acceptance would have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in our efforts to improve and expand our product portfolio, and our failure to do so could cause our business and prospects to suffer.

We have suspended development of other potential products in our planned microcutter product line until the development and commercialization of the MicroCutter 5/80 have been completed. We completed our evaluation of the MicroCutter 5/80, which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through initial market preference testing to validate the clinical benefits prior to broadening our commercial launch. Following our successful evaluation of the MicroCutter 5/80, we expanded our commercial launch to a select group of customers in the U.S. and Europe. Significant additional research and development and financial resources will be required to continue the development of the other products in our planned product line into commercially viable products and to obtain necessary regulatory clearances to commercialize the devices. We cannot assure you that our development efforts will be successful or that they will be completed within our publicly stated anticipated timelines, and we may never be successful in developing a viable product for the markets intended to be addressed by our other potential microcutter products. Further, even if we do successfully develop any of these microcutter products, we may not be successful in commercializing them for any number of reasons, including failure or delays in obtaining regulatory clearances, or if surgeons do not perceive the benefits of these products to be significantly greater than current established products. We may also face additional competition from branded, patent-protected products, as well as generic stapling products similar to currently commercially available products following expiration of patents on our competitors’ products, which could create greater price competition and decrease the revenue potential of our microcutter products. Our failure to successfully develop our other microcutter products and the failure of our MicroCutter 5/80 would have a material adverse effect on our business, growth prospects and ability to raise additional capital.

Healthcare reform measures could hinder or prevent the commercial success of our products.

The pricing and reimbursement environment may change in the future and become more challenging as a result of any of one several possible regulatory developments, including policies advanced by the United States government, new healthcare legislation or fiscal challenges faced by government health administration authorities. The U.S. government has shown significant interest in pursuing healthcare “reform” and reducing healthcare costs. For example, aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, were implemented starting in 2013. Any government-adopted reform measures that decrease the amount of reimbursement available from governmental and other third-party payers, and could potentially adversely affect our business.

Our PAS-Port and C-Port systems, our MicroCutter 5/80, and future products may face future development and regulatory difficulties and limitations on use.

Even though the current generations of the C-Port and PAS-Port systems have received U.S. regulatory clearance, the FDA may still impose significant restrictions on the indicated uses or marketing of these products or ongoing requirements for potentially costly post-clearance studies. The FDA permits commercial distribution of most new medical devices only after the device has received 510(k) clearance or is the subject of an approved PMA.  Any of our future products, including planned products in our microcutter product line and any future generations of the C-Port and PAS-Port systems, may not obtain regulatory clearances required for marketing or may face these types of restrictions or requirements, particularly as the FDA is considering revising its 510(k) clearance system to, in certain cases, require human clinical data and to prohibit the combination of multiple predicate devices as the basis for a 510(k).  

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The process of obtaining regulatory clearances or approvals to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such clearances or approvals will be granted on a timely basis, if at all. We rely substantially on the premarket notification process for FDA clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act.  This provision allows many medical devices to avoid human clinical trials if the product is “substantially equivalent” to another device already on the market.  Premarket notification requires a new device to be compared for safety, effectiveness and technological characteristics to another device (or multiple devices) already on the market.  A successful 510(k) submission results in FDA clearance for commercialization.   If we can no longer use the 510(k) pathway in the future, we may be required to perform clinical trials for our new products in order to obtain clearance or approval for commercialization.  If so, our development costs will increase substantially, and the likelihood of approval for some of our products may be reduced.  The PMA approval process is more costly, lengthy and uncertain than the 510(k) clearance process and requires the development and submission of clinical studies supporting the safety and effectiveness of the device. Product modifications may also require the submission of a new 510(k) clearance or the approval of a PMA before the modified product can be marketed. Any products or product enhancements that we develop that require regulatory clearance or approval may not be cleared or approved on the timelines that we currently anticipate, if approved at all. Any new products or any product enhancements that we develop may not be subject to the shorter 510(k) clearance process, but may instead be subject to the more lengthy PMA requirements. Additionally, even if 510(k) or other regulatory clearance is granted for any potential product, the approved indications for use may be limited, and the FDA may require additional animal or human clinical data prior to any potential approval of additional indications.

The European Union, or EU, requires that manufacturers of medical products obtain the right to affix the CE Mark to their products before selling them in member countries of the EU. We have received CE Mark certification for the MicroCutter XCHANGE 30, which we have also applied to the MicroCutter 5/80. To maintain authorization to apply the CE Mark to future devices within the microcutter product line, we are subject to annual surveillance audits and periodic re-certification audits. If we modify the intended use of new products (relative to predicate products) or change the indication for use or develop new products in the future, we may need to apply for permission to affix the CE Mark to such products. We do not know whether we will be able to obtain permission to affix the CE Mark to new or modified products or whether we will continue to meet the quality and safety standards required to maintain the authorization that we have received. If we are unable to maintain authorization to affix the CE Mark to microcutter products, we will not be able to sell these products in member countries of the EU, which would have a material adverse effect on our results of operations.

Regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review, regulation and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, our collaborators or us, including requiring withdrawal of the product from the market. Our products will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information on the product. If our products fail to comply with applicable regulatory requirements, a regulatory agency may impose any of the following sanctions:

● warning letters, fines, injunctions, consent decrees and civil penalties;

● customer notifications, repair, replacement, refunds, recall or seizure of our products;

● operating restrictions, partial suspension or total shutdown of production;

● delay in processing marketing applications for new products or modifications to existing products;

● withdrawing approvals that have already been granted; and

● criminal prosecution.

To market any products internationally, we must establish and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA clearance or approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA clearance or approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above regarding FDA clearance or approval, including the risk that our products may not be approved for use under all of the circumstances requested, which could limit the uses of our products and adversely impact potential product sales, and that such clearance or approval may require costly, post-marketing follow-up studies. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

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 If we do not achieve our projected development goals in the time frames we announce and expect, the commercialization of our product candidates may be delayed and, as a result, our stock price may decline.

      From time to time, we may estimate and publicly announce the timing anticipated for the accomplishment of various clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include submissions for and receipt of clearances or approvals from regulatory authorities, other clinical and regulatory events or the launch of new products. These estimates are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, in some cases for reasons beyond our control. If we do not meet milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our stock price may decline.

Our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory requirements. Failure of our manufacturing facilities to comply with quality requirements would harm our business and our results of operations.

Our manufacturing facilities and processes are subject to periodic inspections and audits by various federal, state and foreign regulatory agencies. For example, our facilities have been inspected by State of California regulatory authorities pursuant to granting a California Device Manufacturing License and by the FDA. Additionally, to market products in Europe, we are required to maintain International Standards Organization, or ISO, 13485:2003 certifications and are subject to periodic surveillance audits. We are currently ISO 13485:2003 certified; however, our failure to maintain necessary regulatory compliance and permits for our manufacturing facilities could prevent us from manufacturing and selling our products.

Additionally, our manufacturing processes and, in some cases, those of our suppliers, are required to comply with the FDA’s Quality System Regulation, or QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of our products, including the PAS-Port and C-Port systems and the MicroCutter 5/80. We are also subject to similar state requirements and licenses. In addition, we must engage in extensive record keeping and reporting and must make available our manufacturing facilities and records for periodic inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. If we are given notice of significant violations in a QSR inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse QSR inspection could result in, among other things, a shut-down of our manufacturing operations, significant fines, suspension of product distribution or other operating restrictions, seizures or recalls of our devices and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our products and cause our revenue to decline.

We may also be required to recall our products due to manufacturing supply defects. If we issue recalls of our products in the future, our revenue and business could be harmed.

Lack of third-party coverage and reimbursement for our products could delay or limit their adoption.

We may experience limited sales growth resulting from limitations on reimbursements made to purchasers of our products by third-party payors, and we cannot assure you that our sales will not be impeded and our business harmed if third-party payors fail to provide reimbursement that hospitals view as adequate.

In the United States, our products are and will continue to be purchased primarily by medical institutions, which then bill various third-party payors, such as the Centers for Medicare & Medicaid Services, or CMS, which administer the Medicare program, and other government programs and private insurance plans, for the health care services provided to their patients. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Under current CMS reimbursement policies, CMS offers a process to obtain add-on payment for a new medical technology when the existing Diagnosis-Related Group, or DRG, prospective payment rate is inadequate. To obtain add-on payment, a technology must be considered “new,” demonstrate substantial improvement in care and exceed certain payment thresholds. Add-on payments are made for no less than two years and no more than three years. We must demonstrate the safety and effectiveness of our technology to the FDA in addition to CMS requirements before add-on payments can be made. Further, Medicare coverage is based on our ability to demonstrate the treatment is “reasonable and necessary” for Medicare beneficiaries. In November 2006, CMS denied our request for an add-on payment with respect to our C-Port systems. According to CMS, we met the “new” criteria and exceeded the payment threshold but did not in their view demonstrate substantial improvement in care. Even if our products receive FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement in the foreseeable future, if at all. Moreover, many private payors look to CMS in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.

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We cannot assure you that CMS will provide coverage and reimbursement for our products. If a medical device does not receive incremental reimbursement from CMS, then a medical institution would have to absorb the cost of our products as part of the cost of the procedure in which the products are used. Acute care hospitals are now generally reimbursed by CMS for inpatient operating costs under a Medicare hospital inpatient prospective payment system. Under the Medicare hospital inpatient prospective payment system, acute care hospitals receive a fixed payment amount for each covered hospitalized patient based upon the DRG to which the inpatient stay is assigned, regardless of the actual cost of the services provided. At this time, we do not know the extent to which medical institutions would consider insurers’ payment levels adequate to cover the cost of our products. Failure by hospitals and physicians to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing our products and limit our revenue growth. In addition, pre-determined DRG payments may decline over time, which could deter medical institutions from purchasing our products. If medical institutions are unable to justify the costs of our products, they may refuse to purchase them, which would significantly harm our business.

Any clinical trials that we may conduct may not begin on time, or at all, and may not be completed on schedule, or at all.

      The commencement or completion of any clinical trials that we may conduct may be delayed or halted for numerous reasons, including, but not limited to, the following:

● the FDA or other regulatory authorities suspend or place on hold a clinical trial, or do not approve a clinical trial protocol or a clinical trial;

● the data and safety monitoring committee of a clinical trial recommends that a trial be placed on hold or suspended;

● patients do not enroll in clinical trials at the rate we expect;

● patients are not followed-up at the rate we expect;

● clinical trial sites decide not to participate or cease participation in a clinical trial;

● patients experience adverse side effects or events related to our products;

● patients die or suffer adverse medical effects during a clinical trial for a variety of reasons, which may not be related to our product candidates, including the advanced stage of their disease and other medical problems;

● third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner;

● regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials if investigators find us not to be in compliance with regulatory requirements;

● third-party suppliers fail to provide us with critical components that conform to design and performance specifications;

● the failure of our manufacturing processes to produce finished products that conform to design and performance specifications;

● changes in governmental regulations or administrative actions;

● the interim results of the clinical trial are inconclusive or negative;

● pre-clinical or clinical data is interpreted by third parties in different ways; or

● our trial design, although approved, is inadequate to demonstrate safety and/or efficacy.

      Clinical trials sometimes experience delays related to outcomes experienced during the course of the trials, which may result in a material delay in the trial and could lead to more significant delays or other effects in future trials. Clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient follow-up in clinical trials depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures to assess the safety and effectiveness of our product candidates, or they may be persuaded to participate in contemporaneous trials of competitive products. Delays in patient enrollment or failure of patients to continue to participate in a study may cause an increase in costs and delays or result in the failure of the trial.

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Our clinical trial costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned. Adverse events during a clinical trial could cause us to repeat a trial, terminate a trial or cancel an entire program.

If the third parties upon which we rely to conduct our clinical trials do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

      We do not have the ability to independently conduct clinical trials for our product candidates, and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct our clinical trials. In addition, we rely on third parties to assist with our pre-clinical development of product candidates. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control, such as changes in regulations, delays in enrollment, and the like. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, any clinical trials that we may conduct may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates on a timely basis, if at all.

Because two customers account for a substantial portion of our product sales, the loss of these significant customers would cause a substantial decline in our revenue.

We derive a substantial portion of our revenue from sales to Century, our distributor in Japan and Herz-Und Diabeteszentrum in Germany. The loss of these customers would cause a decrease in revenue and, consequently, an increase in net loss. For the six months ended December 31, 2016 and 2015, sales to Century accounted for approximately 16% and 30%, respectively, of our total product sales. For the six months ended December 31, 2016 and 2015, sales to Herz-Und Diabeteszentrum accounted for approximately 14% and 11%, respectively, of our total product sales. We expect these customers will continue to account for a substantial portion of our sales in the near term. As a result, if we lose these customers, our revenue and net loss would be adversely affected. In addition, customers that have accounted for significant revenue in the past may not generate revenue in any future period. The failure to obtain new significant customers or additional orders from existing customers will materially affect our operating results.

If our competitors for our MicroCutter 5/80 have products that are marketed more effectively or are demonstrated to be safer or more effective than ours, our commercial opportunity for our MicroCutter 5/80 and any future microcutter products will be reduced or eliminated and our business will be harmed.

Although we have commercially launched our microcutter products in Europe and in the United States, we have generated minimal revenues from this launch through December 31, 2016. We only received the FDA 510(k) clearances for the MicroCutter XCHANGE 30 and blue reload in January 2014, and for the white reload in February 2014, for use in multiple open or minimally-invasive surgical procedures for the transection, resection and/or creation of anastomoses in the small and large intestine, as well as the transection of the appendix. To further expand the use of the MicroCutter 5/80, we submitted 510(k) Premarket Notifications to the FDA, to expand the indications for use to include vascular structures, and in January 2016 received FDA 510(k) clearance to use the MicroCutter 5/80 with a white reload, and in July 2016 received FDA 510(k) clearance to use the MicroCutter 5/80 with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter 5/80 in surgical procedures in the small and large intestine and in the appendix. The MicroCutter 5/80 competes in the market for stapling and cutting devices against laparoscopic stapling and sealing devices currently marketed around the world. We believe the principal competitive factors in the market for laparoscopic staplers include:

● reduced product size;

● ease of use;

● product quality and reliability;

● device cost-effectiveness;

● degree of articulation;

● surgeon relationships; and

● sales and marketing capabilities.

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Two large competitors, Ethicon Endo-Surgery, part of Johnson & Johnson, and Covidien currently control over 80% of this market. Other large competitors in the laparoscopic device market include Stryker Endoscopy and Olympus, which acquired another competitor, Gyrus Medical. Ethicon Endo-Surgery and Covidien, which acquired a small competitor, Power Medical, each have large direct sales forces in the United States and have been the largest participants in the market for single use disposable laparoscopic stapling devices for many years. Competing against large established competitors with significant resources may make establishing a market for any products that we develop difficult which would have a material adverse effect on our business. A private company, JustRight Surgical, LLC, is developing smaller surgical instruments and is currently marketing their 5 millimeter stapler that could be considered competitive with our stapling products, but is more limited in availability of staple sizes and articulation compared to the MicroCutter 5/80. Further, we may also face additional competition from generic surgical stapling products similar to currently commercially available products following expiration of patents on our competitors’ products.

If our competitors for our anastomotic solutions and cardiac bypass products have products that are approved in advance of ours, are marketed more effectively or are demonstrated to be safer or more effective than ours, our commercial opportunity for our anastomotic solutions and cardiac bypass products will be reduced or eliminated and our business will be harmed.

The market for anastomotic solutions and cardiac bypass products is competitive. Competitors include a variety of public and private companies that currently offer or are developing cardiac surgery products generally and automated anastomotic systems specifically that would compete directly with ours.

      We believe that the primary competitive factors in the market for medical devices used in the treatment of coronary artery disease include:

● improved patient outcomes;

● access to and acceptance by leading physicians;

● product quality and reliability;

● ease of use;

● device cost-effectiveness;

● training and support;

● novelty;

● physician relationships; and

● sales and marketing capabilities.

We may be unable to compete successfully on the basis of any one or more of these factors, which could have a material adverse effect on our business, financial condition and results of operations.

A number of different technologies exist or are under development for performing anastomoses, including sutures, mechanical anastomotic devices, suture-based anastomotic devices and shunting devices. Currently, substantially all anastomoses are performed with sutures and, for the foreseeable future we believe that sutures will continue to be the principal alternative to our anastomotic products. Sutures are far less expensive than our automated anastomotic products, and other anastomotic devices may be less expensive than our own. Surgeons, who have been using sutures for their entire careers, may be reluctant to consider alternative technologies, despite potential advantages. Any resistance to change among practitioners could delay or hinder market acceptance of our products, which would have a material adverse effect on our business.

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Cardiovascular diseases may also be treated by other methods that do not require anastomoses, including, interventional techniques such as balloon angioplasty with or without the use of stents, pharmaceuticals, atherectomy catheters and lasers. Several of these alternative treatments are widely accepted in the medical community and have a long history of use. In addition, technological advances with other therapies for cardiovascular disease, such as drugs, or future innovations in cardiac surgery techniques could make other methods of treating these diseases more effective or lower cost than bypass procedures. For example, the number of bypass procedures in the United States and other major markets has declined in recent years and is expected to decline in the years ahead because competing treatments are, in many cases, far less invasive and provide acceptable clinical outcomes. Many companies working on treatments that do not require anastomoses may have significantly greater financial, manufacturing, marketing, distribution and technical resources and experience than we have. Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing, clinical trials, obtaining regulatory clearance or approval and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our competitors may succeed in developing technologies and therapies that are more effective, better tolerated or less costly than any that we are developing or that would render our product candidates obsolete and noncompetitive. Our competitors may succeed in obtaining clearance or approval from the FDA and foreign regulatory authorities for their products sooner than we do for ours. We will also face competition from these third parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient enrollment for clinical trials and in acquiring and in-licensing technologies and products complementary to our programs or advantageous to our business.

