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EX-10.49 - LICENSE AGREEMENT BETWEEN HANSEN AND LUNA - LUNA INNOVATIONS INCORPORATED - HANSEN MEDICAL INCdex1049.htm
EX-10.48 - DEVELOPMENT AND SUPPLY AGREEMENT - LUNA INNOVATIONS INCORPORATED - HANSEN MEDICAL INCdex1048.htm
EX-10.50 - CROSS LICENSE AGREEMENT BETWEEN INTUITIVE AND HANSEN - INTUITIVE SURGICAL, INC. - HANSEN MEDICAL INCdex1050.htm
EX-10.46 - SEPARATION AGREEMENT - CHRISTOPHER SELLS - HANSEN MEDICAL INCdex1046.htm
EX-10.47 - EXTENDED JOINT DEVELOPMENT AGREEMENT - PHILIPS MEDICAL SYSTEMS NEDERLAND B.V. - HANSEN MEDICAL INCdex1047.htm
EX-21.1 - LIST OF SUBSIDIARIES OF THE REGISTRANT - HANSEN MEDICAL INCdex211.htm
EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - HANSEN MEDICAL INCdex231.htm
EX-31.2 - CERTIFICATION OF CFO REQUIRED BY RULE 13A-15(E) OR RULE 15D-15(E) - HANSEN MEDICAL INCdex312.htm
EX-32.1 - CERTIFICATION OF CEO REQUIRED BY RULE 13A-14(B) OR RULE 15D-14(B) - HANSEN MEDICAL INCdex321.htm
EX-32.2 - CERTIFICATION OF CFO REQUIRED BY RULE 13A-14(B) OR RULE 15D-14(B) - HANSEN MEDICAL INCdex322.htm
EX-10.51 - SEPARATION AGREEMENT - STEVEN M. VAN DICK - HANSEN MEDICAL INCdex1051.htm
EX-31.1 - CERTIFICATION OF CEO REQUIRED BY RULE 13A-15(E) OR RULE 15D-15(E) - HANSEN MEDICAL INCdex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission file number: 001-33151

 

 

HANSEN MEDICAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   14-1850535
(State of Incorporation)   (I.R.S. Employer Identification No.)

800 East Middlefield Road, Mountain View, CA 94043

(Address of Principal Executive Offices)

(650) 404-5800

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

 

Title of Class

 

Name of Exchange On Which Registered

Common stock, $0.0001 par value per share   The NASDAQ Global Market

Securities registered under Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.     Yes   ¨    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨    No   x

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 (the “Exchange Act”) 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  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

At June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock as reported by the Nasdaq Global Market on that date was $128,912,318.

As of February 26, 2010, the registrant had outstanding 37,534,916 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s Definitive Proxy Statement (the “Proxy Statement”), which is expected to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the registrant’s fiscal year ended December 31, 2009 in connection with the registrant’s 2010 Annual Meeting of Stockholders, are incorporated by reference into Part III of this report. Except with respect to information specifically incorporated by reference in this report, the Proxy Statement is not deemed to be filed as a part hereof.

 

 

 


Table of Contents
 

Part I

 

  
Item 1   

Business

   3
Item 1A   

Risk Factors

   38

Item 1B

  

Unresolved Staff Comments

   69
Item 2   

Properties

   69
Item 3   

Legal Proceedings

   70
Item 4   

(Removed and Reserved)

   71
Part II   
Item 5   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   72
Item 6   

Selected Financial Data

   75
Item 7   

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

   76
Item 7A   

Quantitative and Qualitative Disclosure about Market Risk

   92
Item 8   

Financial Statements and Supplementary Data

   93
Item 9   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   126
Item 9A   

Controls and Procedures

   126
Item 9B   

Other Information

   129
Part III   
Item 10   

Directors, Executive Officers and Corporate Governance

   130
Item 11   

Executive Compensation

   130
Item 12   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   130
Item 13   

Certain Relationships and Related Transactions, and Director Independence

   130
Item 14   

Principal Accountant Fees and Services

   130
Part IV   
Item 15   

Exhibits, Financial Statements and Financial Statement Schedules

   130
  

Signatures

   131

We have applied for trademark registration of, and claim trademark rights in, “Artisan,” “Artisan Extend,” “Hansen Artisan,” “Instinctive Motion,” “Lynx,” and “CoolSense.” We have obtained trademark registration in the United States for, and claim trademark rights in “Hansen Medical,” “Hansen Medical (with Heart Design),” “Heart Design (Logo),” “Sensei,” “Fine Force Technology,” and “IntelliSense.” This report also includes other trademarks, service marks and trade names of other companies.