We are dependent upon a number of key suppliers, including single source suppliers, the loss of which would materially harm our business.

      We use or rely upon sole source suppliers for certain components and services used in manufacturing our products, and we utilize materials and components supplied by third parties with which we do not have any long-term contracts. In recent years, many suppliers have ceased supplying materials for use in implantable medical devices. We cannot assure you that materials required by us will not be restricted or that we will be able to obtain sufficient quantities of such materials or services in the future. Moreover, the continued use by us of materials manufactured by third parties could subject us to liability exposure. Because we do not have long-term contracts, none of our suppliers is required to provide us with any guaranteed minimum production levels.

      We cannot quickly replace suppliers or establish additional new suppliers for some of our components, particularly due to both the complex nature of the manufacturing process used by our suppliers and the time and effort that may be required to obtain FDA clearance or approval or other regulatory approval to use materials from alternative suppliers. Any significant supply interruption or capacity constraints affecting our facilities or those of our suppliers would have a material adverse effect on our ability to manufacture our products and, therefore, a material adverse effect on our business, financial condition and results of operations.

We have limited manufacturing experience and may encounter difficulties in increasing production to provide an adequate supply to customers.

      To date, our manufacturing activities have consisted primarily of producing moderate quantities of our products for use in clinical studies and for commercial sales in Japan, Europe and the United States. Production in increased commercial quantities will require us to expand our manufacturing capabilities and to hire and train additional personnel. We may encounter difficulties in increasing our manufacturing capacity and in manufacturing larger commercial quantities, including:

● maintaining product yields;

● maintaining quality control and assurance;

● providing component and service availability;

● maintaining adequate control policies and procedures; and

● hiring and retaining qualified personnel.

 
       Difficulties encountered in increasing our manufacturing could have a material adverse effect on our business, financial condition and results of operations.

      The manufacture of our products is a complex and costly operation involving a number of separate processes and components. Any shipment delays could harm perception of our products and have a material adverse impact on our results of operations.

*If we fail to retain key personnel, or to retain our executive management team, we may be unable to successfully develop or commercialize our products.

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      Our business and future operating results depend significantly on the continued contributions of our key technical personnel and senior management. Future changes to our executive and senior management teams, including new executive hires or departures, could cause disruption to the business and have a negative impact on our operating performance, while these operational areas are in transition. Competition for qualified executive and other management personnel is intense, and we may not be successful in attracting or retaining such personnel. The loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled employees, as needed, could materially adversely affect our business, financial condition and results of operations.

      As of December 31, 2016, we had 49 employees. We will need to maintain an appropriate level of managerial, operational, financial and other resources to manage and fund our operations and clinical trials, continue our research and development activities and commercialize our products, and we expect our past reductions in force will impair our ability to maintain or increase our product sales. It is possible that our management and scientific personnel, systems and facilities currently in place may not be adequate to maintain future operating activities, and we may be required to effect additional reductions in force.

We may in the future be a party to patent litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

      While we are not aware of any patents issued to third parties that contain subject matter materially related to our technology, there may be patents held by third parties of which we are not aware that contain subject matter materially related to our technology. We cannot assure you that third parties will not assert that our products and systems infringe the claims in their patents or seek to expand their patent claims to cover aspects of our products and systems. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities or require us to seek licenses. In addition, if we are found to willfully infringe third-party patents, we could be required to pay treble damages in addition to other penalties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may be required to redesign our products to avoid infringement, and it may not be possible to do so effectively. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling the C-Port or PAS-Port systems or any other product we may develop, which would have a significant adverse impact on our business.

Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.

We rely upon patents, trade secret laws and confidentiality agreements to protect our technology and products. Our pending patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain in the future might be invalidated or circumvented by third parties. If any challenges are successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be adequate. In addition, the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. To the extent that our intellectual property protection is inadequate, we are exposed to a greater risk of direct competition. In addition, competitors could purchase any of our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our protected technology. If our intellectual property is not adequately protected against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees, consultants and advisors to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific circumstances and that all inventions arising out of the individual’s relationship with us shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology.

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Our products face the risk of technological obsolescence, which, if realized, could have a material adverse effect on our business.

The medical device industry is characterized by rapid and significant technological change. There can be no assurance that third parties will not succeed in developing or marketing technologies and products that are more effective than ours or that would render our technology and products obsolete or non-competitive. Additionally, new, less invasive surgical procedures and medications could be developed that replace or reduce the importance of current procedures that use or could use our products. Accordingly, our success will depend in part upon our ability to respond quickly to medical and technological changes through the development and introduction of new products. The relative speed with which we can develop products, complete clinical testing and regulatory clearance or approval processes, train physicians in the use of our products and supply commercial quantities of products to the market are expected to be important competitive factors. Product development involves a high degree of risk, and we cannot assure you that our new product development efforts will result in any commercially successful products. We have experienced delays in completing the development and commercialization of our planned products, and there can be no assurance that these delays will not continue or recur in the future. Any delays could result in a loss of market acceptance and market share.

We are subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, marketing expenditure tracking and disclosure (or “sunshine”) laws, health information privacy and security laws, and consumer protection laws. If we are unable to comply, or have not fully complied, with such laws, we could face criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

Our operations may be directly, or indirectly, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act. These laws may impact, among other things, our current activities with physicians, including consulting arrangements, as well as proposed sales, marketing and educational activities. In addition, we may be subject to patient privacy regulation by the federal government and by the US states and foreign jurisdictions in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to:

● the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase or recommendation of an item or service for which payment may be made under a federal health care program, such as the Medicare and Medicaid programs;

● federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;

● federal criminal statutes created under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

● HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009 (HITECH), and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;

● state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;

● the Foreign Corrupt Practices Act, a U.S. law which regulates certain financial relationships with foreign government officials (which could include, for example, certain medical professionals);

● federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and

● state and federal marketing expenditure tracking and reporting laws, which generally require certain types of expenditures in the United States to be tracked and reported (compliance with such requirements may require investment in infrastructure to ensure that tracking is performed properly, and some of these laws result in the public disclosure of various types of payments and relationships, which could potentially have a negative effect on our business and/or increase enforcement scrutiny of our activities).

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If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

We could be exposed to significant product liability claims, which could be time consuming and costly to defend, divert management attention, and adversely impact our ability to obtain and maintain insurance coverage. The expense and potential unavailability of insurance coverage for our company or our customers could adversely affect our ability to sell our products, which would adversely affect our business.

The testing, manufacture, marketing, and sale of our products involve an inherent risk that product liability claims will be asserted against us. Additionally, we are currently training physicians in the United States and in Europe on the use of our MicroCutter 5/80, C-Port and PAS-Port systems. During training, patients may be harmed, which could also lead to product liability claims. Product liability claims or other claims related to our products, or their off-label use, regardless of their merits or outcomes, could harm our reputation in the industry, reduce our product sales, lead to significant legal fees, and result in the diversion of management’s attention from managing our business.

      Although we maintain product liability insurance in the amount of $10.0 million, we may not have sufficient insurance coverage to fully cover the costs of any claim or any ultimate damages we might be required to pay. We may not be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and adversely affecting our operating results.

Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operations and use of the C-Port or PAS-Port systems or the microcutter product line. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using the C-Port or PAS-Port systems and potential customers may opt against purchasing the C-Port or PAS-Port systems due to the cost or inability to procure insurance coverage.

We sell our systems internationally and are subject to various risks relating to these international activities, which could adversely affect our revenue.

      To date, a substantial portion of our product sales has been attributable to sales in international markets. By doing business in international markets, we are exposed to risks separate and distinct from those we face in our domestic operations. Our international business may be adversely affected by changing economic conditions in foreign countries. Because most of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become more costly to the international customer and, therefore, less competitive in international markets, which could affect our results of operations. Engaging in international business inherently involves a number of other difficulties and risks, including:

● export restrictions and controls relating to technology;

● the availability and level of reimbursement within prevailing foreign healthcare payment systems;

● pricing pressure that we may experience internationally;

● required compliance with existing and changing foreign regulatory requirements and laws;

● laws and business practices favoring local companies;

● longer payment cycles;

● difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;

● political and economic instability;

● potentially adverse tax consequences, tariffs and other trade barriers;

● international terrorism and anti-American sentiment;

● difficulties and costs of staffing and managing any foreign operations; and

● difficulties in enforcing intellectual property rights.

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       Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention. We cannot assure you that one or more of these factors will not harm our business.

Our operations are currently conducted at a single location that may be at risk from earthquakes, terror attacks or other disasters.

      We currently conduct all of our manufacturing, development and management activities at a single location in Redwood City, California, near known earthquake fault zones. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site storage of computer data. However, any future natural disaster, such as an earthquake, or a terrorist attack, could cause substantial delays in our operations, damage or destroy our equipment or inventory and cause us to incur additional expenses. A disaster could seriously harm our business and results of operations. Our insurance does not cover earthquakes and floods and may not be adequate to cover our losses in any particular case.

If we use hazardous materials in a manner that causes injury, we may be liable for damages.

      Our research and development and manufacturing activities involve the use of hazardous materials. Although we believe that our safety procedures for handling and disposing of these materials comply with federal, state and local laws and regulations, we cannot entirely eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of these materials. We do not carry specific hazardous waste insurance coverage, and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory clearances or approvals could be suspended or terminated.

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change," generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. If we undergo such an ownership change, the limitation may result in the expiration of our net operating losses and credits before we can use them, which could potentially result in increased future tax liability to us.  We may experience ownership changes in the future as a result of future offerings of our stock and other subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Risks Related to Our Common Stock

If our stock price declines, our common stock may be subject to delisting from the NASDAQ Capital Market.

On December 8, 2015, we received a letter from the staff of The NASDAQ Stock Market LLC stating that we had not been able to regain compliance with the Nasdaq Listing Rule requiring that we maintain a closing bid price for our common stock of at least $1.00 per share. We cured the deficiency by effecting a one-for-ten reverse stock split, effective February 17, 2016. We cannot guarantee that our stock price will continue to trade at above $1.00 per share or otherwise meet the listing requirements and therefore our common stock may in the future be subject to delisting.  If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.

The conversion of shares of Series A preferred stock into common stock, or the perception that such conversions may occur, could cause the market price of our common stock to decline. 

We currently have 191,474 shares of our Series A preferred stock outstanding. Each share of our Series A preferred stock is convertible into 10 shares of our common stock at any time at the option of the holder, subject to certain limitations. The conversion of substantial amounts of our Series A preferred stock would result in the issuance by us of a substantial number of additional shares of our common stock, which, subject to certain limitations, could be traded publicly. Such conversions, or the perception that such conversions may occur, could cause the market price of our common stock to decline.

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The price of our common stock may continue to be volatile, and the value of an investment in our common stock may decline.

      An active and liquid trading market for our common stock may not develop or be sustained. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

● completion of development and commercial launch of our microcutter products, and the timing thereof;

● our ability to maintain our listing on the NASDAQ Capital Market;

● perceptions that we may not be able to raise capital as needed, or that investors will be substantially diluted if we do raise capital;

● market acceptance and adoption of our products;

● regulatory clearance or approvals of or other regulatory developments with respect to our products;

● volume and timing of orders for our products;

● changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;

● quarterly variations in our or our competitors’ results of operations;

● general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;

● the announcement of new products or product enhancements by us or our competitors;

● announcements related to patents issued to us or our competitors and to litigation;

● developments in our industry; and

● actions by stockholder activists.

        In addition, the stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market price of our common stock.

The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Our executive officers and directors and their affiliates, together with other stockholders that own 5% or more of our outstanding common stock, beneficially owned approximately 43% of our outstanding common stock as of December 31, 2016. In addition, two stockholders collectively hold all of our Series A preferred stock and may convert those shares into 1,914,740 shares of our common stock and, if they were to convert all of the shares of our Series A preferred stock, our executive officers and directors and their affiliates, together with other stockholders that own 5% or more of our outstanding common stock, would beneficially own approximately 53% of our outstanding common stock. Accordingly, these stockholders have significant influence over the outcome of corporate actions requiring stockholder approval. The interests of these stockholders may be different than the interests of other stockholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

Evolving regulation of corporate governance and public disclosure will result in additional expenses and continuing uncertainty.

      Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and The NASDAQ Stock Market rules are creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional compliance costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by courts and regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Maintaining appropriate standards of corporate governance and public disclosure will result in increased general and administrative expenses and a diversion of management time and attention from product-generating and revenue-generating activities to compliance activities. In addition, if we fail to comply with new or changed laws, regulations and standards, regulatory authorities may initiate legal proceedings against us and our business and reputation may be harmed.

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Our future operating results may be below securities analysts’ or investors’ expectations, which could cause our common stock price to decline.

      The revenue and income potential of our products and our business model are unproven, and we may be unable to generate significant revenue or grow at the rate expected by securities analysts or investors. In addition, our costs may be higher than we, securities analysts or investors expect. If we fail to generate sufficient revenue or our costs are higher than we expect, our results of operations will suffer, which in turn could cause our stock price to decline. Our results of operations will depend upon numerous factors, including:

● the trading volume of our stock;

● the extent to which we are able to raise additional capital in any equity, debt or licensing transaction;

● market acceptance of our MicroCutter 5/80 in Europe and the United States once we improve the supply chain to enable the broader commercial launch;

● the extent of our ongoing enhancements of the MicroCutter 5/80, including alterations and post-commercialization improvements based on early adopter experience with this newly commercial product;

● the extent of our ongoing research and development programs and related costs, including costs related to the development of additional products and features in our planned microcutter product line;

● our ability to enter into additional license, development and/or collaboration agreements with respect to our technology, and the terms thereof;

● market acceptance and adoption of future products that we may commercialize;

● our level of revenues;

● costs associated with our sales and marketing initiatives and manufacturing activities;

● costs and timing of obtaining and maintaining FDA and other regulatory clearances and approvals for our products and potential additional products;

● securing, maintaining and enforcing intellectual property rights and the costs thereof;

● the effects of competing technological and market developments; and

● the timing of repayment of the principal of our $4.0 million loan to Century, and whether we are required to pay the penalty interest (which would amount to $0.8 million as of December 31, 2016).

    Our operating results in any particular period may not be a reliable indication of our future performance. In some future quarters, our operating results may be below the expectations of securities analysts or investors.  If this occurs, the price of our common stock will likely decline.

Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management.

      Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third-party from acquiring control of us without the approval of our board of directors. These provisions:

● limit who may call a special meeting of stockholders;

● establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

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● prohibit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;

● prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

● provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock without stockholder approval.

      In addition, Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive stockholders of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

We may become involved in securities class action litigation that could divert management’s attention and harm our business.

      The stock market in general, the NASDAQ Capital Market and the market for medical device companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, the market prices of securities of medical device companies have been particularly volatile. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could materially harm our financial condition and results of operations.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

      We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain to our stockholders for the foreseeable future.

ITEM 6. EXHIBITS

See the Exhibit Index which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated here by reference.

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Dextera Surgical Inc.
Date: February 10, 2017	/s/ Julian Nikolchev
	Julian Nikolchev
	President, Chief Executive Officer and Director,  (Principal Executive Officer)
Date: February 10, 2017	/s/ Robert Y. Newell
	Robert Y. Newell
	Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

		Incorporation by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit/ Appendix Reference	Filing Date	Filed Herewith
3.1	Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	S-1	333-129497	3.2	01/13/2006
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	10-Q	000-51772	3.3	11/15/2010
3.3	Certificate of Correction of Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	8-K	000-51772	3.2	11/16/2010
3.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	8-K	000-51772	3.1	11/19/2012
3.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	8-K	000-51772	3.1	11/15/2013
3.6	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	8-K	333-194039	3.1	02/17/2016
3.7	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Dextera Surgical Inc.	8-K	333-194039	3.1	06/21/2016
3.8	Certificate of Designations of Series A Preferred Stock.	S-1	333-194039	3.6	04/14/2014
3.9	Bylaws of the Registrant as currently in effect.	8-K	000-51772	3.2	08/19/2008
4.1	Specimen Common Stock certificate of the Registrant.	S-1	333-129497	3.5	02/01/2006
10.1	Form of Option Grant Notice and Option Agreement for use under the 2016 Equity Incentive Plan					X
10.2	Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement for use under the 2016 Equity Incentive Plan					X
10.3	Dextera Surgical Inc. 2016 Equity Incentive Plan	8-K	000-51772	10.1	11/28/2016
10.4	Dextera Surgical Inc. 2016 Employee Stock Purchase Plan	8-K	000-51772	10.2	11/28/2016
31.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a).					X
31.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a).					X
32.1	Certification required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase					X
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

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EX-10.1

Exhibit 10.1

DEXTERA SURGICAL INC.

2016 EQUITY INCENTIVE PLAN

OPTION GRANT NOTICE

Dextera Surgical Inc. (the “Company”), pursuant to its 2016 Equity Incentive Plan (the “Plan”), hereby grants to Optionholder an option to purchase the number of shares of the Company’s Common Stock (the “Shares”) set forth below at the exercise price set forth below. This Option is subject to all of the terms and conditions set forth in this Option Grant Notice (the “Grant Notice”), the Option Agreement (the “Agreement”), the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined in this Grant Notice but defined in the Plan or the Agreement will have the same definitions as in the Plan or the Agreement.