Table of Contents

PART I

 

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements are based on our current expectations about our business and industry. In some cases, these statements may be identified by terminology such as “may,” “will”, “should,” “expects,” “could,” “intends,” “might,” “plans,” “anticipates,” “targets,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in this report in Item 1A “Risk Factors.” Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

We develop, manufacture and sell a new generation of medical robotics designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. While earlier generations of medical robotics were designed primarily for manipulating rigid surgical instruments, our technology is designed to enable and improve medical procedures that are reliant upon flexible tools like wires, catheters, sheaths, guides, and stents. Our currently marketed product, the Sensei® Robotic Catheter System, or Sensei system, is designed to allow physicians to instinctively navigate flexible catheters with greater stability and control in electrophysiology procedures. Instinctive navigation refers to the ability of our Sensei system to enable physicians to direct the movements of a robotic catheter like our currently marketed Artisan Control Catheter, or Artisan catheter, to a desired anatomical location in a way that is natural and inherently simple. Within the field of electrophysiology, we believe our Sensei system and its corresponding disposable Artisan catheter enable physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with existing catheters and catheter-based technologies, or that we believe could be accomplished only by the most skilled physicians. We believe that our Sensei system has the potential to benefit patients, physicians, hospitals and third-party payors by improving clinical outcomes and permitting more complex procedures to be performed interventionally. We believe our technology has many applications outside of the field of electrophysiology and there are a number of applications for flexible robotics technology in the endovascular and interventional markets, which are substantially larger than electrophysiology in both procedure volume and market size. We plan to advance our technology into these larger, more mature markets so that benefits of flexible robotics and instinctive control can be experienced by a larger group of physicians and patients.

We received CE Mark approval for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. In May 2007, we received CE Mark approval for our Artisan catheter and also received U.S. Food & Drug Administration, or FDA, clearance to market and promote our Sensei system and Artisan catheter in the United States for manipulation, positioning and control of certain mapping catheters during electrophysiology, or EP, procedures. To better define the scope of our initial mapping clearance, the FDA also required that we label our products with language stating that their safety and effectiveness for use with ablation catheters have not been established in the treatment of cardiac arrhythmias including atrial fibrillation. We recognized revenue on our first system in May 2007 and, through December 31, 2009, we had recognized revenue on a total of 69 Sensei systems and had shipped another 12 units on which revenue recognition has been deferred. Of this total of 81 Sensei systems 50 were shipped in the United States and 31 in Europe. Our end customers for these systems range from large university medical centers to community hospitals and many were shipped through distributors.

For the most part, catheters and catheter-based technologies have used blood vessels and other tubular anatomic structures as “highways” to constrain and guide their movement to specific parts of the body. However, we believe that physicians have limited ability to accurately control the working tips of these manually-controlled, hand-held instruments, which may hinder the physician’s ability to perform complex procedures that

 

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require precise navigation and stability of catheters in tortuous vessels. These issues are magnified in larger open spaces such as the atria and ventricles of the heart where the navigation of the tip of the catheter is no longer aided by vessel walls.

Our current focus is on EP procedures for the diagnosis and treatment of patients who suffer from abnormal heart rhythms, or arrhythmias, such as atrial fibrillation. Most of the procedures completed to date using our Sensei system involved mapping and ablation of cardiac tissue to treat atrial fibrillation. The use of the Sensei system and Artisan catheter in the United States for ablation procedures has been done on an off-label basis. Without FDA clearance for labeling that includes certain ablation procedures, this use (and any use other than manipulation, positioning and control of certain mapping catheters during EP procedures) is considered an off-label use of our products, and we are prohibited from labeling or promoting our products, or training physicians for such off-label use. Off-label use is possible because physicians are not precluded from using an FDA-cleared product in the practice of medicine beyond the scope of its cleared indications.

To address this issue, we have submitted an IDE with a proposed clinical trial to the FDA for the use of our Artisan catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the United States beyond mapping. We are currently finalizing the protocol for an approximately 300-patient study and hope to enroll our first patient in the second quarter of 2010 with completion of enrollment by the end of 2010. The proposed study, if approved by the FDA, will include a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days. If successful, we hope to use the data from this study to support a submission to the FDA to obtain clearance for use in atrial fibrillation procedures.

We believe that our Sensei system can improve a physician’s ability to map the hearts of patients with cardiac arrhythmias – and to perform ablation procedures on such patients in the European Union – because of its ability to provide accurate and stable robotic control of the working tip of catheters and flexible instruments. Based on our experience with previous catheter and catheter-based procedures, the results of the procedures performed with our Sensei system and feedback from the physicians that have used our Sensei system, we believe that our Sensei system offers significant benefits over conventional catheter-based technologies.