Optionholder:

Date of Grant:

Vesting Commencement Date:

Number of Shares Subject to Option:

Exercise Price (Per Share):

Total Exercise Price:

Expiration Date:

Type of Grant:	☐ Incentive Stock Option1                                         ☐ Nonstatutory Stock Option
Exercise Schedule:	[Initial Grant: 1/4th of the Shares vest and become exercisable one year after the Vesting Commencement Date; the balance of the Shares vest and become exercisable in a series of thirty-six (36) successive equal monthly installments measured from the first anniversary of the Vesting Commencement Date.]
	[Refresher Grant: The Shares vest and become exercisable in a series of forty-eight (48) successive equal monthly installments over the four (4)-year period measured from the Vesting Commencement Date.]
Payment:	By one or a combination of the following items (described in the Option Agreement):
	☒      By cash or check
	☒      Pursuant to a Regulation T Program if the Shares are publicly traded
	☒      By delivery of already-owned shares if the Shares are publicly traded
	☒      If and only to the extent that the option is a Nonstatutory Stock Option, and subject to the Company’s consent at the time of exercise, by a “net exercise” arrangement

Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Agreement, the Plan and the prospectus for the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding this Option and supersede all prior oral and written agreements, promises and/or representations regarding this Option, with the exception, if applicable, of (i) any written employment, offer letter or severance agreement, or any written severance plan or policy specifying the terms that should govern this Option, (ii) the Company’s stock ownership guidelines, and (iii) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law. By accepting this Option, Optionholder consents to receive this Grant Notice, the Agreement, the Plan, the prospectus for the Plan and any other Plan-related documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

¹ If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.

DEXTERA SURGICAL INC.		OPTIONHOLDER:
By:
	Signature	Signature
Title:		Date:
Date:

ATTACHMENTS: Option Agreement, 2016 Equity Incentive Plan, Prospectus, and Notice of Exercise

ATTACHMENT I

OPTION AGREEMENT

DEXTERA SURGICAL INC.

2016 EQUITY INCENTIVE PLAN

OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)

Pursuant to the accompanying Option Grant Notice (the “Grant Notice”) and this Option Agreement (the “Agreement”), Dextera Surgical Inc. (the “Company”) has granted you an Option under the Dextera Surgical Inc. 2016 Equity Incentive Plan (the “Plan”) to purchase the number of shares of Common Stock set forth in the Grant Notice at the exercise price set forth in the Grant Notice. This Option is granted to you effective as of the date of grant set forth in the Grant Notice (the “Date of Grant”). Capitalized terms not explicitly defined in this Agreement but defined in the Plan or the Grant Notice will have the same definitions as in the Plan or the Grant Notice.

The details of your Option are as follows:

1.     VESTING. Subject to the limitations contained herein, your Option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.

2.     NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your Option and your exercise price per share referenced in your Grant Notice will be adjusted from time to time for Capitalization Adjustments, if any, as provided in the Plan.

3.    EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (that is, a “Non-Exempt Employee”), then except as otherwise provided in the Plan, you may not exercise this Option until you have completed at least six months of Continuous Service following the Date of Grant, even if you have already been an Employee for more than six months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exercise this Option as to any vested portion prior to such six-month anniversary in the case of (i) your death or Disability, (ii) a Corporate Transaction in which this Option is not assumed, continued or substituted, (iii) a Change in Control, or (iv) your “retirement” (as defined in a written agreement between you and the Company or an Affiliate, or, if no such definition, in accordance with the Company’s then current employment policies and guidelines).

4.     EXERCISE PRIOR TO VESTING (“EARLY EXERCISE”). This Option may not be exercised prior to vesting.

5.    METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares of Common Stock you wish to purchase. You may pay the exercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by the Grant Notice, which may include one or more of the following:

(a)     Provided that at the time of exercise the Common Stock is publicly traded, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. This manner of payment is also known as a “broker-assisted exercise,” “same day sale,” or “sell to cover.”

(b)     Provided that at the time of exercise the Common Stock is publicly traded, by delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, with a Fair Market Value on the date of exercise that does not exceed the aggregate exercise price. You must pay any remaining balance of the aggregate exercise price not satisfied by such delivery in cash or other permitted form of payment. “Delivery” for these purposes, in the sole discretion of the Company at the time you exercise this Option, will include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. You may not exercise this Option by delivery to the Company of Common Stock if doing so would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

(c)     If this Option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of exercise, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock otherwise issuable to you upon exercise of this Option by the largest number of whole shares of Common Stock with a Fair Market Value on the date of exercise that does not exceed the aggregate exercise price. You must pay any remaining balance of the aggregate exercise price not satisfied by such “net exercise” in cash or other permitted form of payment. Shares of Common Stock will no longer be outstanding under this Option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to a “net exercise,” (ii) are delivered to you as a result of such exercise, or (iii) are withheld to satisfy tax withholding obligations.

6.    WHOLE SHARES. You may exercise your Option only for whole shares of Common Stock.

7.    SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your Option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your Option also must comply with other applicable laws and regulations governing your Option, and you may not exercise your Option if the Company determines that such exercise would not be in material compliance with such laws and regulations.

8.    TERM. You may not exercise your Option before the commencement or after the expiration of its term. The term of your Option commences on the Date of Grant and expires upon the earliest of the following:

(a)     immediately upon the termination of your Continuous Service if such termination is for Cause;

(b)     three months after the termination of your Continuous Service if such termination is for any reason other than Cause, your Disability or your death (except as otherwise provided in Section 8(d) below); provided, however, that if (i) you are a Non-Exempt Employee, (ii) your Continuous Service terminates within six months after the Date of Grant, and (iii) you have vested in a portion of this Option as of the time of your termination of Continuous Service, then this Option will not expire until the earlier of (x) the later of (A) the date that is seven months after the Date of Grant, and (B) the date that is six months after the termination of your Continuous Service, and (y) the Expiration Date set forth in the Grant Notice;

(c)    12 months after the termination of your Continuous Service if such termination is due to your Disability (except as otherwise provided in Section 8(d) below);

(d)    18 months after your death if either your Continuous Service terminates due to your death or you die within six months after your Continuous Service terminates for any reason other than Cause;

(e)     the Expiration Date set forth in the Grant Notice; or

(f)     the day before the seventh anniversary of the Date of Grant.

If this Option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the Date of Grant and ending on the day three months before the date of exercise of this Option, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of this Option under certain circumstances for your benefit but cannot guarantee that this Option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise this Option more than three months after the date your employment with the Company or an Affiliate terminates.

9.     EXERCISE.

(a)     You may exercise the vested portion of this Option during its term by (i) (A) delivering a Notice of Exercise (in a form designated by the Company), or (B) making the required electronic election with the Company’s designated broker, and (ii) paying the exercise price and any applicable withholding taxes to the Company’s stock plan administrator, or to such other person as the Company may designate, together with such additional documents as the Company may then require.

 (b)     By exercising this Option, you agree that, as a condition to any exercise of this Option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) the exercise of this Option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (iii) the disposition of shares of Common Stock acquired upon such exercise.

 (c)     If this Option is an Incentive Stock Option, by exercising this Option, you agree that you will notify the Company in writing within 15 days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this Option that occurs within two years after the Date of Grant or within one year after such shares of Common Stock are transferred upon exercise of this Option.

10.   TRANSFERABILITY. Except as otherwise provided in this Section 10, this Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you.

 (a)     Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee, you may transfer this Option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while this Option is held in the trust, provided that you and the trustee enter into transfer and other agreements required by the Company.

 (b)     Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer this Option pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by applicable law that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss with the Company’s General Counsel the proposed terms of any such transfer prior to finalizing such domestic relations order, marital settlement agreement or other divorce or separation instrument to help ensure the required information is contained within the domestic relations order, marital settlement agreement or other divorce or separation instrument. If this Option is an Incentive Stock Option, this Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.

 (c)     Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized designee, you may, by delivering written notice to the Company, in a form approved by the Company and any broker designated by the Company to handle option exercises, designate a third party who, upon your death, will thereafter be entitled to exercise this Option and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, upon your death, the executor or administrator of your estate will be entitled to exercise this Option and receive, on behalf of your estate, the Common Stock or other consideration resulting from such exercise.

11.   OPTION NOT A SERVICE CONTRACT. Your Continuous Service is not for any specified term and may be terminated by you or by the Company or an Affiliate at any time, for any reason, with or without cause and with or without notice.  This Option is not an employment or service contract, and nothing in this Option (including, but not limited to, the vesting of the shares of Common Stock subject to this Option or the issuance of such shares upon exercise of this Option), this Agreement, the Plan or any covenant of good faith and fair dealing that may be found implicit in this Option or Agreement or the Plan will: (i) create or confer upon you any right or obligation to continue in the employ or service of, or affiliation with, the Company or an Affiliate; (ii) constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other term or condition of employment, service or affiliation; (iii) create or confer upon you any right or benefit under this Option unless such right or benefit has specifically accrued under the terms of this Agreement or the Plan; or (iv) deprive the Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have. In addition, nothing in this Option will obligate the Company or an Affiliate, their respective stockholders, boards of directors, Officers or Employees to continue any relationship that you might have as an Employee, Director or Consultant for the Company or an Affiliate.

12.   WITHHOLDING OBLIGATIONS.

 (a)     At the time you exercise this Option, in whole or in part, and at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a “same day sale” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate which arise in connection with this Option.

 (b)     If this Option is a Nonstatutory Stock Option, then upon your request and subject to the consent of the Company at the time of exercise, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon exercise of this Option a number of whole shares of Common Stock with a Fair Market Value on the date of exercise that does not exceed the minimum amount of tax required to be withheld by law (or such other amount as may be necessary to avoid classification of this Option as a liability for financial accounting purposes).

 (c)     You may not exercise this Option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise this Option when desired even though this Option is vested, and the Company will have no obligation to issue a certificate for any shares of Common Stock unless such obligations are satisfied.

13.    TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this Option and will not be liable to you for any adverse tax consequences to you arising in connection with this Option. You acknowledge that this Option is exempt from Section 409A of the Code only if the exercise price per share set forth in the Grant Notice is at least equal to the “fair market value” per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the Option. You are hereby advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Option and by accepting this Option, you have agreed that you have done so or knowingly and voluntarily declined to do so.

14.    NOTICES. Any notices provided for in this Agreement or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole discretion, decide to deliver any documents related to this Option or participation in the Plan by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this Option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

15.    GOVERNING PLAN DOCUMENT. This Option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. Except as otherwise expressly provided in the Grant Notice or this Agreement, in the event of any conflict between the terms in the Grant Notice or this Agreement and the terms of the Plan, the terms of the Plan will control.

16.    OTHER DOCUMENTS. You hereby acknowledge receipt of and the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Company’s policy permitting certain individuals to sell shares of Common Stock only during certain “window” periods in effect from time to time and the Company’s insider trading policy.

17.    EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of this Option will not be included as compensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

18.    STOCKHOLDER RIGHTS. You will not have voting or any other rights as a stockholder of the Company with respect to the shares of Common Stock to be issued pursuant to this Option until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

19.   SEVERABILITY. If any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid will, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

20.    AMENDMENT. Any amendment to this Agreement must be in writing, signed by a duly authorized representative of the Company. Notwithstanding anything in the Plan to the contrary, the Board reserves the right to amend this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, interpretation, ruling, or judicial decision.

21.   CLAWBACK/RECOVERY. This Option (and any compensation paid or shares of Common Stock issued under this Option) will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any agreement with the Company.

22.    MISCELLANEOUS.

  (a)     The rights and obligations of the Company under this Option will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by, the Company’s successors and assigns.

  (b)     You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of this Option.

  (c)     You acknowledge and agree that you have reviewed this Option in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting this Option, and fully understand all provisions of this Option.

  (d)     This Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

  (e)     All obligations of the Company under the Plan and this Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

*     *     *

This Option Agreement will be deemed to be signed by you upon the signing by you of the Stock Option Grant Notice to which it is attached.

ATTACHMENT II

2016 EQUITY INCENTIVE PLAN

ATTACHMENT III

PROSPECTUS

ATTACHMENT IV

NOTICE OF EXERCISE

2016 EQUITY INCENTIVE PLAN

NOTICE OF EXERCISE

Dextera Surgical Inc.
900 Saginaw Drive
Redwood City, CA 94063	Date of Exercise: _______________

Ladies and Gentlemen:

This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below.

Type of option (check one):	Incentive ☐		Nonstatutory ☐
Stock option dated:	_______________
Number of shares as to which option is exercised:	_______________
Certificates to be issued in name of:	_______________
Total exercise price:	$______________
Cash or check payment delivered herewith:		$______________
Value of ________ shares of Dextera Surgical Inc. common stock delivered herewith2:		$______________
Regulation T Program (cashless exercise)3		$______________
_________ shares of Dextera Surgical Inc. common stock pursuant to net exercise4:		$______________

2	Shares must meet the public trading requirements and have been owned for the minimum period as set forth in the option agreement. Shares must be valued in accordance with the terms of the option being exercised, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate.
3	Shares must meet the public trading requirements set forth in the option agreement and Cardica, Inc. must have established procedures for cashless exercise to utilize this method of payment.
4	Option must be a nonstatutory option and Cardica, Inc. must have established net exercise procedures and must consent to the net exercise election at the time of exercise in order to utilize this payment method.

By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 2016 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within 15 days after the date of any disposition of any of the shares issued upon exercise of this option that occurs within two years after the date of grant of this option or within one year after such shares are issued upon exercise of this option.

.

Very truly yours,

EX-10.2

Exhibit 10.2

DEXTERA SURGICAL INC.

RESTRICTED STOCK UNIT AWARD GRANT NOTICE

2016 EQUITY INCENTIVE PLAN

Dextera Surgical Inc. (the “Company”) hereby awards to Participant the number of Restricted Stock Units specified and on the terms set forth below (the “Award”). The Award is subject to all of the terms and conditions as set forth in this Restricted Stock Unit Grant Notice (the “Grant Notice”), in the Restricted Stock Unit Award Agreement (the “Award Agreement”) and in the Company’s 2016 Equity Incentive Plan (the “Plan”), all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Award Agreement shall have the meanings set forth in the Plan or the Award Agreement, as applicable. In the event of any conflict between the terms of this Grant Notice, the Award Agreement or the Plan, the terms of the Plan shall control.

Participant:	[Name]
Date of Grant:	[Date]
Vesting Commencement Date	[Date]
Number of Restricted Stock Units:	[_______]
Settlement Date:	One share of Common Stock of the Company will be issued for each Restricted Stock Unit (subject to any Capitalization Adjustment) that vests at the time set forth in Section 6 of the Award Agreement.
Vesting Schedule:	________________________________________

Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock Unit Grant Notice, the Restricted Stock Unit Agreement and the Plan. Participant acknowledges and agrees that this Restricted Stock Unit Grant Notice and the Restricted Stock Unit Agreement may not be modified, amended or revised except as provided in the Plan. Participant further acknowledges that as of the Date of Grant, this Restricted Stock Unit Grant Notice, the Restricted Stock Unit Agreement, and the Plan set forth the entire understanding between Participant and the Company regarding this award and supersede all prior oral and written agreements, promises and/or representations on that subject with the exception of (i) restricted stock units previously granted and delivered to Participant, (ii) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law and (iii) any written employment or severance arrangement that would provide for vesting acceleration of this award upon the terms and conditions set forth therein.

By accepting the Award, Participant acknowledges having received and read the Restricted Stock Unit Grant Notice, the Restricted Stock Unit Award Agreement and the Plan (the “Grant Documents”) and agrees to all of the terms and conditions set forth in these documents. Furthermore, by accepting this Award, Participant consents to receive such documents by electronic delivery and to participate in the Plan through an online or electronic system established and maintained by the Company or another third party designated by the Company.

Your electronic signature indicates your agreement to be bound by the terms of this Agreement.

The Participant hereby accepts the Award subject to all of the terms and conditions of this Notice, the Award Agreement and the Plan. Participant consents to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

DEXTERA SURGICAL INC.	PARTICIPANT
By:
	Signature
Its:
	Date
	Address

ATTACHMENTS: 2016 Equity Incentive Plan; Restricted Stock Unit Agreement and Plan Prospectus

DEXTERA SURGICAL INC.

2016 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the Restricted Stock Unit Grant Notice (the “Grant Notice”) and this Restricted Stock Unit Award Agreement (the “Award Agreement”) and in consideration of your services, Dextera Surgical Inc. (the “Company”) has awarded you a Restricted Stock Unit Award (the “Award”) under its 2016 Equity Incentive Plan (the “Plan”) for the number of Restricted Stock Units indicated in the Grant Notice (the “Stock Units”). Capitalized terms not explicitly defined in this Award Agreement or in the Grant Notice but defined in the Plan will have the same definitions as in the Plan.

The details of your Award, in addition to those set forth in the Grant Notice and the Plan are as follows:

1.     GRANT OF THE AWARD. This Award represents your right to be issued on a future date one share of the Company’s Common Stock for each Stock Unit indicated in the Grant Notice that vests. As of the Date of Grant specified in the Grant Notice, the Company will credit to a bookkeeping account maintained by the Company for your benefit (the “Account”) the number of Stock Units subject to the Award. This Award was granted in consideration of your services to the Company.

2.     VESTING. Subject to the provisions contained herein, your Award will vest, if at all, in accordance with the vesting schedule provided in the Grant Notice. Vesting will cease upon the termination of your Continuous Service for any reason. Upon such termination of your Continuous Service, any Stock Units credited to the Account that were not yet vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or interest in such Stock Units or the shares of Common Stock to be issued in respect of such portion of the Award.

3.     NUMBER OF STOCK UNITS AND SHARES OF COMMON STOCK.

(a)     The Stock Units subject to your Award will be adjusted for Capitalization Adjustments, as provided in the Plan.

(b)     Any additional Stock Units and any shares, cash or other property that become subject to the Award pursuant to this Section 3, if any, will be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award.

(c)     No fractional shares or rights for fractional shares of Common Stock will be created pursuant to this Section 3. Except as provided in Section 7 or otherwise provided by the Company, any fraction of a share will be rounded down to the nearest whole share.

4.     SECURITIES LAW COMPLIANCE. You will not be issued any Common Stock in respect of your Stock Units or other shares with respect to your Stock Units unless either (i) the shares are registered under the Securities Act, or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award also must comply with all other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

5.     TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not transfer, pledge, sell or otherwise dispose of any portion of the Stock Units or the shares in respect of your Stock Units. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan, nor may you transfer, pledge, sell or otherwise dispose of such shares. This restriction on transfer will lapse upon delivery to you of shares in respect of your vested Stock Units.

(a)     Death. Your Stock Units are not transferable other than by will and by the laws of descent and distribution. Upon receiving written permission from the Board or its duly authorized designee, you may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company and any broker designated by the Company to effect transactions under the Plan, designate a third party who, in the event of your death, will thereafter be entitled to receive any distribution of Common Stock or other consideration to which you were entitled at the time of your death pursuant to this Award Agreement. In the absence of such a designation, your executor or administrator of your estate will be entitled to receive, on behalf of your estate, such Common Stock or other consideration.

(b)     Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your right to receive the distribution of Common Stock or other consideration under your Stock Units, pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by applicable law that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss with the Company the proposed terms of any such transfer prior to finalizing the domestic relations order or marital settlement agreement to help ensure the required information is contained within the domestic relations order, marital settlement agreement or other divorce or separation instrument. The Company is not obligated to allow you to transfer your Award in connection with your domestic relations order, marital settlement agreement or other divorce or separation instrument.

6.     DATE OF ISSUANCE.

(a)     To the extent that your Award is exempt from the application of Section 409A of the Code, the issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulation Section 1.409A-1(b)(4) and will be construed and administered in such a manner.

(b)     Subject to the satisfaction of the withholding obligations set forth in Section 10 of this Award Agreement, in the event one or more Stock Units vests, the Company will issue to you, on the vesting date, one share of Common Stock for each Stock Unit that vests and such issuance date is referred to as the “Original Issuance Date.” If the Original Issuance Date falls on a date that is not a business day, delivery will instead occur on the next following business day.

(c)     However, if (i) the Original Issuance Date does not occur (1) during an “open window period” applicable to you, as determined by the Company in accordance with the Company’s then-effective policy on trading in Company securities, or (2) on a date when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market (including but not limited to under a previously established written trading plan that meets the requirements of Rule 10b5-1 under the Exchange Act and was entered into in compliance with the Company’s policies (a “10b5-1 Plan”)), and (ii) the Company elects, prior to the Original Issuance Date, not to satisfy the Withholding Taxes described in Section 10 by withholding shares of Common Stock from the shares otherwise due, on the Original Issuance Date, to you under this Award, then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company’s Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that complies with Treasury Regulation Section 1.409A-1(b)(4), no later than the date that is the later of (i) the 15th day of the third month following the end of the calendar year in which such shares of Common Stock under this Award are no longer subject to a “substantial risk of forfeiture” within the meaning of Treasury Regulation Section 1.409A-1(d) or (ii) the 15th day of the third month following the end of the Company’s fiscal year in which such shares of Common Stock under this Award are no longer subject to a “substantial risk of forfeiture” within the meaning of Treasury Regulation Section 1.409A-1(d).

7.    DIVIDENDS. You will receive no benefit or adjustment to your Award or Stock Units with respect to any cash dividend, stock dividend or other distribution that does not constitute a Capitalization Adjustment as provided in the Plan; provided, however, that this sentence will not apply with respect to any shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.

8.     RESTRICTIVE LEGENDS. The Common Stock issued with respect to your Stock Units will be endorsed with appropriate legends, if any, as determined by the Company.

9.     AWARD NOT A SERVICE CONTRACT.

(a)     Except as otherwise provided in a separate, written employment or other agreement between the Company and/or its Affiliates and you, your Continuous Service is not for any specified term and may be terminated by you or by the Company or an Affiliate at any time, for any reason, with or without cause and with or without notice.  Nothing in this Award Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of the shares in respect of your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this Award Agreement or the Plan will:  (i) confer upon you any right to continue in the employ or service of, or affiliation with, the Company or an Affiliate; (ii) constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this Award Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Award Agreement or Plan; or (iv) deprive the Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.

(b)     By accepting this Award, you acknowledge and agree that the right to continue vesting in the Award pursuant to the vesting schedule provided in the Grant Notice is earned only by continuing as an employee, director or consultant at the will of the Company or an Affiliate, as applicable (not through the act of being hired, being granted this Award or any other award or benefit) and that the Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its businesses or Affiliates at any time or from time to time, as it deems appropriate (a “reorganization”).  You further acknowledge and agree that such a reorganization could result in the termination of your Continuous Service, or the termination of Affiliate status of your employer and the loss of benefits available to you under this Award Agreement, including but not limited to, the termination of the right to continue vesting in the Award. You further acknowledge and agree that this Award Agreement, the Plan, the transactions contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the term of this Award Agreement, for any period, or at all, and shall not interfere in any way with your right or the Company’s right to terminate your Continuous Service at any time, with or without cause and with or without notice.

10.     WITHHOLDING OBLIGATIONS.

  (a)     On each vesting date, and on or before the time you receive a distribution of the shares in respect of your Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize any required withholdings from the shares of Common Stock issuable to you and/or otherwise agree to make adequate provision, including in cash, for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate that arise in connection with your Award (the “Withholding Taxes”). Specifically, the Company or an Affiliate may, in its sole discretion, satisfy all or any portion of the Withholding Taxes relating to your Award by any of the following means or by a combination of such means: (i) withholding from any compensation otherwise payable to you by the Company or an Affiliate; (ii) causing you to tender a cash payment; (iii) permitting or requiring you to enter into a “same day sale” commitment with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its Affiliates; or (iv) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to you in connection with your Stock Units with a Fair Market Value (measured as of the date shares of Common Stock are issued to you) equal to the amount of such Withholding Taxes; provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and, if applicable, foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided further, that to the extent necessary to qualify for an exemption from application of Section 16(b) of the Exchange Act, such share withholding procedure shall be subject to the express prior approval of the Board or a duly authorized committee thereof.

  (b)    Unless the Withholding Taxes of the Company and/or any Affiliate are satisfied, the Company will have no obligation to deliver to you any Common Stock or other consideration pursuant to this Award.

  (c)     In the event the Company’s obligation to withhold arises prior to the delivery to you of Common Stock or it is determined after the delivery of Common Stock to you that the amount of the Company’s withholding obligation was greater than the amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold the proper amount.

11.     UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you will be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares or other property pursuant to this Award Agreement. You will not have voting or any other rights as a shareholder of the Company with respect to the shares to be issued pursuant to this Award Agreement until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a shareholder of the Company. Nothing contained in this Award Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

12.     OTHER DOCUMENTS. You hereby acknowledge receipt of and the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Company’s policy permitting certain individuals to sell shares only during certain “window” periods and the Company’s insider trading policy, in effect from time to time.

13.     NOTICES. Any notices provided for in this Award Agreement or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this Award, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

14.     PERSONAL DATA. You understand that your employer, if applicable, the Company, and/or its Affiliates hold certain personal information about you, including but not limited to your name, home address, telephone number, date of birth, social security or equivalent tax identification number, salary, nationality, job title, and details of your Award (the “Personal Data”). Certain Personal Data may also constitute “Sensitive Personal Data” or similar classification under applicable local law and be subject to additional restrictions on collection, processing and use of the same under such laws. Such data include but are not limited to Personal Data and any changes thereto, and other appropriate personal and financial data about you. You hereby provide express consent to the Company or its Affiliates to collect, hold, and process any such Personal Data and Sensitive Personal Data. You also hereby provide express consent to the Company and/or its Affiliates to transfer any such Personal Data and Sensitive Personal Data outside the country in which you are employed or retained, including transfers to the United States, if applicable. The legal persons for whom such Personal Data are intended are the Company and any broker company providing services to the Company in connection with the administration of the Plan. You have been informed of your right to access and correct your Personal Data and/or Sensitive Personal Data by applying to the Company.

15.     ADDITIONAL ACKNOWLEDGEMENTS. You hereby consent and acknowledge that:

  (a)     Participation in the Plan is voluntary and therefore you must accept the terms and conditions of the Plan and this Award Agreement and Grant Notice as a condition to participating in the Plan and receipt of this Award. This Award and any other awards under the Plan are voluntary and occasional and do not create any contractual or other right to receive future awards or other benefits in lieu of future awards, even if similar awards have been granted repeatedly in the past. All determinations with respect to any such future awards, including, but not limited to, the time or times when such awards are made, the size of such awards and performance and other conditions applied to the awards, will be at the sole discretion of the Company.

  (b)     The future value of your Award is unknown and cannot be predicted with certainty. You do not have, and will not assert, any claim or entitlement to compensation, indemnity or damages arising from the termination of this Award or diminution in value of this Award and you irrevocably release the Company, its Affiliates and, if applicable, your employer, if different from the Company, from any such claim that may arise.

  (c)     The rights and obligations of the Company under your Award will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and assigns.

  (d)     Upon request, you agree to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

  (e)     You have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award, and fully understand all provisions of your Award.

  (f)     This Award Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

  (g)     All obligations of the Company under the Plan and this Award Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

16.    GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In addition, your Award will be subject to recoupment in accordance with any clawback policy that the Company has adopted or any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd–Frank Wall Street Reform and Consumer Protection Act or other applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any plan of or agreement with the Company. Except as expressly provided in this Award Agreement or the Grant Notice, in the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan will control.

17.     SEVERABILITY. If all or any part of this Award Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Award Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Award Agreement (or part of such a Section) so declared to be unlawful or invalid will, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

18.     EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Award Agreement will not be included as compensation, earnings, salaries, or other similar terms used when calculating the Employee’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

19.     AMENDMENT. Any amendment to this Award Agreement must be in writing, signed by a duly authorized representative of the Company. The Board reserves the right to amend this Award Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, interpretation, ruling, or judicial decision.

20.    COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to be exempt from the application of Section 409A of the Code, including but not limited to by reason of complying with the “short-term deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4) and any ambiguities herein shall be interpreted accordingly. However, if this Award fails to satisfy the requirements of the short-term deferral rule and is otherwise not exempt from, and therefore deemed to be deferred compensation subject to, Section 409A of the Code, this Award shall comply with Section 409A of the Code to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly. To the extent this Award is subject to Section 409A of the Code and if you are a “Specified Employee” (within the meaning set forth Section 409A(a)(2)(B)(i) of the Code) as of the date of your separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h)), then the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six months thereafter will not be made on the originally scheduled dates and will instead be issued in a lump sum on the date that is six months and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition of taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is a “separate payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2).

21.     NO OBLIGATION TO MINIMIZE TAXES. The Company has no duty or obligation to minimize the tax consequences to you of this Award and will not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so.

*     *     *

This Restricted Stock Unit Award Agreement will be deemed to be accepted by you upon your acceptance of the Restricted Stock Unit Grant Notice to which it is attached.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Julian Nikolchev, certify that:

1.     I have reviewed this Form 10-Q of Dextera Surgical Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 10, 2017	/s/ Julian Nikolchev
	Julian Nikolchev President, Chief Executive Officer and Director (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Robert Y. Newell, certify that:

1.     I have reviewed this Form 10-Q of Dextera Surgical Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 10, 2017	/s/ Robert Y. Newell
	Robert Y. Newell Vice President, Finance, Chief Financial Officer and Secretary (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Julian Nikolchev, Chief Executive Officer of Dextera Surgical Inc. (the "Company"), and Robert Y. Newell, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2016, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of the 10th day of February, 2017.

/s/ Julian Nikolchev	/s/ Robert Y. Newell
Julian Nikolchev	Robert Y. Newell
Chief Executive Officer	Chief Financial Officer

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Dextera Surgical Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Document And Entity Information - shares	6 Months Ended
	Dec. 31, 2016	Feb. 06, 2017
Document Information [Line Items]
Entity Registrant Name	DEXTERA SURGICAL INC
Entity Central Index Key	0001178104
Trading Symbol	dxtr
Current Fiscal Year End Date	--06-30
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		8,927,830
Document Type	10-Q
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Current assets:
Cash and cash equivalents	$ 5,103	$ 3,626
Short-term investments	650	9,090
Accounts receivable, net	489	313
Inventories	1,505	1,063
Prepaid expenses and other current assets	108	318
Total current assets	7,855	14,410
Property and equipment, net	909	1,178
Restricted cash	104	104
Total assets	8,868	15,692
Current liabilities:
Accounts payable	1,000	766
Accrued compensation	582	739
Other accrued liabilities	391	517
Current portion of deferred revenue	633	569
Total current liabilities	2,606	2,591
Deferred revenue, net of current portion	2,384	2,499
Note payable, net of discount	3,293	3,124
Other non-current liabilities	167	196
Total liabilities	8,450	8,410
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized; 191,474 shares issued and outstanding at December 31, 2016, and June 30, 2016	17,214	17,214
Common stock, $0.001 par value: 125,000,000 shares authorized; 8,934,452 shares issued and 8,927,830 shares outstanding at December 31, 2016, and June 30, 2016	9	9
Additional paid-in capital	197,079	196,355
Treasury stock at cost (6,622 shares at December 31, 2016, and June 30, 2016)	(596)	(596)
Accumulated comprehensive loss		(4)
Accumulated deficit	(213,288)	(205,696)
Total stockholders' equity	418	7,282
Total liabilities and stockholders' equity	$ 8,868	$ 15,692

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Dec. 31, 2016	Jun. 30, 2016
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	191,474	191,474
Preferred stock, shares outstanding (in shares)	191,474	191,474
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	125,000,000	125,000,000
Common stock, shares issued (in shares)	8,934,452	8,927,830
Common stock, shares outstanding (in shares)	8,934,452	8,927,830
Treasury stock, shares acquired (in shares)	6,622	6,622

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands		3 Months Ended		6 Months Ended
		Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015
Net revenue:
Product sales, net		$ 695,000	$ 683,000	$ 1,122,000	$ 1,420,000
License and development revenue		83,000		109,000
Royalty revenue		21,000	17,000	35,000	35,000
Total net revenue		799,000	700,000	1,266,000	1,455,000
Operating costs and expenses:
Cost of product sales		940,000	889,000	1,455,000	1,912,000
Research and development		1,400,000	1,630,000	3,168,000	3,246,000
Selling, general and administrative		1,960,000	2,161,000	3,979,000	4,818,000
Total operating costs and expenses		4,300,000	4,680,000	8,602,000	9,976,000
Loss from operations		(3,501,000)	(3,980,000)	(7,336,000)	(8,521,000)
Interest income		7,000	14,000	21,000	27,000
Interest expense		(137,000)	(123,000)	(270,000)	(243,000)
Other income (expense), net		(6,000)	2,000	(7,000)	8,000
Net loss		$ (3,637,000)	$ (4,087,000)	$ (7,592,000)	$ (8,729,000)
Basic and diluted net loss per share (in dollars per share)	[1]	$ (0.41)	$ (0.46)	$ (0.85)	$ (0.98)
Shares used in computing basic and diluted net loss per share (in shares)		8,928	8,902	8,928	8,899

[1] All per share amounts and shares of Dextera Surgical common stock issued and outstanding for all periods have been retroactively adjusted to reflect Dextera Surgicals one-for-ten reverse stock split of its common stock, which was effective February 17, 2016.

XML

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015
Net loss	$ (3,637)	$ (4,087)	$ (7,592)	$ (8,729)
Changes in market value of investments:
Change in unrealized loss on short-term investments, net of tax	4	(9)	4	(6)
Comprehensive loss	$ (3,633)	$ (4,096)	$ (7,588)	$ (8,735)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Operating activities:
Net loss	$ (7,592)	$ (8,729)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	316	543
Amortization of premiums on marketable securities	12	106
Stock-based compensation expense	724	400
Non-cash interest expense	169	143
Changes in operating assets and liabilities:
Accounts receivable, net	(176)	(109)
Prepaid expenses and other current assets	210	89
Inventories	(442)	373
Accounts payable and other accrued liabilities	79	255
Deferred revenue	(51)
Accrued compensation	(157)	451
Net cash used in operating activities	(6,908)	(6,478)
Investing activities:
Purchases of property and equipment	(47)	(136)
Proceeds from maturities of investments	9,600	13,658
Purchases of investments	(1,168)	(8,927)
Net cash provided by investing activities	8,385	4,595
Net increase (decrease) in cash and cash equivalents	1,477	(1,883)
Cash and cash equivalents at beginning of period	3,626	8,264
Cash and cash equivalents at end of period	5,103	6,381
Supplemental disclosure of cash flow information:
Interest paid	$ 100	$ 100

XML

Note 1 - Summary of Significant Accounting Policies

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Significant Accounting Policies [Text Block]

NOTE

1

- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

 Dextera Surgical Inc. (the “Company”) was incorporated in the state of Delaware on

October

15,

1997,

as Vascular Innovations, Inc. On

November

26,

2001,

the Company changed its name to Cardica, Inc., and on

June

19,

2016,

changed its name to Dextera Surgical Inc. The Company is commercializing and developing the MicroCutter

5/80™

stapler based on its proprietary “staple-on-a-strip” technology intended for use by thoracic, pediatric, bariatric, colorectal and general surgeons. The MicroCutter

5/80,

which is currently commercially available, is a cartridge-based stapler device with a

5

millimeter shaft diameter,

80

degrees of articulation, and a

30

millimeter staple line cleared for specified indications for use in the United States and in the European Union, or EU, for a broader range of specified indications of use.