In April 2007, we entered into a Joint Development Agreement and a Co-Marketing Agreement with the Atrial Fibrillation Division of St. Jude Medical, Inc., or St. Jude. Pursuant to this joint development agreement, we have introduced our CoHesionTM 3D Visualization Module, or CoHesion Module, which integrates our Sensei system with St. Jude’s EnSite® System. The EnSite system provides visualization and localization or detection of EP catheters in 3D space within the heart chamber. The CoHesion Module became commercially available in the European Union and in the United States in 2008. We believe that the integrated system helps physicians navigate more instinctively within the 3D cardiac space and helps reduce radiation to the patient and physician because the system combines visualization in 3D and catheter movement in 3D, which may lead to greater accuracy of movement during catheter-based EP procedures. As of December 31, 2009, 50 of the 81 systems we have shipped are configured with the CoHesion Module.

We believe our Sensei system and Artisan catheter, which are labeled and marketed for manipulation, positioning and control of certain mapping catheters during EP procedures, a critical step in the identification of the heart tissue generating abnormal heart rhythms that may require ablation or other treatment, will improve the efficacy, consistency of results and ease of performing many catheter-based interventional procedures. Our initial focus is on EP procedures for the diagnosis and treatment of patients who suffer from abnormal heart rhythms, or arrhythmias. Atrial fibrillation, which is the most common form of arrhythmia, results from abnormal electrical impulses that cause a rapid, irregular heartbeat within the upper chambers of the heart, leading to ineffective pumping of the blood through the heart, as well as complications that include a significantly increased risk of stroke. According to industry estimates, approximately five million people in the United States and the European Union alone suffer from atrial fibrillation. The vast majority of patients with atrial fibrillation require some form of treatment.

 

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Many patients with atrial fibrillation are initially treated with drug therapies, which may cause significant side effects. Patients who are either not responsive to drug therapy or are unhappy with its side effects are candidates for catheter-based ablation treatments. However, non-robotic catheter-based approaches have significant drawbacks that we believe directly relate to the difficulty of manually controlling the catheters. These drawbacks include success rates of only approximately 75 percent and risks such as lengthy procedure times, which can lead to extensive radiation exposure for the physician and the patient. We believe that, primarily due to the limitations of non-robotic techniques, only approximately 40,000 of these procedures were performed in the United States in 2008. We believe that many of the electrophysiologists in the United States do not regularly perform these catheter-based procedures because of the difficulty of manual technique, lack of clinical data and the complexity and time-consuming nature of treating atrial fibrillation.

In addition to our development efforts in the treatment of complex atrial arrhythmias, we are also investigating other EP applications such as ventricular tachycardia and left atrial appendage occlusion.

We also believe that robotic control of flexible instruments has potential application to a broad range of interventional procedures. We have investigated expanding the uses for our technology beyond EP procedures to additional interventional applications in peripheral vascular and cardiovascular diseases. Consistent with this strategy, we have investigated the application of robotic delivery techniques to endovascular interventions such as angioplasty and stenting, as well as structural heart applications such as percutaneous aortic valve replacement and mitral valve repair.

As a result of these investigations, we have defined a strategy for pursuing applications of our technology in the endovascular treatment of vascular disease. To address the vascular market, we are developing a new Hansen robotic system and catheter for use in the arterial and venous vascular systems. We believe this platform and its clinical capability has the potential to open up new markets for Hansen by providing vascular surgeons, interventional cardiologists, and interventional radiologists with accurate control of the catheter tip for faster, easier, and safer vessel navigation, helping them to perform more complex catheter based procedures in a more systematic way, and consequently converting procedures in interventional therapy to robotics. We are currently targeting a clinical study of a vascular robotic system and catheter during the second half of 2010 and pursuing regulatory approvals including 510(k) clearance in the U.S. and CE mark in the European Union estimated in the first quarter of 2011. We cannot assure you that we will be able to achieve this timeline or create a suitable product at all.

Background

Over the past thirty years, one of the most significant medical trends has been the development of less traumatic or minimally invasive methods of diagnosing and treating disease. These less traumatic methods have largely fallen into two groups:

 

   

Minimally invasive surgery, which reduces the size of incisions in body walls, generally results in fewer complications, shorter hospitalization and recovery times and substantially reduced pain and suffering. These procedures generally use rigid instruments.

 

   

Interventional procedures, which minimize trauma by using blood vessels and other tubular anatomic structures such as the nose, mouth, urethra, rectum and cervix as “highways” to guide flexible instruments such as catheters to the area of treatment.