In

January

2016,

the Company received FDA

510(k)

clearance to use the MicroCutter

5/80

with a white reload and in

July

2016,

received FDA

510(k)

clearance to use the MicroCutter

5/80

with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter

5/80

in surgical procedures in the small and large intestine and in the appendix. Following the

510(k)

clearances, the Company conducted its evaluation of the MicroCutter

5/80,

which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through initial market preference testing to validate the clinical benefits prior to broadening its commercial launch. The Company completed its market preference testing of the MicroCutter

5/80

with approximately

55

procedures and

200

staple cartridge deployments with reliable and consistent hemostasis (stopping of the blood flow). Following its successful evaluation of the MicroCutter

5/80,

the Company expanded its commercial launch to a select group of customers in the U.S. and Europe. The Company is conducting the MicroCutter-Assisted Thoracic Surgery Hemostasis (“MATCH”) registry, a post-market surveillance registry, to evaluate the hemostasis and ease-of-use for the MicroCutter

5/80.

This is a prospective, open-label, multi-center registry and the Company plans to enroll up to

120

patients requiring surgical stapling during a lobectomy (surgical removal of a lobe of an organ) or segmentectomy (surgical removal of a segment of a lung lobe) at leading centers in the U.S. and Europe.

The Company is also attempting to expand use of the MicroCutter

5/80

in the international market with selected regulatory filings. The Company submitted the application to Health Canada for regulatory approval of the MicroCutter XCHANGE

30

and the white cartridge reload and, in

March

2016,

received a medical device license to market in Canada. Although the Company is licensed to market the MicroCutter XCHANGE

30

with white reloads in Canada, the Company intends to wait until the Company files an amendment for the MicroCutter

5/80

with Health Canada for regulatory approval before it markets the MicroCutter

5/80

in Canada. In addition, in

August

2013,

the Company’s exclusive distributor in Japan, Century Medical, Inc., or Century, filed for regulatory approval of the MicroCutter XCHANGE

30

white and blue cartridge reloads with the Pharmaceuticals and Medical Devices Agency, or PMDA, in Japan and in

April

2014,

filed for approval for the MicroCutter XCHANGE

30

with TUV Rheinland Japan Ltd, a registered

third

-party agency in Japan, and received approvals in late

2014

for both reloads and stapler, to market in Japan. Also, in

January

2015,

Century submitted an application to PMDA relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a Vectra Liquid Crystal Polymer, or LCP, to IXEF Polyarylamide, or IXEF, and received approval in

August

2015

to market in Japan. Though approvals of the MicroCutter XCHANGE

30

and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter

5/80

to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter

5/80

in Japan.

Historically, the Company generated product revenues primarily from the sale of automated anastomotic systems; however, the Company started generating revenues from the commercial sales of the microcutter products since its introduction in Europe in

December

2012,

and in the United States in

March

2014,

and through

December

31,

2016,

the Company generated

$2.0

million of net product revenues from the commercial sales of the microcutter products.

For the

six

months ended

December

31,

2016,

the Company generated net revenue of

$1.3

million, including

$0.8

million from the sale of automated anastomotic systems,

$0.3

million from commercial sales of the microcutter products,

$0.1

million from license and development revenue and

$35,000

of royalty revenue.

 

Need for Additional Capital

Going Concern

The Company has incurred cumulative net losses of

$213.3

 million through

December

31,

2016,

and negative cash flows from operating activities and expects to incur losses for the next several years. As of

December

31,

2016,

the Company had approximately

$5.8

million of cash, cash equivalents and short-term investments, and

$4.0

million of debt principal outstanding.

The Company believes that the existing cash, cash equivalents and short-term investments will be sufficient to meet its anticipated cash needs to enable it to conduct its business substantially as currently conducted for at least the next

three

months, subject to the ultimate resolution of the following uncertainty.

In

August

2016,

Century asserted that the Company had an obligation to repay Century’s loan in the amount of

$4.0

million within

ten

days of receiving net proceeds from financing of over

$44.0

million in

April

2014,

notwithstanding that the Company entered into an agreement with Century in

July

2014

to extend the due date to

September

30,

2018.

Century further has asserted that the Company owes Century penalty interest at the incremental rate of

7%

per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to

$0.8

million as of

December

31,

2016.

The Company does not agree with Century’s assertions as the Company believes that it had notified Century of the financing that occurred in

April

2014

and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since

August

2016,

both the Company and Century have maintained their respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. The Company does not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of

December

31,

2016.

Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount

($0.7

million at

December

31,

2016).

If the Company is required to repay the

$4.0

million loan from Century along with the related penalty interest prior to

September

30,

2018,

the Company will not have cash, cash equivalents and short-term investments sufficient to meet the Company’s cash needs, which would severely impair the Company’s ability to continue its business unless it is able to raise other funds to repay this debt.

The Company

may

be able to extend these time periods to the extent that it decreases its planned expenditures, or raises additional capital. The Company would need to further reduce expenses in advance of the date on which it would exhaust its cash, cash equivalents and short-term investments in the event that it is unable to complete a financing, strategic or commercial transaction in the near term to ensure that it has sufficient capital to meet its obligations and continue on a path designed to create and preserve stockholders’ value.

In order to satisfy its longer term liquidity requirements, the Company

may

seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with

third

parties or divest

one

or more of its commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to its stockholders, particularly in light of the prices at which its common stock has been recently trading. In addition, if the Company raises additional funds through the sale of equity securities, new investors could have rights superior to its existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with its common stock and could contain covenants that would restrict its operations. Any product development, licensing, distribution or sale agreements that the Company enters into

may

require it to relinquish valuable rights, including with respect to commercialized products or products in development that the Company would otherwise seek to commercialize or develop itself. The Company

may

not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Its need to raise capital

may

require it to accept terms that

may

harm its business or be disadvantageous to its current stockholders.

The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Its continuation as a going concern is contingent upon its ability to generate revenue and cash flow to meet its obligations on a timely basis and its ability to raise financing. The Company’s plans will be adversely impacted if it fails to raise financing. However, there can be no assurance that the Company will be able to raise such funds. Failure to obtain future funding on acceptable terms would adversely affect its ability to fund operations and continues as a going concern. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Basis of Presentation

and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form

10

-Q and Rule 

10

-

01

of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements which include the accounts of Dextera Surgical Inc. and its wholly-owned subsidiary in Germany. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair statement of balances and results have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended

June

 

30,

2016,

included in the Company’s Form

10

-K filed with the Securities and Exchange Commission on

October

 

12,

2016.

Reverse Stock Split

On

February

 

16,

2016,

the Company effected a 

one

-for-

ten

 reverse split of its outstanding common stock (the “Reverse Split”) which had the effect of reducing the number of outstanding shares of common stock from 

89,344,777

to

8,934,452,

effective

February

17,

2016.

Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the Company reclassified its consolidated balance sheets total par value of approximately

$80,000

from common stock to additional paid-in capital for the reporting periods.

All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.

Recently Issued Accounting Standards

In

August

2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ( “ASU”)

2016

-

15,

"Statement of Cash Flows (Topic

230):

Classification of Certain Cash Receipts and Cash Payments," which provides the FASB's guidance on certain cash flow statements items. ASU

2016

-

15

is effective for fiscal reporting periods beginning after

December

15,

2017,

including interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In

June

2016,

the FASB issued ASU

2016

-

13,

"Financial Instruments - Credit Losses (Topic

326):

Measurement of Credit Losses on Financial Instruments," which amends the current guidance by replacing the incurred loss model with a forward-looking expected loss model. The standard is effective for fiscal years beginning after

December

 

15,

2019,

and interim periods within fiscal years beginning after

December

15,

2019.

Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In

May

2016,

the FASB issued ASU

2016

-

12,

"Revenue from Contracts with Customers (Topic

606):

Narrow-Scope Improvements and Practical Expedients," amending guidance in the new revenue standard on transition, collectability, noncash consideration and the presentation of sales taxes and other similar taxes. The amendments clarify that for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under the existing GAAP. The amendments also clarified the collectability assessment and expanded circumstances under which nonrefundable consideration

may

receive revenue recognition when collectability of the remainder is not probable. It clarified that the fair value of noncash consideration should be measured at contract inception for determining the transaction price. The amendments permit an entity to make a policy election to exclude from the transaction price sales taxes and similar taxes. The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU

2014

-

09,

as amended by ASU

2015

-

14).

The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

April

2016,

the FASB issued ASU

2016

-

10,

"Revenue from Contracts with Customers (Topic

606):

Identifying Performance Obligations and Licensing," adding clarification, while retaining the core principles in the revenue guidance. For identifying performance obligations, the ASU clarifies when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. For licensing, the ASU clarifies how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether it recognizes revenue over time (“symbolic IP”) or at a point in time (“functional IP”).The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU

2014

-

09,

as amended by ASU

2015

-

14).

The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

March

2016,

the FASB issued ASU

2016

-

09,

 

Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting, 

which relates to the accounting for employee share-based payments.  This standard addresses several aspects of the accounting for share-based payment award transactions, including:  (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  This standard will be effective for fiscal years beginning after

December

15,

2016,

including interim periods within those fiscal years.  The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

March

2016,

the FASB issued an accounting standard update ASU

2016

-

08,

which clarifies the implementation guidance on principal versus agent considerations under the new revenue recognition standard, ASU

2014

-

09

(Topic

606),

Revenue from Contracts with Customers. It requires the entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or service before it is transferred to the customer. The amendment will be effective for annual reporting periods beginning after

December

15,

2017,

which will be the Company’s fiscal year

2019

(beginning

July

1,

2018).

The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

February

2016,

the FASB issued ASU No. 

2016

-

02,

Leases,

requiring lessee’s to recognize assets and liabilities for leases with lease terms of more than

12

months in the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for fiscal years and for interim periods within those fiscal years, beginning after

December

 

15,

2018.

A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

January

2016,

the FASB issued ASU

2016

-

01,

 

Recognition and Measurement of Financial Assets and Financial Liabilities

, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU

2016

-

01

is effective for annual periods, and interim periods within those annual periods, beginning after

December

 

15,

2017.

The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

November

2015,

the FASB issued ASU No.

2015

-

17,

Income Taxes (Topic

740):

 

Balance Sheet Classification of Deferred Taxes

. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability. The new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as noncurrent on the balance sheet. As a result, each tax-paying jurisdiction will now only have

one

net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from

one

jurisdiction against deferred tax assets of another jurisdiction. ASU No.

2015

-

17

is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2016,

which will be the Company’s fiscal year

2017

beginning

July

1,

2016.

The amendments

may

be applied prospectively to all deferred assets and liabilities, or retrospectively for all periods presented. Early adoption of the amendments is permitted. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

July

2015,

the FASB issued an accounting standard update which requires an entity measuring inventory other than last-in,

first

-out (LIFO) or the retail inventory method to measure inventory at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its costs, the difference will be recognized as a loss in the statement of operations. The standard is effective for fiscal years beginning after

December

15,

2016,

and interim periods within fiscal years beginning after

December

15,

2017.

The Company will be evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and disclosures.

In

May

2014,

the FASB issued ASU No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606):

Revenue from Contracts with Customers

, which guidance in this update will supersede the revenue recognition requirements in Topic

605,

Revenue Recognition

, and most industry-specific guidance when it becomes effective. ASU No.

2014

-

09

affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of ASU No.

2014

-

09

is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These

may

include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No.

2014

-

09

is effective for annual reporting periods beginning after

December

15,

2017,

which will be the Company’s fiscal year

2019

(beginning

July

1,

2018).

The FASB will permit companies to adopt the new standard early, but not before the original effective date of

December

15,

2016.

The Company is in the process of evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and has not yet determined the transition method.

Use of Estimates

      The preparation of financial statements in conformity with GAAP generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Significant estimates include the valuation of inventory, measurement of stock based compensation, valuation of financial instruments and revenue recognition. Actual results could materially differ from these estimates.

Revenue Recognition

The Company recognizes revenue when

four

basic criteria are met:

(1)

persuasive evidence of an arrangement exists;

(2)

title has transferred;

(3)

the fee is fixed or determinable; and

(4)

collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and

third

-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company’s sales to distributors do not include price protection.

Payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved subject to satisfaction of all revenue recognition criteria at that time. Revenue generated from license fees and performing development services are recognized when they are earned and non-refundable upon receipt, over the period of performance, or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on a project are recorded as deferred revenue until such time as performance is rendered or the related development expenses, plus overhead costs for certain project activities, are incurred.

Inventories

Inventories are recorded at the lower of cost or market on a

first

-in,

first

-out basis. The Company periodically assesses the recoverability of all inventories, including materials, work-in-process and finished goods, to determine whether adjustments for impairment are required. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Further reduced demand

may

result in the need for additional inventory write-downs in the near term. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory.

Risks and Uncertainties

The Company depends upon a number of key suppliers, including single source suppliers, the loss of which would materially harm the Company’s business. Single source suppliers are relied upon for certain components and services used in manufacturing the Company’s products. The Company does not have long-term contracts with any of the suppliers; rather, purchase orders are submitted for each order. Because long-term contracts do not exist, none of the suppliers are required to provide the Company any guaranteed minimum quantities.

Foreign Currency Translation

The Company’s foreign operations are subject to exchange rate fluctuations and foreign currency costs. The functional currency of the German subsidiary is the United States dollar. Transactions and balances denominated in dollars are presented at their original amounts. Monetary assets and liabilities denominated in currencies other than the dollar are re-measured at the current exchange rate prevailing at the balance sheet date. All transaction gains or losses from the re-measurement of monetary assets and liabilities are included in the consolidated statements of operations within other income (expense).

XML

Note 2 - Stockholders' Equity

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

NOTE

2

- STOCKHOLDERS' EQUITY

Common Stock and Preferred Stock

In

April

2014,

the Company sold

3,737,500

shares of its common stock at

$8.50

per share, and

191,474

shares of Series A Convertible Preferred Stock at

$85

per share. The Series A convertible preferred stock is non-voting and is convertible into shares of common stock at a conversion rate of

10

shares of common stock for each share of Series A convertible preferred stock, provided that conversion will be prohibited if, as a result, the holder and their affiliates would own more than

9.98%

of the total number of shares of the Company’s common stock then outstanding unless the holder gives the Company at least

61

days prior notice of an intent to convert into shares of common stock that would cause the holder to own more than

9.98%

of the total number of shares of common stock then issued and outstanding. Net proceeds from the financing to the Company were approximately

$44.6

million. For fiscal year ended

June

30,

2014,

the Company recorded a deemed dividend of

$1.9

million related to beneficial conversion feature of series A convertible preferred stock.

A

one

-time beneficial conversion charge was due to the difference between the common stock price and conversion price on the closing date of the Company’s public offering in

April

2014.

Stock-Based Compensation

Stock-based compensation expense related to employee and director share-based compensation plans, including stock options and restricted stock units, or RSUs, pursuant to Accounting Standards Codification, or ASC,

718

“Compensation — Stock Compensation”. Stock-based compensation cost is measured on the grant date, based on the fair value-based measurement of the award and is recognized as an expense over the requisite service period which generally equals the vesting period of each grant. The Company recognizes compensation expense using the accelerated method and accounts for the non-employee share-based grants pursuant to ASC

505

-

50,

Equity Based Payments to Non-Employees.

The Company selected the Black-Scholes option pricing model for determining the estimated fair value-based measurements of share-based awards. The use of the Black-Scholes model requires the use of assumptions including expected term, expected volatility, risk-free interest rate and expected dividends. The Company used the following assumptions in its fair value-based measurements:

	Three months ended						Six months ended
	December 31,						December 31,
	2016			201 5			2016			201 5
Risk-free interest rate	1.25%	–	1.98%		1.33	%	1.11%	-	1.98%	0.71%	-	1.50%
Dividend yield		—			—			—			—
Weighted-average expected term (in years)	4.80	–	4.83		4.98		4.80	-	4.83	4.24	-	4.98
Expected volatility	74.7%	-	77.5%		67.4	%	74.7%	-	77.5%	54.8%	-	67.4%

The Company estimates the expected life of options granted based on historical exercise and post-vest cancellation patterns, which the Company believes are representative of future behavior

. The risk-free interest rate for the expected term of each option is based on a risk-free

zero

-coupon spot interest rate on the date of grant. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. The expected volatility is based on the Company’s historical stock price. The Company estimates forfeitures in calculating the expense related to stock-based compensation. The Company recorded stock-based compensation expenses for awards granted to employees under ASC

718

of

$0.7

million and

$0.4

million for the

six

months ended

December

31,

2016

and

2015,

respectively.

The Company recorded stock-based compensation expenses for awards granted to non-employees under ASC

505

-

50

of

$0

and

$5,991

for the

six

months ended

December

31,

2016

and

2015,

respectively. Total compensation expense related to unvested awards not yet recognized is approximately

$0.7

million at

December

31,

2016,

and is expected to be recognized over a weighted average period of

3.5

years.