Minimally invasive surgery reduces the trauma of open surgery, and interventional procedures cause even less trauma and can reach many areas of the body that rigid-instrument robotic surgery cannot. Each year, catheter-based technologies are used for millions of interventional diagnostic and therapeutic medical procedures worldwide. However, manually-controlled hand-held catheter delivery devices, even in the hands of the most skilled specialists, have inherent instrument control limitations. In traditional interventional procedures, devices are manually manipulated by physicians, who twist and push the external ends of the instrument in an iterative process that attempts to thread the internal end of the instrument through tubular anatomic structures to a specific

 

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treatment site. Manual control of the working tip of the catheter becomes increasingly difficult as more turns are required to navigate the instrument to the treatment site. These control problems are significant in constrained tubular spaces such as blood vessels and become even more difficult in unconstrained spaces such as the atria and ventricles of the heart. In addition, while sophisticated imaging, mapping and location-sensing systems have provided visualization for interventional procedures and allowed physicians to treat more complex conditions using flexible instruments, the substantial lack of integration of these information systems requires the physician to mentally integrate and process large quantities of information from different sources in real time during an interventional procedure. These systems display data differently, requiring physicians to continuously reorient themselves to the different formats and displays as they shift their focus from one data source to the next while at the same time manually controlling an inherently difficult-to-control catheter.

In recent years, another company has attempted to address these challenges with a remote guidance system that steers catheters using large magnets. However, we believe this magnetic system has a number of limitations, including the overall cost of the large equipment; the need to modify and magnetically shield procedure rooms at significant expense prior to installation; the need to dedicate a room to the magnetic system; potential magnetic interference with other equipment and implanted devices; the inability to apply variable force at the working tip of the catheter, narrowing the range of potential procedural applications for the system; and the inherent limitations associated with only having one magnetically moveable surgical instrument at a time inside the patient’s body. In addition, this magnetically based system lacks an open architecture for third-party catheters, necessitating the development, regulatory clearance and utilization of proprietary therapeutic magnetically based catheters made by the system manufacturer or its business partners.

The Hansen Medical Solution

Our Sensei system principally consists of two portable modules: a physician control console and a patient-side module that can be easily connected to most procedure tables. Physicians sit at the control console and use their hands to instinctively control the motion of our disposable Artisan catheter, which is attached to the patient-side module. The Artisan catheter is designed to accurately navigate third-party catheters and catheter-based technologies to specific sites. Our Sensei system is designed to use advanced robotics to enable physicians to vary the force at the working tip of these flexible devices in a broad range of procedures.

We believe our Sensei system, combined with our disposable Artisan catheters, overcomes the limitations of both hand-held catheters and magnetic navigation systems. We designed our Sensei system to have the following attributes:

 

   

Instinctive control. Our Sensei system utilizes computer-controlled robotics to directly translate the motions of the physician’s hands from our control console into corresponding accurate manipulations of the catheters and catheter-based technologies inside the body. We believe the instinctive robotic control of the catheters will be easier to use than manual catheter approaches and therefore have the potential to reduce the variability of procedure times, improve efficacy and enable new or additional procedures to be performed. In addition, we believe this instinctive control enables physicians to be trained in the use of our Sensei system in a relatively short period of time which can increase the number of physicians who are capable of performing these catheter-based procedures.

 

   

Stability. We believe our Sensei system provides the accuracy and control required for treating a number of cardiac conditions in which the stable and repeated placement of a catheter is necessary for an effective outcome, such as against a specific location on the inner wall of a beating heart.

 

   

Variable force at the catheter tip. To effectively perform a broad range of catheter-based procedures, physicians must have the ability to apply variable force at the working tip of the catheters and other catheter-based technologies. We designed our disposable Artisan catheter products to provide variable support while maintaining the flexibility required to navigate the catheter. In addition, we have developed our proprietary IntelliSense® force-sensing technology to measure and display the amount of force being applied by a catheter throughout the procedure.

 

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Compatibility with third-party devices. Our Artisan catheter does not require physicians to use a set of proprietary therapeutic catheters made by a specific manufacturer. Although we have received clearance for use of our Sensei system with only two specified mapping catheters, our Artisan catheter incorporates a center lumen that is designed to be compatible with most currently approved third-party catheters without modification. This enables us to potentially achieve clearance for a broader range of devices for use with our Sensei system than we have achieved thus far.

 

   

Movability. Our Sensei system primarily consists of two portable modules: a physician control console and a patient-side module that can be connected to most procedure tables. In addition, the system includes a portable electronics rack. These modules can be wheeled between procedure rooms and reinstalled by a Hansen service technician, and do not require a dedicated space, any special facility modification or magnetic shielding to prevent interference for their use. As a result, we expect our Sensei system to be much more convenient and significantly less expensive to install than a magnetic system.

 

   

Reducing x-ray radiation exposure. Our Sensei system allows the primary physician to conduct procedures away from the radiation field or in an adjacent room which greatly reduces their radiation exposure.