      Included in the statement of operations are the following non-cash stock-based compensation expenses (in thousands):

	Three months ended				Six months ended
	December 31,				December 31,
	2016		201 5		201 6		201 5
Cost of product sales	$	48	$	17	$	70	$	35
Research and development		121		30		189		72
Selling, general and administrative		257		218		465		293
Total	$	426	$	265	$	724	$	400

XML

Note 3 - Net Loss Per Share

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Earnings Per Share [Text Block]

NOTE

3

- NET LOSS PER SHARE

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, and without consideration of potential common shares.  Diluted net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period, plus dilutive potential common shares for the period determined using the treasury-stock method.  For purposes of this calculation, options and warrants to purchase stock and unvested restricted stock awards are considered to be potential common shares and are only included in the calculation of diluted net loss per share when their effect is dilutive.

In the years the preferred stock is outstanding, the

two

-class method is used to calculate basic and diluted earnings (loss) per common share since it is a participating security under ASC

260

Earnings per Share

. The

two

-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the

two

-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common share after allocation of earnings to participating securities by the weighted-average number of common shares outstanding during the year. Diluted earnings (loss) per common share is computed using the more dilutive of the

two

-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Numerator:
Net loss	$	(3,637	)	$	(4,087	)	$	(7,592	)	$	(8,729	)
Denominator:
Denominator for basic and diluted net loss per share		8,928			8,902			8,928			8,899
Basic and diluted net loss per share	$	(0.41	)	$	(0.46	)	$	(0.85	)	$	(0.98	)

The following table sets forth the outstanding securities not included in the diluted net loss per common share calculation as of

December

31,

2016

and

2015,

because their effect would be antidilutive (in thousands):

	As of December 31,
	201 6		201 5
Options to purchase common stock		1,538		939
Unvested restricted stock awards		64		53
Shares reserved for issuance upon conversion of Series A Preferred		1,915		1,915
Total		3,517		2,907

XML

Note 4 - Fair Value Measurements

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE

4

- FAIR VALUE MEASUREMENTS

      ASC

820,

“Fair Value Measurements,”defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. ASC

820

establishes a

three

-level fair value hierarchy that prioritizes the inputs used to measure fair value. The

three

levels of inputs used to measure fair value are as follows:

Level 1 -	Quoted prices in active markets for identical assets or liabilities.
Level 2 -	Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 -	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company does

not

have any liabilities that are measured at fair value on a recurring basis. All assets that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. These assets measured at fair value are summarized below (in thousands):

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	2,025	$	—	$	—	$	2,025
Corporate debt securities		—		982		—		982
Commercial paper		—		600		—		600
Short-term investments:
Corporate debt securities		—		650		—		650
Total assets at fair value	$	2,025	$	2,232	$	—	$	4,257

	As of June 30, 201 6
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	3,029	$	—	$	—	$	3,029
Short-term investments:
Commercial paper		—		999		—		999
Corporate debt securities		—		8,091		—		8,091
Total assets at fair value	$	3,029	$	9,090	$	—	$	12,119

Funds held in money market instruments are included in Level

1

as their fair values are based on market prices/quotes for identical assets in active markets.

Corporate debt securities and commercial papers are valued primarily using market prices comparable securities, bid/ask quotes, interest rate yields, and prepayment spreads and are included in Level

2.

Cash balances of

$1.5

million at

December

31,

2016,

and

$0.6

million at

June

30,

2016,

were not included in the fair value hierarchy disclosure. As of

December

31,

2016,

the Company’s material financial assets and liabilities were reported at their current carrying values which approximate fair value given the short-term nature of less than a year, except for its note payable and deferred revenue relating to Intuitive Surgical amended license agreement. As of

December

31,

2016,

the Company’s note payable and deferred revenue were reported at its current carrying value which approximates fair value based on Level

3

unobservable inputs involving discounted cash flows and the estimated market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s credit risk (

See “Note

8

- Note Payable

”) and the relative estimated selling prices of deliverables of the license rights with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes (

See “Note

7

– Distribution,

L

icense,

D

evelopment

A

nd

C

ommercialization

A

greements”

). 

XML

Note 5 - Available-for-sale Securities

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

 

NOTE

5

–

Available–for-Sale Securities

The Company held investments in marketable securities as of

December

31,

2016,

and

June

30,

2016,

with maturity dates of less than

one

year for short-term and greater than

one

year for long-term.

The Company’s investments consisted of the following (in thousands):

	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Corporate debt securities – Short-term	$	650	$	—	$	—	$	650
Total	$	650	$	—	$	—	$	650

	As of June 30, 201 6
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Commercial paper – Short-term	$	999	$	—	$	—		$	999
Corporate debt securities – Short-term		8,095		—		(4	)		8,091
Total	$	9,094	$	—	$	(4	)	$	9,090

There are no gross unrealized losses at

December

31,

2016.

The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of

June

30,

2016,

aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

	June 30, 2016
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)
Total	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)

The Company reviews investments for other-than-temporary impairment. It was determined that unrealized losses at

June

30,

2016,

are temporary in nature, because the changes in market value for these securities resulted from the fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers. The Company is unlikely to experience losses if these securities are held to maturity. In the event that the Company disposes of these securities before maturity, it is expected that any losses will be immaterial.

XML

Note 6 - Inventories

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Inventory Disclosure [Text Block]

NOTE

6

- INVENTORIES

      Inventories consisted of the following (in thousands):

	December 31, 2016		June 30, 201 6
Raw materials	$	785	$	698
Work in progress		284		133
Finished goods		436		232
Total	$	1,505	$	1,063

XML

Note 7 - Distribution, License, Development and Commercialization Agreements

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Intangible Assets Disclosure [Text Block]

NOTE

7

– DISTRIBUTION, LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENTS

Century

On

September

2,

2011,

the Company signed a distribution agreement (the “Distribution Agreement”) with Century with respect to distribution of the Company’s planned microcutter products in Japan. Under the terms of a secured note purchase agreement, Century agreed to loan the Company an aggregate of up to

$4.0

million, with principal due in

September

30,

2016,

subject to certain conditions, which principal due date was extended by

two

years effective

July

1,

2014.

Under this facility, the Company received

$2.0

million on

September

30,

2011,

and the remaining

$2.0

million on

December

27,

2011.

The note bears

5%

annual interest which is payable quarterly in arrears through

September

30,

2018,

the maturity date when the total

$4.0

million of principal becomes due. The timing of the repayment of the principal is subject to an uncertainty because in

August

2016,

Century asserted that the Company had an obligation to repay Century’s loan in the amount of

$4.0

million within

ten

days of receiving net proceeds from financing of over

$44.0

million in

April

2014,

notwithstanding that the Company entered into an agreement with Century in

July

2014

to extend the due date to

September

30,

2018.

Century further has asserted that the Company owes Century penalty interest at the incremental rate of

7%

per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to $

0.8

million as of

December

31,

2016.

Please see additional details related to this in Note

8

.

In return for the loan commitment, the Company granted Century distribution rights to the Company’s planned microcutter product line in Japan, and a right of

first

negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for the microcutter product line. In

August

2013,

Century filed for regulatory approval of the MicroCutter XCHANGE

30

blue and white reloads with the Pharmaceuticals and Medical Devices Agency and in

April

2014,

filed for the MicroCutter XCHANGE

30

stapler with TUV Rheinland Japan Ltd, a registered

third

-party agency in Japan and received approvals in late

2014

for both reloads and stapler, to market in Japan. Also, in

January

2015,

Century submitted an application to PMDA, relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a LCP to an IXEF, and received approval in

August

2015,

to market in Japan. Though approvals of the MicroCutter XCHANGE

30

stapler and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter

5/80

to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter

5/80

in Japan. After approval for marketing in Japan, the Company would sell microcutter units to Century, who would then sell the microcutter devices to their customers in Japan.

Proceeds from the note and granting the distribution rights were allocated to the note based on its aggregate fair value of

$2.4

million at the dates of receipt. This fair value was determined by discounting cashflows using a discount rate of

18%,

which the Company estimated a market rate of borrowing that could be obtained by companies with credit risk similar to the Company’s. The remainder of the proceeds of

$1.6

million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized over the term of the Distribution Agreement, beginning upon the

first

sale by Century of the microcutter products in Japan which had not occurred as of

December

31,

2016.

The Company’s distribution agreement with Century pertaining to the PAS-Port system, originally dated

June

16,

2003,

was due to expire on

July

31,

2014.

Concurrently and in return for the amendment of the note, as discussed above, to extend the maturity date to

September

30,

2018,

the Company amended its distribution agreement with Century for the PAS-Port system, effective

July

1,

2014,

to, among other things, renew the contract for another

five

years, extending the expiration date to

July

31,

2019.

The note amendment was accounted for as the modification of the

2011

note agreement, as the value of the consideration provided by the Company in the form of additional distribution rights was estimated to be approximately equal to the reduction in the fair value of the note. Accordingly, the Company reduced the carrying value of the note of

$3.1

million to its post-modification fair value of

$2.6

million, and recorded the resulting incremental discount of

$0.5

million as deferred revenue. The Company determined the fair value of the amended note using the discount rate of

18%,

which the Company estimated as the market rate of borrowing as of the modification date that could be obtained by companies with credit risk similar to the Company’s. The incremental discount of

$0.5

million will be amortized over the remaining term of the note using the effective interest rate method. The deferred revenue will be recognized over the term of the distribution agreement beginning upon the

first

sale by Century of the microcutter products in Japan.

As of

December

31,

2016,

and

June

30,

2016,

the balance of the loan was

$3.3

million and

$3.1

million net of debt issuance costs of

$0.7

million and

$0.9

million, respectively, and the distribution of the microcutter products had not begun for the respective periods.

      For the

six

months ended

December

31,

2016

and

2015,

sales of automated anastomosis systems to Century accounted for approximately

16%

and

30%,

of the Company’s total product sales. As of

December

31,

2016,

and

June

30,

2016,

Century accounted for approximately

10%

and

33%,

respectively, of the total accounts receivable balance.

Intuitive Surgical

On

August

16,

2010,

the Company entered into a license agreement with Intuitive Surgical Operations, Inc., or Intuitive Surgical, (the “License Agreement”) pursuant to which the Company granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use the Company’s intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of

$9.0

million. The Company is also eligible to receive a contingent payment related to achieving a certain sales volume. Each party has the right to terminate the License Agreement in the event of the other party’s uncured material breach or bankruptcy. Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and except in the case of termination for the Company’s uncured material breach or insolvency, Intuitive Surgical’s payment obligations will continue as well. Under the License Agreement, Intuitive Surgical has rights to improvements in the Company’s technology and intellectual property over a specified period of time.

The Company determined that there were

two

substantive deliverables under the License Agreement representing separate units of accounting: license rights to technology that existed as of

August

16,

2010,

and license rights to technology that

may

be developed over the following

three

years. The

$9.0

million upfront license payment and

$1.0

million premium on the stock purchase by Intuitive Surgical were aggregated and allocated to the

two

units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes. Based upon the relative estimated selling prices of the deliverables,

$9.0

million of the total consideration of

$10.0

million was allocated to the license rights to technology that existed as of

August

16,

2010,

that has been recognized as revenue in the fiscal year ended

June

30,

2011,

and

$1.0

million was allocated to technology that

may

be developed over the following

three

years that is being recognized as revenue ratably over that

three

year period. In total, the revenue recognized for the fiscal years ended

June

30,

2016,

2015

and

2014,

related to this arrangement were

$0,

$0

and

$41,000,

respectively. The Company has fully recognized such revenue, and as of

June

30,

2016

and

2015,

no

deferred revenue related to this arrangement.

On

December

31,

2015,

the Company and Intuitive Surgical amended the license agreement, which was initially signed in

August

2010,

to include, among other things, an agreement providing for a feasibility evaluation and potential development of a surgical stapling cartridge for use with Intuitive Surgical’s

da Vinci

Surgical Systems. Under the terms of the amendment, Intuitive Surgical paid a

one

-time, non-refundable and non-creditable payment of

$2.0

million to extend its rights to improvements in the Company’s stapling technology and certain patents until

August

16,

2018,

and to provide for a feasibility evaluation period from

December

31,

2015,

to

June

30,

2016.

In addition, the amendment provides that each of the parties releases the other party from any claims they have or

may

have against the other party

The feasibility evaluation allowed Intuitive Surgical

six

months to test and evaluate the Company’s microcutter technology and it was completed successfully in

August

2016,

when Intuitive Surgical exercised its option to initiate a joint development program for an

8

-millimeters-in-diameter surgical stapling cartridge for use with the 

da Vinci 

Surgical System. The Company and Intuitive Surgical entered into a joint development program in which Intuitive Surgical will be responsible for the development work on the stapler and the Company will be responsible for the development work on the stapler cartridge. 

Pursuant to the agreement, the Company will receive further funding for development of the cartridge and tooling as well as a unit-based royalty on commercial sales.

The Company determined that there were

two

substantive deliverables under the amended license agreement representing separate units of accounting: license rights to technology that existed as of

December

30,

2015;

and license rights to technology that

may

be developed over the following

two

years. The

$2.0

million payment from the amended license agreement was aggregated and allocated to the

two

units of accounting based upon the relative estimated selling prices of the deliverables. The relative estimated selling prices of the deliverables were determined using a probability weighted expected return model with significant inputs relating to the nature of potential future outcomes and the probability of occurrence of future outcomes, which approximates fair value based on Level

3

unobservable inputs. Based upon the relative estimated selling prices of the deliverables,

$1.4

million of the total consideration of

$2.0

million was allocated to the license rights to technology that existed as of

December

30,

2015,

that was recognized as revenue in the

three

months ended

March

31,

2016,

and

$0.6

million was allocated to technology that

may

be developed over the following

two

years that was being recognized as revenue ratably over that

two

year period. As of

December

31,

2016,

the Company recognized a total of

$1.5

million of license and development revenue and as of

December

31,

2016,

the Company had deferred revenue of

$0.5

million related to this amended license agreement. Also, as of

December

31,

2016,

the Company recorded

$0.1

million of license and development revenue related to this joint development program as the terms were fixed and determinable.

Cook Incorporated

In

June

2007,

the Company entered into, and in

September

2007

and in

June

2009

amended, a license, development and commercialization agreement with Cook Incorporated, to develop and commercialize a specialized device, which the Company refers to as the PFO Device, designed to close holes in the heart from genetic heart defects known as patent foramen ovales (“PFOs”). Under the agreement, Cook funded certain development activities and the Company and Cook jointly developed the PFO Device.  The Company’s significant deliverables under the arrangement were the license rights and the associated development activities.  These deliverables were determined to represent

one

unit of accounting as there was no stand-alone value to the license rights. If developed, Cook would receive an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, to make, have made, use, sell, offer for sale and import the PFO Device. The Company did

not

record any license and development revenue under this agreement for the

six

months ended

December

31,

2016

or

2015.

  Amounts paid but not yet earned on the project are recorded as deferred revenue until such time as the related development expenses for certain project activities are incurred.  A total of

$0.4

million under this agreement had been recorded as deferred revenue as of

December

31,

2016,

and

June

30,

2016.

 On

January

6,

2010,

the Company and Cook mutually agreed to suspend work on the PFO project and, accordingly, the Company does not anticipate receiving any additional payments or recording any additional revenue related to this agreement in the foreseeable future.

XML

Note 8 - Note Payable

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Debt Disclosure [Text Block]

NOTE

8

– NOTE PAYABLE

In connection with the Distribution Agreement with Century (see Note

7),

the Company entered into a secured note purchase agreement and a related security agreement pursuant to which Century agreed to loan to the Company up to an aggregate of

$4.0

million, which amount was received in the fiscal year ended

June

30,

2012,

and the secured note purchase agreement was amended effective

July

1,

2014,

to extend the principal due date by

two

years.  Under this facility, the Company received

$2.0

million on

September

30,

2011,

and the remaining

$2.0

million on

December

27,

2011.

This note bears

5%

annual interest which is payable quarterly in arrears on the last business day of

March,

June,

September

and

December

of each year through

September

30,

2018,

the maturity date when the total

$4.0

million of principal becomes due. The debt issuance discount of approximately

$2.1

million is reflected as a reduction in long-term debt and is being amortized as interest expense over the term of the note using the effective interest method. The note is secured by substantially all of the Company's assets, including the Company’s intellectual property related to the PAS-Port® Proximal Anastomosis System, but excluding all other intellectual property, until the note is repaid. There are no covenants associated with this debt.

In

August

2016,

Century asserted that the Company had an obligation to repay Century’s loan in the amount of

$4.0

million within

ten

days of receiving net proceeds from financing of over

$44.0

million in

April

2014,

notwithstanding that the Company entered into an agreement with Century in

July

2014

to extend the due date to

September

30,

2018.

Century further has asserted that the Company owes Century penalty interest at the incremental rate of

7%

per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to

$0.8

million as of

December

31,

2016.

The Company does not agree with Century’s assertions as the Company believes it had notified Century of the financing that occurred in

April

2014

and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since

August

2016,

both the Company and Century have maintained their respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. The Company does not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of

December

31,

2016.

Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount

($0.7

million at

December

31,

2016).

As of

December

31,

2016,

and

June

30,

2016,

the balance of the loan was

$3.3

million and

$3.1

million net of debt issuance costs of

$0.7

million and

$0.9

million, respectively, and the distribution of the microcutter products had not begun for the respective periods.