We believe that our robotic solution may offer the potential for substantial benefits to patients, physicians, hospitals and third-party payors including:

 

   

improving patient outcomes through greater control, consistency and stability in catheter-based procedures;

 

   

permitting access to more complex existing cases and enabling broader use of catheter-based treatments for diseases where catheters are rarely used today, if at all;

 

   

enabling more physicians to perform complex interventional procedures through greater ease of use and reduced training time; and

 

   

reducing physician fatigue and the risk of physician back and neck problems from heavy lead protective clothing by allowing physicians to sit comfortably at our control console during a procedure instead of standing at table-side. Reduced fatigue to primary physician may allow for additional cases to be performed in one day, thus increasing hospital efficiency.

Since the commercial launch of our Sensei system, an increasing number of clinical studies have been performed evaluating, among other things, the clinical experience of using our system for physicians and patients. Most of the studies compare robotic versus manual procedures and describe differences in efficacy and treatment outcomes, procedure times, power use and power settings, complication rates, and fluoroscopy time (exposure to radiation). While there remain a number of studies underway, and the current body of completed studies represent in the aggregate a limited number of procedures, we are encouraged by some of the early conclusions regarding the benefits of our technology. For example, at IKEM in Prague, Professor Kautzner, in his pilot study of 16 patients treated manually versus 22 with robotic assistance, found that robotic navigation was associated with a statistically significant reduction in radiation exposure to the patient, reduced energy requirements, shorter procedures and low complication rates. Another larger single center study of 390 patients at St. David’s Medical Center in Austin, Texas demonstrated reductions in radiation exposure and power settings, with equivalent low complication rates to the manual arm. As additional studies conclude and a greater body of cases are performed we believe there will be greater empirical data for the acceptance and adoption of our products and technology.

Our Products

Sensei system

Our Sensei system is principally comprised of two portable modules: a physician control console and a patient-side module that can be connected to most procedure tables. The control console can be located inside the

 

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EP lab and close to the patient or outside the EP lab in a separate location shielded from radiation. The control console features an instinctive motion controller, which robotically controls the patient-side module to accurately move the catheter within the patient anatomy. Our robotics technology uses sophisticated software and system control algorithms to command the motion of our Artisan catheter. Having navigated the catheter to the treatment site, the physician uses instinctive controls to accurately place the working tip of the control catheters where the desired treatment is to be performed.

Our patient-side module is a robotic manipulator actuated by motors that control pull-wires in our Artisan catheter. The manipulator is mounted on an articulating, or pivoting, arm that is in turn mounted to the procedure table in the EP lab or other treatment room. The manipulator may be directed over the patient during a procedure and thus positioned optimally for that procedure.

We received CE Mark approval for our Sensei system in the fourth quarter of 2006 and in May 2007 we received FDA clearance for the marketing of our Sensei system for manipulation, positioning and control of certain mapping catheters during EP procedures. When the FDA cleared our technology for commercialization in the U.S., it concluded that there is a reasonable likelihood that our products will be used for an intended use not identified in the proposed labeling and that such uses could cause harm. The FDA therefore required that we label our products with language spelling out that the safety and effectiveness of our products for use with cardiac ablation catheters, in the treatment of cardiac arrhythmias including atrial fibrillation, have not been established. Our Sensei system and our Artisan catheter have been used in the United States for ablation procedures in an off-label basis.

To assist physicians in applying the appropriate force with the catheter tip, we have developed our proprietary IntelliSense Fine Force TechnologyTM to measure and display the amount of force in grams transmitted along the shaft of the catheter as a result of catheter tissue contact. We obtained premarket notification, or 510(k) clearance, from the FDA for this feature in 2008. In the third quarter of 2009, we introduced Sensei X, our new generation Sensei system.

Artisan catheter

Our disposable Artisan catheter and guide catheter assembly consists of a telescoping set of control catheters that are integrated to provide the desired motion of the tip of a diagnostic or therapeutic catheter that is inserted through the center lumen of the Artisan catheter. In this manner, the Artisan assembly is designed to accurately control the movement of an existing mapping catheter chosen by the physician. As a result, physicians are not limited to using particular proprietary catheters as is the case with the magnetic-based remote system. In addition, the center lumen of the Artisan catheter allows physicians to adapt and expand the procedures they can perform as other manufacturers invent new therapeutic or diagnostic catheters. Each Artisan catheter is designed to be used only once and then discarded.

Our disposable Artisan catheter and guide are designed to move together or independently, and can move with multiple degrees of freedom when attached to the robotically-controlled motors of our Sensei system. In addition, our Artisan catheter has a programmable chip that prevents use of an Artisan catheter that has been previously used and that restricts other control catheters from being plugged into our Sensei system patient-side module. In May 2007, we received CE Mark approval for our Artisan catheter and also received FDA clearance for the marketing of our Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. In fall of 2009, we introduced our Artisan eXtend catheter, which provides improved flexibility and ease of use. However, some of the new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any consequences associated with the new catheters, we voluntarily recalled all of the catheters and reported the events to the FDA in accordance with applicable regulations. Our manufacturing group is testing a revised catheter design which we expect to be able to ship to customers later this year.

 

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We expect to begin shipping the Lynx catheter, a standard sized, flexible, integrated irrigated ablation catheter in the second half of 2010 outside of the United States. This catheter is the culmination of our development work on improvements in catheter design, flexibility, and control, and in the development program of the irrigated RF ablation tip. Our preclinical work as well as engineering clinical work continues to confirm that the quality of ablation, cooling capabilities, and navigation and control capabilities of this catheter are consistent with our requirements. We believe the Lynx will provide users the opportunity to use a flexible, integrated, irrigated ablation product that also affords them the opportunity of reducing the disposable procedure cost.

CoHesionTM 3D Visualization Module

Our CoHesion 3D Visualization Module, or CoHesion Module, is a software interface between our Sensei system and the St. Jude Medical EnSiteTM System for EP procedures. It is designed to provide physicians with 3D visualization to augment their ability to move a catheter throughout the heart, as well as increase control over placement of the catheter in specific locations. The CoHesion Module expands the utility of the EnSite and Sensei systems to provide physicians with a comprehensive and easy-to-use remote navigation and mapping system for EP procedures. Key features of the CoHesion Module include:

 

   

importation of EnSite 3D geometry into the Sensei system’s main navigation window;

 

   

localization of the percutaneous catheter tip within the EnSite 3D geometry; and

 

   

instinctive navigation of the localized catheter tip by the Artisan catheter.

Multiple published clinical studies show that the use of the CoHesion Module results in the reduction of radiation exposure to the patient compared to conventional procedures. The CoHesion Module became commercially available in the European Union in the first quarter of 2008 and we obtained FDA clearance for the CoHesion Module in the United States at the end of the second quarter of 2008.

Our Strategy

Our goal is to establish our technology as the leading robotic platform for complex interventional catheter-based procedures for cardiovascular and peripheral vascular diseases. We believe our Sensei system and the system we are developing for vascular procedures will accomplish this objective by improving patient outcomes, reducing physician fatigue which may allow for additional cases to be performed in one day, reducing radiation exposure for primary physicians and reducing overall procedure costs and hospital expenditures. We also believe that we will be able to increase the number of procedures treated with catheter-based approaches and enable more doctors to perform such procedures. We market our initial products for EP procedures in the United States through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products.

Elements of our strategy include:

 

   

Focus on key institutions and thought leaders to encourage adoption of our Sensei system. We are currently focusing our marketing efforts on the academic and community hospitals where the majority of EP procedures are performed. We believe these efforts will benefit those hospitals which adopt our technology by reinforcing their reputations as centers of excellence in their local markets in the specialties that benefit from procedures performed with our Sensei system. Through December 31, 2009, we have shipped a total of 81 Sensei systems worldwide and recognized revenue on a total of 69 Sensei systems, consisting of 48 in the United States and 21 in Europe. The installation sites range from large university medical centers to community hospitals.

 

   

Continue ongoing research and development efforts to broaden our technology platform and extend our leadership. We intend to enhance and maintain our technology leadership with focused research

 

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and development efforts. Currently, we are seeking to develop a new system and catheter for use in the arterial vascular system that we expect will feature advanced electrical, mechanical, and sensing capabilities that will permit development of both more complex as well as simpler catheters. We believe this platform and its clinical capability could provide us access to significant markets beyond EP. We are currently targeting a clinical study during the second half of 2010 and receipt of regulatory approvals including 510(k) clearance in the United States and CE mark in the European Union estimated in the first quarter of 2011. We believe that a robotic system with flexibility, in terms of tools and disposables, has the potential to allow us to address broadly market needs for both complex interventions as well as simpler cases.

 

   

Increase use of our Sensei systems and Artisan catheter. Following the initial placement within a given hospital, we will endeavor to expand the number of physicians who use our Sensei system. Our goal is to increase usage per system, leading to higher volume sales of our disposable Artisan catheter and sales of additional Sensei systems at each hospital. Through December 31, 2009, we estimate approximately 3,000 procedures have been performed using our Sensei system and Artisan catheter.

 

   

Expand potential applications for our Sensei system. We intend to conduct post-marketing studies to provide evidence for the benefits which we believe our technology brings to the clinician, which should help to drive adoption of our technology. We also intend to develop relationships and pursue clinical research with leading cardiologists in order to develop and expand the range of clinical applications for our Sensei system in the fields of EP and interventional cardiology, and to capitalize on such relationships to apply our Sensei system to areas of unmet need within cardiovascular disease. Studies are currently under way in Europe comparing the safety, usability and success of the treatment of atrial fibrillation with our Sensei system to manual techniques. In addition, we have proposed a clinical trial to the FDA for the use of our Artisan catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the U.S. beyond mapping. We are currently finalizing an approximately 300 patient study protocol and estimate enrolling our first patient in the second quarter of 2010 and completing enrollment by the end of 2010. The study will include a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days.