XML

Note 9 - Commitments and Contingencies

6 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

NOTE

9

–

COMMITMENTS AND CONTINGENCIES

Operating Lease

On

November

11,

2010,

the Company entered into an amendment to its facility lease (the “Lease Amendment”). Pursuant to the latest Lease Amendment, the term was extended through

August

31,

2018

and the Company was granted an option to further extend the lease for a period of

three

years beyond

August

31,

2018,

with the annual rent payable by the Company during the such period to be equal to the annual rent for comparable buildings. Under the operating lease, the Company is required to maintain a letter of credit with a restricted cash balance at the Company’s bank. A certificate of deposit of

$0.1

million was recorded as restricted cash in the condensed consolidated balance sheet as of

December

31,

2016,

and

June

30,

2016,

related to the letter of credit.

Future minimum lease payments under the Company’s non-cancelable operating leases having initial terms of a year or more as of 

December

31,

2016,

including the Second Lease Amendment, are as follows (in thousands):

Fiscal year ending June 30,	Operating Leases
2017 (remaining six months)	$	503
2018		1,032
2019		173
Total minimum lease payments	$	1,708

XML

Significant Accounting Policies (Policies)

6 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Organization [Policy Text Block]

Organization

 Dextera Surgical Inc. (the “Company”) was incorporated in the state of Delaware on

October

15,

1997,

as Vascular Innovations, Inc. On

November

26,

2001,

the Company changed its name to Cardica, Inc., and on

June

19,

2016,

changed its name to Dextera Surgical Inc. The Company is commercializing and developing the MicroCutter

5/80™

stapler based on its proprietary “staple-on-a-strip” technology intended for use by thoracic, pediatric, bariatric, colorectal and general surgeons. The MicroCutter

5/80,

which is currently commercially available, is a cartridge-based stapler device with a

5

millimeter shaft diameter,

80

degrees of articulation, and a

30

millimeter staple line cleared for specified indications for use in the United States and in the European Union, or EU, for a broader range of specified indications of use.

In

January

2016,

the Company received FDA

510(k)

clearance to use the MicroCutter

5/80

with a white reload and in

July

2016,

received FDA

510(k)

clearance to use the MicroCutter

5/80

with a blue reload, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter

5/80

in surgical procedures in the small and large intestine and in the appendix. Following the

510(k)

clearances, the Company conducted its evaluation of the MicroCutter

5/80,

which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through initial market preference testing to validate the clinical benefits prior to broadening its commercial launch. The Company completed its market preference testing of the MicroCutter

5/80

with approximately

55

procedures and

200

staple cartridge deployments with reliable and consistent hemostasis (stopping of the blood flow). Following its successful evaluation of the MicroCutter

5/80,

the Company expanded its commercial launch to a select group of customers in the U.S. and Europe. The Company is conducting the MicroCutter-Assisted Thoracic Surgery Hemostasis (“MATCH”) registry, a post-market surveillance registry, to evaluate the hemostasis and ease-of-use for the MicroCutter

5/80.

This is a prospective, open-label, multi-center registry and the Company plans to enroll up to

120

patients requiring surgical stapling during a lobectomy (surgical removal of a lobe of an organ) or segmentectomy (surgical removal of a segment of a lung lobe) at leading centers in the U.S. and Europe.

The Company is also attempting to expand use of the MicroCutter

5/80

in the international market with selected regulatory filings. The Company submitted the application to Health Canada for regulatory approval of the MicroCutter XCHANGE

30

and the white cartridge reload and, in

March

2016,

received a medical device license to market in Canada. Although the Company is licensed to market the MicroCutter XCHANGE

30

with white reloads in Canada, the Company intends to wait until the Company files an amendment for the MicroCutter

5/80

with Health Canada for regulatory approval before it markets the MicroCutter

5/80

in Canada. In addition, in

August

2013,

the Company’s exclusive distributor in Japan, Century Medical, Inc., or Century, filed for regulatory approval of the MicroCutter XCHANGE

30

white and blue cartridge reloads with the Pharmaceuticals and Medical Devices Agency, or PMDA, in Japan and in

April

2014,

filed for approval for the MicroCutter XCHANGE

30

with TUV Rheinland Japan Ltd, a registered

third

-party agency in Japan, and received approvals in late

2014

for both reloads and stapler, to market in Japan. Also, in

January

2015,

Century submitted an application to PMDA relating to a change in the material of the reload insert component within the reloads, changing the distal tip of the reload insert material from a Vectra Liquid Crystal Polymer, or LCP, to IXEF Polyarylamide, or IXEF, and received approval in

August

2015

to market in Japan. Though approvals of the MicroCutter XCHANGE

30

and reloads for marketing in Japan have been obtained, Century intends to wait until the Company releases the MicroCutter

5/80

to Century and Century will need to file additional regulatory approvals with the Ministry of Health to market the MicroCutter

5/80

in Japan.

Historically, the Company generated product revenues primarily from the sale of automated anastomotic systems; however, the Company started generating revenues from the commercial sales of the microcutter products since its introduction in Europe in

December

2012,

and in the United States in

March

2014,

and through

December

31,

2016,

the Company generated

$2.0

million of net product revenues from the commercial sales of the microcutter products.

For the

six

months ended

December

31,

2016,

the Company generated net revenue of

$1.3

million, including

$0.8

million from the sale of automated anastomotic systems,

$0.3

million from commercial sales of the microcutter products,

$0.1

million from license and development revenue and

$35,000

of royalty revenue.

Liquidity [Policy Text Block]

Going Concern

The Company has incurred cumulative net losses of

$213.3

 million through

December

31,

2016,

and negative cash flows from operating activities and expects to incur losses for the next several years. As of

December

31,

2016,

the Company had approximately

$5.8

million of cash, cash equivalents and short-term investments, and

$4.0

million of debt principal outstanding.

The Company believes that the existing cash, cash equivalents and short-term investments will be sufficient to meet its anticipated cash needs to enable it to conduct its business substantially as currently conducted for at least the next

three

months, subject to the ultimate resolution of the following uncertainty.

In

August

2016,

Century asserted that the Company had an obligation to repay Century’s loan in the amount of

$4.0

million within

ten

days of receiving net proceeds from financing of over

$44.0

million in

April

2014,

notwithstanding that the Company entered into an agreement with Century in

July

2014

to extend the due date to

September

30,

2018.

Century further has asserted that the Company owes Century penalty interest at the incremental rate of

7%

per annum, but has offered to waive it if the Company immediately repays the loan. Such interest would amount to

$0.8

million as of

December

31,

2016.

The Company does not agree with Century’s assertions as the Company believes that it had notified Century of the financing that occurred in

April

2014

and the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan. Since

August

2016,

both the Company and Century have maintained their respective positions on this matter and neither has initiated arbitration proceedings that are provided for under the agreement. The Company does not believe it is probable that Century would prevail in a legal resolution of this matter. Accordingly, the Company has not changed the classification of the note as a noncurrent liability as of

December

31,

2016.

Penalty interest has not been reflected in the financial statements as its payment is not considered probable. Additionally, the Company has not accelerated amortization of the remaining note discount

($0.7

million at

December

31,

2016).

If the Company is required to repay the

$4.0

million loan from Century along with the related penalty interest prior to

September

30,

2018,

the Company will not have cash, cash equivalents and short-term investments sufficient to meet the Company’s cash needs, which would severely impair the Company’s ability to continue its business unless it is able to raise other funds to repay this debt.

The Company

may

be able to extend these time periods to the extent that it decreases its planned expenditures, or raises additional capital. The Company would need to further reduce expenses in advance of the date on which it would exhaust its cash, cash equivalents and short-term investments in the event that it is unable to complete a financing, strategic or commercial transaction in the near term to ensure that it has sufficient capital to meet its obligations and continue on a path designed to create and preserve stockholders’ value.

In order to satisfy its longer term liquidity requirements, the Company

may

seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with

third

parties or divest

one

or more of its commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to its stockholders, particularly in light of the prices at which its common stock has been recently trading. In addition, if the Company raises additional funds through the sale of equity securities, new investors could have rights superior to its existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with its common stock and could contain covenants that would restrict its operations. Any product development, licensing, distribution or sale agreements that the Company enters into

may

require it to relinquish valuable rights, including with respect to commercialized products or products in development that the Company would otherwise seek to commercialize or develop itself. The Company

may

not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner. Its need to raise capital

may

require it to accept terms that

may

harm its business or be disadvantageous to its current stockholders.

The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Its continuation as a going concern is contingent upon its ability to generate revenue and cash flow to meet its obligations on a timely basis and its ability to raise financing. The Company’s plans will be adversely impacted if it fails to raise financing. However, there can be no assurance that the Company will be able to raise such funds. Failure to obtain future funding on acceptable terms would adversely affect its ability to fund operations and continues as a going concern. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Basis of Presentation and Principles of Consolidation [Policy Text Block]

Basis of Presentation

and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form

10

-Q and Rule 

10

-

01

of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements which include the accounts of Dextera Surgical Inc. and its wholly-owned subsidiary in Germany. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for the fair statement of balances and results have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended

June

 

30,

2016,

included in the Company’s Form

10

-K filed with the Securities and Exchange Commission on

October

 

12,

2016.

Stockholders' Equity, Policy [Policy Text Block]

Reverse Stock Split

On

February

 

16,

2016,

the Company effected a 

one

-for-

ten

 reverse split of its outstanding common stock (the “Reverse Split”) which had the effect of reducing the number of outstanding shares of common stock from 

89,344,777

to

8,934,452,

effective

February

17,

2016.

Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the Company reclassified its consolidated balance sheets total par value of approximately

$80,000

from common stock to additional paid-in capital for the reporting periods.

All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards

In

August

2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ( “ASU”)

2016

-

15,

"Statement of Cash Flows (Topic

230):

Classification of Certain Cash Receipts and Cash Payments," which provides the FASB's guidance on certain cash flow statements items. ASU

2016

-

15

is effective for fiscal reporting periods beginning after

December

15,

2017,

including interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In

June

2016,

the FASB issued ASU

2016

-

13,

"Financial Instruments - Credit Losses (Topic

326):

Measurement of Credit Losses on Financial Instruments," which amends the current guidance by replacing the incurred loss model with a forward-looking expected loss model. The standard is effective for fiscal years beginning after

December

 

15,

2019,

and interim periods within fiscal years beginning after

December

15,

2019.

Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In

May

2016,

the FASB issued ASU

2016

-

12,

"Revenue from Contracts with Customers (Topic

606):

Narrow-Scope Improvements and Practical Expedients," amending guidance in the new revenue standard on transition, collectability, noncash consideration and the presentation of sales taxes and other similar taxes. The amendments clarify that for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under the existing GAAP. The amendments also clarified the collectability assessment and expanded circumstances under which nonrefundable consideration

may

receive revenue recognition when collectability of the remainder is not probable. It clarified that the fair value of noncash consideration should be measured at contract inception for determining the transaction price. The amendments permit an entity to make a policy election to exclude from the transaction price sales taxes and similar taxes. The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU

2014

-

09,

as amended by ASU

2015

-

14).

The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

April

2016,

the FASB issued ASU

2016

-

10,

"Revenue from Contracts with Customers (Topic

606):

Identifying Performance Obligations and Licensing," adding clarification, while retaining the core principles in the revenue guidance. For identifying performance obligations, the ASU clarifies when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. For licensing, the ASU clarifies how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether it recognizes revenue over time (“symbolic IP”) or at a point in time (“functional IP”).The effective date and transition requirements for these amendments are the same as those of the new revenue standard (ASU

2014

-

09,

as amended by ASU

2015

-

14).

The Company will be evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

March

2016,

the FASB issued ASU

2016

-

09,

 

Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting, 

which relates to the accounting for employee share-based payments.  This standard addresses several aspects of the accounting for share-based payment award transactions, including:  (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  This standard will be effective for fiscal years beginning after

December

15,

2016,

including interim periods within those fiscal years.  The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

March

2016,

the FASB issued an accounting standard update ASU

2016

-

08,

which clarifies the implementation guidance on principal versus agent considerations under the new revenue recognition standard, ASU

2014

-

09

(Topic

606),

Revenue from Contracts with Customers. It requires the entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or service before it is transferred to the customer. The amendment will be effective for annual reporting periods beginning after

December

15,

2017,

which will be the Company’s fiscal year

2019

(beginning

July

1,

2018).

The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

February

2016,

the FASB issued ASU No. 

2016

-

02,

Leases,

requiring lessee’s to recognize assets and liabilities for leases with lease terms of more than

12

months in the balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for fiscal years and for interim periods within those fiscal years, beginning after

December

 

15,

2018.

A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

January

2016,

the FASB issued ASU

2016

-

01,

 

Recognition and Measurement of Financial Assets and Financial Liabilities

, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU

2016

-

01

is effective for annual periods, and interim periods within those annual periods, beginning after

December

 

15,

2017.

The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

November

2015,

the FASB issued ASU No.

2015

-

17,

Income Taxes (Topic

740):

 

Balance Sheet Classification of Deferred Taxes

. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability. The new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as noncurrent on the balance sheet. As a result, each tax-paying jurisdiction will now only have

one

net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from

one

jurisdiction against deferred tax assets of another jurisdiction. ASU No.

2015

-

17

is effective for fiscal years, and interim periods within those years, beginning after

December

15,

2016,

which will be the Company’s fiscal year

2017

beginning

July

1,

2016.

The amendments

may

be applied prospectively to all deferred assets and liabilities, or retrospectively for all periods presented. Early adoption of the amendments is permitted. The Company will be evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements and related disclosures.

In

July

2015,

the FASB issued an accounting standard update which requires an entity measuring inventory other than last-in,

first

-out (LIFO) or the retail inventory method to measure inventory at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its costs, the difference will be recognized as a loss in the statement of operations. The standard is effective for fiscal years beginning after

December

15,

2016,

and interim periods within fiscal years beginning after

December

15,

2017.

The Company will be evaluating the impact of the adoption of this standard on the Company’s consolidated financial statements and disclosures.

In

May

2014,

the FASB issued ASU No.

2014

-

09,

Revenue from Contracts with Customers (Topic

606):

Revenue from Contracts with Customers

, which guidance in this update will supersede the revenue recognition requirements in Topic

605,

Revenue Recognition

, and most industry-specific guidance when it becomes effective. ASU No.

2014

-

09

affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of ASU No.

2014

-

09

is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These

may

include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No.

2014

-

09

is effective for annual reporting periods beginning after

December

15,

2017,

which will be the Company’s fiscal year

2019

(beginning

July

1,

2018).

The FASB will permit companies to adopt the new standard early, but not before the original effective date of

December

15,

2016.

The Company is in the process of evaluating the impact of the pending adoption of this guidance on the Company’s consolidated financial statements and has not yet determined the transition method.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

      The preparation of financial statements in conformity with GAAP generally requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Significant estimates include the valuation of inventory, measurement of stock based compensation, valuation of financial instruments and revenue recognition. Actual results could materially differ from these estimates.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

The Company recognizes revenue when

four

basic criteria are met:

(1)

persuasive evidence of an arrangement exists;

(2)

title has transferred;

(3)

the fee is fixed or determinable; and

(4)

collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and

third

-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company’s sales to distributors do not include price protection.

Payments that are contingent upon the achievement of a substantive milestone are recognized in their entirety in the period in which the milestone is achieved subject to satisfaction of all revenue recognition criteria at that time. Revenue generated from license fees and performing development services are recognized when they are earned and non-refundable upon receipt, over the period of performance, or upon incurrence of the related development expenses in accordance with contractual terms, based on the actual costs incurred to date plus overhead costs for certain project activities. Amounts paid but not yet earned on a project are recorded as deferred revenue until such time as performance is rendered or the related development expenses, plus overhead costs for certain project activities, are incurred.

Inventory, Policy [Policy Text Block]

Inventories

Inventories are recorded at the lower of cost or market on a

first

-in,

first

-out basis. The Company periodically assesses the recoverability of all inventories, including materials, work-in-process and finished goods, to determine whether adjustments for impairment are required. Inventory that is obsolete or in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand and market conditions. Further reduced demand

may

result in the need for additional inventory write-downs in the near term. Inventory write-downs are charged to cost of product sales and establish a lower cost basis for the inventory.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Risks and Uncertainties

The Company depends upon a number of key suppliers, including single source suppliers, the loss of which would materially harm the Company’s business. Single source suppliers are relied upon for certain components and services used in manufacturing the Company’s products. The Company does not have long-term contracts with any of the suppliers; rather, purchase orders are submitted for each order. Because long-term contracts do not exist, none of the suppliers are required to provide the Company any guaranteed minimum quantities.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency Translation

The Company’s foreign operations are subject to exchange rate fluctuations and foreign currency costs. The functional currency of the German subsidiary is the United States dollar. Transactions and balances denominated in dollars are presented at their original amounts. Monetary assets and liabilities denominated in currencies other than the dollar are re-measured at the current exchange rate prevailing at the balance sheet date. All transaction gains or losses from the re-measurement of monetary assets and liabilities are included in the consolidated statements of operations within other income (expense).