 

   

Leverage the open architecture of our Sensei platform. We believe that our broad compatibility with key imaging and visualization technologies will facilitate adoption of our system in the marketplace. We also believe that adoption of our system will be enhanced because physicians will be able to use existing approved catheters in the lumen of our Artisan catheter. We plan to collaborate with manufacturers of disposable interventional products and imaging equipment to optimize compatibility with future enhancements of our Sensei system. Further, our open architecture allows us to benefit from third-party development efforts that advance current catheter and imaging technologies. For example, we are encouraged with the recent movement within imaging technology companies to create a convergence of surgical operating rooms and interventional suites into hybrid interventional operating labs. We believe this convergence of imaging for intervention and operative intervention is consistent with our strategy to create increase efficacy, safety and efficiency through the pairing of visualization and imaging technology with our flexible robotics.

 

   

Focus commercial, clinical, and engineering activities to drive adoption and utilization of the Sensei technology in electrophysiology. We have, during 2009, significantly streamlined our product development strategy to focus our efforts on projects with the highest level of clinical value and which we believe will have attractive returns on investment. We have also reoriented our investments in marketing and clinical marketing to better educate the physician community as to the benefits of our technology. We believe that through both simultaneous broad and focused physician interaction, publications of our clinical experiences, dissemination of those experiences, and engagement of current and new users, we can positively affect system utilization. We also believe that committing to utilization and physician interaction we will also drive improvements in adoption of the technology.

 

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We only received FDA clearance of our Sensei system and Artisan catheter to map the heart anatomy using two particular mapping catheters. Our business and future growth, however, will depend on the use of our Sensei system in the treatment of atrial fibrillation and other cardiovascular procedures, for which we plan to seek future clearances or approvals for labeling that includes certain ablation procedures, depending upon regulatory requirements and our understanding of the needs of the physician community. Without such clearance or approval, each of these uses is considered an off-label use of our Sensei system, and we are prohibited from labeling or promoting our Sensei system, or training physicians, for such off-label use. Due to these legal constraints, our sales and marketing efforts focus on the general technical attributes and benefits of our Sensei system and its use to map the heart anatomy. As a result of promotional limits based on our labeling and the competitive nature of the market, some hospitals or physicians may not adopt our Sensei system or use our products unless and until we are able to broaden the scope of FDA clearance for our products. In addition, if the FDA determines that we have engaged in off-label promotion, we could be subject to significant liability.

Clinical Focus

Electrophysiology

Electrophysiology, or EP, is the study of electrical impulses through the heart. EP is focused primarily on diagnosing and treating arrhythmias, which are conditions in which electrical impulses within the heart vary from the normal rate or rhythm of a heartbeat. Such conditions may be associated with significant risks. Drug therapies have traditionally been used as initial treatments but they often fail to adequately control the arrhythmia and may have significant side effects. As a result, a significant unmet medical need for long-term solutions persists.

Severe heart rhythm disturbances were historically treated by highly invasive open chest heart surgery and are therefore typically only performed in conjunction with other procedures unrelated to the arrhythmia such as coronary artery bypass surgery or valve replacement and, as such, the total procedure can be very expensive. While generally very effective, these procedures are extremely traumatic for the patient, and usually require long hospital stays followed by a significant period of convalescence. Minimally invasive surgical procedures for the treatment of severe heart rhythm disturbances, including some which are robotically controlled, were devised to add visualization and instrument control using an endoscope in order to reduce the trauma for the patient. While these minimally invasive surgical techniques have been used for a number of anti-arrhythmic procedures, we believe the results have been mixed and the trauma to the patient and procedure cost remain high.

Interventional electrophysiology further advanced these surgical procedures in EP labs through visualization provided by real-time x-ray imaging, often enhanced by electro-anatomic mapping and intracardiac ultrasound. These advances enable physicians to insert and navigate catheters into the vasculature or open chambers of the heart to deliver diagnostic and therapeutic technologies.

In EP mapping and ablation procedures, physicians have traditionally used specialized hand-held catheters. These catheters are manually navigated using a system of mechanical control cables to first map the electrical signals within the patient’s heart and then to ablate the heart tissue to eliminate arrhythmias. Generally, ablation is accomplished by applying radio frequency energy or electrical energy, or freezing the diseased tissue giving rise to the arrhythmia, usually through a catheter which creates a small scar that is incapable of generating or conducting heart arrhythmias. EP procedures have proven highly effective at treating arrhythmias at sites accessible through the vasculature. According to Millennium Research Group, there were approximately 164,000 EP procedures for diagnosis and treatment of arrhythmia conducted in the United States in 2007 and approximately 200,000 such procedures in Europe in 2006.