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Note 2 - Stockholders' Equity (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three months ended						Six months ended
	December 31,						December 31,
	2016			201 5			2016			201 5
Risk-free interest rate	1.25%	–	1.98%		1.33	%	1.11%	-	1.98%	0.71%	-	1.50%
Dividend yield		—			—			—			—
Weighted-average expected term (in years)	4.80	–	4.83		4.98		4.80	-	4.83	4.24	-	4.98
Expected volatility	74.7%	-	77.5%		67.4	%	74.7%	-	77.5%	54.8%	-	67.4%

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three months ended				Six months ended
	December 31,				December 31,
	2016		201 5		201 6		201 5
Cost of product sales	$	48	$	17	$	70	$	35
Research and development		121		30		189		72
Selling, general and administrative		257		218		465		293
Total	$	426	$	265	$	724	$	400

XML

Note 3 - Net Loss Per Share (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended						Six months ended
	December 31,						December 31,
	2016			2015			2016			2015
Numerator:
Net loss	$	(3,637	)	$	(4,087	)	$	(7,592	)	$	(8,729	)
Denominator:
Denominator for basic and diluted net loss per share		8,928			8,902			8,928			8,899
Basic and diluted net loss per share	$	(0.41	)	$	(0.46	)	$	(0.85	)	$	(0.98	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	As of December 31,
	201 6		201 5
Options to purchase common stock		1,538		939
Unvested restricted stock awards		64		53
Shares reserved for issuance upon conversion of Series A Preferred		1,915		1,915
Total		3,517		2,907

XML

Note 4 - Fair Value Measurements (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	2,025	$	—	$	—	$	2,025
Corporate debt securities		—		982		—		982
Commercial paper		—		600		—		600
Short-term investments:
Corporate debt securities		—		650		—		650
Total assets at fair value	$	2,025	$	2,232	$	—	$	4,257

	As of June 30, 201 6
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	3,029	$	—	$	—	$	3,029
Short-term investments:
Commercial paper		—		999		—		999
Corporate debt securities		—		8,091		—		8,091
Total assets at fair value	$	3,029	$	9,090	$	—	$	12,119

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Note 5 - Available-for-sale Securities (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Available-for-sale Securities [Table Text Block]

	As of December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Corporate debt securities – Short-term	$	650	$	—	$	—	$	650
Total	$	650	$	—	$	—	$	650

	As of June 30, 201 6
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Commercial paper – Short-term	$	999	$	—	$	—		$	999
Corporate debt securities – Short-term		8,095		—		(4	)		8,091
Total	$	9,094	$	—	$	(4	)	$	9,090

Schedule of Unrealized Loss on Investments [Table Text Block]

	June 30, 2016
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)
Total	$	8,091	$	(4	)	$	—	$	—	$	8,091	$	(4	)

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Note 6 - Inventories (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	December 31, 2016		June 30, 201 6
Raw materials	$	785	$	698
Work in progress		284		133
Finished goods		436		232
Total	$	1,505	$	1,063

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Note 9 - Commitments and Contingencies (Tables)

6 Months Ended

Dec. 31, 2016

Notes Tables

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Fiscal year ending June 30,	Operating Leases
2017 (remaining six months)	$	503
2018		1,032
2019		173
Total minimum lease payments	$	1,708

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Note 1 - Summary of Significant Accounting Policies (Details Textual)		1 Months Ended	3 Months Ended		6 Months Ended		48 Months Ended
	Feb. 16, 2016 shares	Apr. 30, 2014 USD ($)	Dec. 31, 2016 USD ($) shares	Dec. 31, 2015 USD ($)	Dec. 31, 2016 USD ($) shares	Dec. 31, 2015 USD ($)	Dec. 31, 2016 USD ($) shares	Sep. 30, 2016	Aug. 31, 2016 USD ($)	Jun. 30, 2016 USD ($) shares	Feb. 17, 2016 shares	Jul. 01, 2014 USD ($)
Revenue, Net			$ 799,000	$ 700,000	$ 1,266,000	$ 1,455,000
License and Services Revenue			83,000		109,000
Royalty Revenue			21,000	$ 17,000	35,000	$ 35,000
Retained Earnings (Accumulated Deficit)			(213,288,000)		(213,288,000)		$ (213,288,000)			$ (205,696,000)
Cash, Cash Equivalents, and Short-term Investments			5,800,000		5,800,000		5,800,000
Long-term Debt, Gross			4,000,000		4,000,000		4,000,000
Proceeds from Issuance or Sale of Equity		$ 44,600,000
Interest Expense, Debt Penalties					800,000
Debt Instrument, Unamortized Discount			$ 700,000		$ 700,000		$ 700,000
Common Stock, Shares, Outstanding | shares	89,344,777		8,934,452		8,934,452		8,934,452			8,927,830	8,934,452
Reverse Stock Split [Member]
Stockholders' Equity Note, Stock Split, Conversion Ratio	10
Reverse Stock Split [Member] | Reclassification from Common Stock to Additional Paid-in Capital [Member]
Current Period Reclassification Adjustment					$ 80,000
Century Medical [Member]
Debt Instrument, Face Amount									$ 4,000,000
Debt Instrument, Unamortized Discount			$ 700,000		$ 700,000		$ 700,000					$ 2,100,000
Century Medical [Member] | Pro Forma [Member]
Debt Instrument, Penalty Rate			7.00%		7.00%		7.00%	7.00%
Interest Expense, Debt Penalties					$ 800,000
Microcutter Products [Member]
Revenue, Net					300,000		$ 2,000,000
Automated Anastomotic Systems [Member]
Revenue, Net					$ 800,000

XML

Note 2 - Stockholders' Equity (Details Textual) - USD ($)	1 Months Ended	3 Months Ended		6 Months Ended
	Apr. 30, 2014	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015	Jun. 30, 2014
Proceeds from Issuance or Sale of Equity	$ 44,600,000
Allocated Share-based Compensation Expense		$ 700,000	$ 400,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized		$ 700,000		$ 700,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition				3 years 182 days
Non-employees [Member]
Allocated Share-based Compensation Expense				$ 0	$ 5,991
Series A Preferred Stock [Member]
Stock Issued During Period, Shares, New Issues	191,474
Share Price	$ 85
Convertible Preferred Stock, Shares Issued upon Conversion	10
Common Stock Ownership Threshold, Preferred Stock Conversion	9.98%
Dividends Payable						$ 1,900,000
Common Stock [Member]
Stock Issued During Period, Shares, New Issues	3,737,500
Share Price	$ 8.50

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Note 2 - Stockholders' Equity - Black-scholes Valuation Assumptions (Details)	3 Months Ended		6 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015
Risk-free interest rate		1.33%
Dividend yield	0.00%		0.00%	0.00%
Weighted-average expected term (in years) (Year)		4 years 357 days
Expected volatility		67.40%
Minimum [Member]
Risk-free interest rate	1.25%		1.11%	0.71%
Weighted-average expected term (in years) (Year)	4 years 292 days		4 years 292 days	4 years 87 days
Expected volatility	74.70%		74.70%	54.80%
Maximum [Member]
Risk-free interest rate	1.98%		1.98%	1.50%
Weighted-average expected term (in years) (Year)	4 years 302 days		4 years 302 days	4 years 357 days
Expected volatility	77.50%		77.50%	67.40%

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Note 2 - Stockholders' Equity - Non-cash Stock-based Compensation (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015
Stock-based compensation expense	$ 426	$ 265	$ 724	$ 400
Cost of Sales [Member]
Stock-based compensation expense	48	17	70	35
Research and Development Expense [Member]
Stock-based compensation expense	121	30	189	72
Selling, General and Administrative Expenses [Member]
Stock-based compensation expense	$ 257	$ 218	$ 465	$ 293

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Note 3 - Net Loss Per Share - Computation of Basic and Diluted Net Income (Loss) Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands		3 Months Ended		6 Months Ended
		Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2016	Dec. 31, 2015
Numerator:
Net loss		$ (3,637)	$ (4,087)	$ (7,592)	$ (8,729)
Denominator:
Shares used in computing basic and diluted net loss per share (in shares)		8,928	8,902	8,928	8,899
Basic and diluted net loss per share (in dollars per share)	[1]	$ (0.41)	$ (0.46)	$ (0.85)	$ (0.98)

[1] All per share amounts and shares of Dextera Surgical common stock issued and outstanding for all periods have been retroactively adjusted to reflect Dextera Surgicals one-for-ten reverse stock split of its common stock, which was effective February 17, 2016.

XML

Note 3 - Net Loss Per Share - Antidilutive Securities Excluded From Computation of Earnings Per Share (Details) - shares shares in Thousands	6 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Antidilutive securities excluded from the computation of earnings per share (in shares)	3,517	2,907
Employee Stock Option [Member]
Antidilutive securities excluded from the computation of earnings per share (in shares)	1,538	939
Restricted Stock [Member]
Antidilutive securities excluded from the computation of earnings per share (in shares)	64	53
Common Stock Shares Reserved for Future Issuance [Member]
Antidilutive securities excluded from the computation of earnings per share (in shares)	1,915	1,915

XML

Note 4 - Fair Value Measurements (Details Textual) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Cash	$ 1,500	$ 600
Liabilities, Fair Value Disclosure, Recurring	$ 0

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Note 4 - Fair Value Measurements - Assets Measured at Fair Value on a Recurring Basis (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Investments	$ 650	$ 9,090
Short-term Commercial Paper [Member]
Investments		999
Short-term Corporate Debt Securities [Member]
Investments	650	8,091
Fair Value, Measurements, Recurring [Member]
Total assets at fair value	4,257	12,119
Fair Value, Measurements, Recurring [Member] | Short-term Commercial Paper [Member]
Investments		999
Fair Value, Measurements, Recurring [Member] | Short-term Corporate Debt Securities [Member]
Investments	650	8,091
Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Total assets at fair value	2,025	3,029
Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Commercial Paper [Member]
Investments
Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Corporate Debt Securities [Member]
Investments
Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Total assets at fair value	2,232	9,090
Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Commercial Paper [Member]
Investments		999
Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Corporate Debt Securities [Member]
Investments	650	8,091
Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Total assets at fair value
Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Commercial Paper [Member]
Investments
Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member] | Short-term Corporate Debt Securities [Member]
Investments
Money Market Funds [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	2,025	3,029
Money Market Funds [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	2,025	3,029
Money Market Funds [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents
Money Market Funds [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents
Corporate Debt Securities with Maturity Less than 90 Days [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	982
Corporate Debt Securities with Maturity Less than 90 Days [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents
Corporate Debt Securities with Maturity Less than 90 Days [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	982
Corporate Debt Securities with Maturity Less than 90 Days [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents
Commercial Paper [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	600
Commercial Paper [Member] | Fair Value, Inputs, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents
Commercial Paper [Member] | Fair Value, Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents	600
Commercial Paper [Member] | Fair Value, Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Cash equivalents

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Note 5 - Available-for-sale Securities - Investments (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Amortized Cost	$ 650	$ 9,094
Gross Unrealized Losses		(4)
Fair Value	650	9,090
Investments	650	9,090
Short-term Corporate Debt Securities [Member]
Amortized Cost	650	8,095
Gross Unrealized Losses		(4)
Fair Value	650	8,091
Investments	$ 650	8,091
Short-term Commercial Paper [Member]
Amortized Cost		999
Gross Unrealized Losses		0
Fair Value		999
Investments		$ 999

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Note 5 - Available-for-sale Securities - Investment Securities in a Continuous Unrealized Loss Position (Details) $ in Thousands	Jun. 30, 2016 USD ($)
Less than 12 months Fair Value	$ 8,091
Less than 12 months Gross Unrealized Losses	(4)
12 months or greater Fair Value
12 months or greater Gross Unrealized Losses
Total Fair Value	8,091
Total Gross Unrealized Losses	(4)
Corporate Debt Securities [Member]
Less than 12 months Fair Value	8,091
Less than 12 months Gross Unrealized Losses	(4)
12 months or greater Fair Value
12 months or greater Gross Unrealized Losses
Total Fair Value	8,091
Total Gross Unrealized Losses	$ (4)

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Note 6 - Inventories - Summary of Inventories (Details) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Raw materials	$ 785	$ 698
Work in progress	284	133
Finished goods	436	232
Total	$ 1,505	$ 1,063

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Note 7 - Distribution, License, Development and Commercialization Agreements (Details Textual) - USD ($)							1 Months Ended		3 Months Ended	6 Months Ended		12 Months Ended			18 Months Ended
	Dec. 31, 2015	Jul. 01, 2014	Dec. 27, 2011	Sep. 30, 2011	Sep. 02, 2011	Aug. 16, 2010	Apr. 30, 2014	Sep. 30, 2011	Mar. 31, 2016	Dec. 31, 2016	Dec. 31, 2015	Jun. 30, 2016	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2016	Sep. 30, 2016	Aug. 31, 2016	Jun. 30, 2012	Jun. 30, 2011
Proceeds from Issuance or Sale of Equity							$ 44,600,000
Interest Expense, Debt Penalties										$ 800,000
Debt Instrument, Unamortized Discount										700,000					$ 700,000
Notes Payable, Noncurrent										3,293,000		$ 3,124,000			3,293,000
Deferred Revenue, Noncurrent										2,384,000		2,499,000			2,384,000
Deferred Revenue, Current										$ 633,000		569,000			$ 633,000
Century Medical [Member] | Sales Revenue, Net [Member] | Product Concentration Risk [Member]
Concentration Risk, Percentage										16.00%	30.00%
Century Medical [Member] | Accounts Receivable [Member] | Product Concentration Risk [Member]
Concentration Risk, Percentage										10.00%					33.00%
Intuitive Surgical [Member] | Initial Licensing Agreement [Member]
Deferred Revenue												0	$ 0
Licenses Revenue						$ 9,000,000						0	$ 0	$ 41,000
Common Stock Premium						1,000,000
Noncash or Part Noncash Divestiture, Amount of Consideration Received						$ 10,000,000
Deferred Revenue, Noncurrent																			$ 1,000,000
Intuitive Surgical [Member] | Amended Licensing Agreement [Member]
Licenses Revenue										$ 1,500,000
Proceeds from License Fees Received	$ 2,000,000
Deferred Revenue, Current										500,000					$ 500,000
Intuitive Surgical [Member] | Amended Licensing Agreement [Member] | Patented Technology [Member]
Proceeds from License Fees Received	$ 1,400,000
Intuitive Surgical [Member] | Amended Licensing Agreement [Member] | Developed Technology Rights [Member]
Proceeds from License Fees Received									$ 600,000
Intuitive Surgical [Member] | Joint Development Program [Member]
Licenses Revenue										100,000
Cook Incorporated [Member]
Licenses Revenue										0	$ 0
Deferred Revenue, Current										400,000		400,000			400,000
Century Medical [Member]
Debt Instrument, Face Amount																	$ 4,000,000
Proceeds from Secured Notes Payable			$ 2,000,000	$ 2,000,000				$ 2,000,000
Debt Instrument, Interest Rate, Stated Percentage		5.00%
Notes Payable, Fair Value Disclosure		$ 2,600,000			$ 2,400,000
Debt Instrument, Unamortized Discount		$ 2,100,000								$ 700,000					$ 700,000
Distribution Agreement Term of Extension		5 years
Notes Payable		$ 3,100,000
Century Medical [Member] | Pro Forma [Member]
Debt Instrument, Penalty Rate										7.00%					7.00%	7.00%
Interest Expense, Debt Penalties										$ 800,000
Century Medical [Member] | Notes Payable, Other Payables [Member]
Debt Instrument, Face Amount					$ 4,000,000													$ 4,000,000
Debt Instrument, Interest Rate, Stated Percentage					5.00%
Fair Value Inputs, Discount Rate		18.00%			18.00%
Debt Instrument, Unamortized Discount		$ 500,000			$ 1,600,000
Deferred Revenue		$ 500,000
Notes Payable, Noncurrent										3,300,000		3,100,000			$ 3,300,000
Debt Issuance Costs, Line of Credit Arrangements, Net										$ 700,000		$ 900,000			$ 700,000

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Note 8 - Note Payable (Details Textual) - USD ($)			1 Months Ended		6 Months Ended
	Dec. 27, 2011	Sep. 30, 2011	Apr. 30, 2014	Sep. 30, 2011	Dec. 31, 2016	Sep. 30, 2016	Aug. 31, 2016	Jun. 30, 2016	Jul. 01, 2014	Jun. 30, 2012	Sep. 02, 2011
Debt Instrument, Unamortized Discount					$ 700,000
Proceeds from Issuance or Sale of Equity			$ 44,600,000
Interest Expense, Debt Penalties					800,000
Notes Payable, Noncurrent					3,293,000			$ 3,124,000
Century Medical [Member]
Debt Instrument, Face Amount							$ 4,000,000
Proceeds from Secured Notes Payable	$ 2,000,000	$ 2,000,000		$ 2,000,000
Debt Instrument, Interest Rate, Stated Percentage									5.00%
Debt Instrument, Unamortized Discount					$ 700,000				$ 2,100,000
Century Medical [Member] | Pro Forma [Member]
Debt Instrument, Penalty Rate					7.00%	7.00%
Interest Expense, Debt Penalties					$ 800,000
Century Medical [Member] | Notes Payable, Other Payables [Member]
Debt Instrument, Face Amount										$ 4,000,000	$ 4,000,000
Debt Instrument, Interest Rate, Stated Percentage											5.00%
Debt Instrument, Unamortized Discount									$ 500,000		$ 1,600,000
Notes Payable, Noncurrent					3,300,000			3,100,000
Debt Issuance Costs, Line of Credit Arrangements, Net					$ 700,000			$ 900,000

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Note 9 - Commitments and Contingencies (Details Textual) - USD ($) $ in Thousands	Dec. 31, 2016	Jun. 30, 2016
Restricted Cash and Cash Equivalents	$ 104	$ 104
Restricted Cash, Letter of Credit [Member]
Restricted Cash and Cash Equivalents	$ 100	$ 100

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Note 9 - Commitments and Contingencies - Future Minimum Lease Payments (Details) $ in Thousands	Dec. 31, 2016 USD ($)
2017 (remaining six months)	$ 503
2018	1,032
2019	173
Total minimum lease payments	$ 1,708