Control of the hand-held devices used in these EP procedures requires significant skill, because navigation in the blood vessels and the chambers of the heart can be difficult. The path that the interventional device must follow to arrive at the treatment site can be complex and tortuous and can include crossing the septum. Existing hand-held devices are limited in their ability to accurately navigate the tip of the mapping and ablation catheter to the treatment site on the heart wall, maintain adequate tissue contact within a beating heart to effect treatment

 

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and perform complex ablations within the left atrium of the heart. Physicians using manually-controlled, hand-held devices often utilize a range of different catheters and sheaths in an attempt to find the right device or devices for the procedure being performed. Our Sensei system has been designed to address the challenges associated with the use of current hand-held devices in performing many EP procedures.

We believe the instinctive robotic control of our Sensei system may provide greater accuracy, stability and control, reduce the variability of procedure times and improve the efficacy of EP procedures, including:

 

   

General mapping and ablation. A physician typically performs a diagnostic procedure in which the electrical signal patterns of the heart wall are mapped to identify the heart tissue generating the aberrant electrical signals. Mapping allows the physician to measure the timing and strength of the electrical activity. Following the mapping procedure, the physician may then use an ablation catheter to disable the aberrant signal or signal path, restoring the heart to its normal rhythm. In cases where an ablation is anticipated, physicians generally choose an ablation catheter and perform both the mapping and ablation with the same catheter.

 

   

Atrial fibrillation. The most common arrhythmia is atrial fibrillation, which is characterized by rapid, disorganized contractions of the heart’s upper chambers, the atria. Atrial fibrillation leads to ineffective pumping of the blood through the heart and significantly increases the risk of stroke. According to Millennium Research Group, over 3.1 million people in the United States currently suffer from atrial fibrillation. Despite wide-spread use of catheters by interventional cardiologists, interventional radiologists and vascular surgeons for the past 10 years, there were approximately 40,000 ablation treatments of atrial fibrillation performed in the United States in 2008. We believe that the number of atrial fibrillation procedures has the potential to grow rapidly if quicker, effective and easier to accomplish interventional treatments are available. We believe that due primarily to the difficulties of accurately controlling the catheter, the efficacy of ablation to treat atrial fibrillation is believed to be only approximately 75% and the procedure has significant risks, including stroke. As a result, atrial fibrillation ablations are generally only performed by very experienced physicians. We believe that many of the electrophysiologists in the United States do not regularly perform these catheter-based procedures because of their complexity and time-consuming nature and lack of clinical data. These procedures often last three to seven hours because of their complexity. The length of these procedures exposes the physician and staff to extensive radiation, requiring them to wear heavy lead vests for many hours at a time. In addition, there is only one catheter approved by the FDA for the treatment of a particular sub-set of patients with atrial fibrillation. In February 2009, Biosense Webster, a Johnson & Johnson company, obtained FDA approval of a premarket approval, or PMA, for the NAVISTAR® THERMOCOOL® Catheter for the treatment of drug refractory recurrent symptomatic paroxysmal atrial fibrillation, when used with compatible three-dimensional electroanatomic mapping systems. As noted above, our Sensei System has not been cleared or approved for use with ablation catheters or for the treatment of atrial fibrillation. We are required by the FDA to label our products with language specifying that the safety and effectiveness of our products for use with cardiac ablation catheters, in the treatment of cardiac arrhythmias including atrial fibrillation, has not been established.

 

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The following table summarizes arrhythmias we believe could benefit from use of our Sensei system. All data regarding prevalence and incidence is for 2007:

 

Form of Arrhythmia

  

Definition

   U.S. Prevalence/Incidence    Location and Success Rate
of Ablation Therapy
Atrial Fibrillation (AF)    Rapid, disorganized beating of the upper chambers or atria of the heart. The ventricle or lower chamber of the heart cannot respond to the increased pace, so blood pools in the atria leading to a three to five times increased risk of stroke. Heart failure will eventually occur if AF is left untreated. This arrhythmia may occur intermittently, or it may be permanent.    3.1 million/160,000    In this arrhythmia, the
ablation therapy is
performed in the left
atrium. Since this
arrhythmia can arise
from multiple
electrical sites, the
goal is to electrically
isolate those sites from
the rest of the left
atrium, thereby forcing
the heart’s normal
conduction pathway to
take over. Success
rates vary from
approximately 50% to
75%.
Atrial Flutter    Rapid, but organized and predictable pattern of beating of the atria. As with AF, the ventricles cannot respond to all of the atrial beats, so blood pools in the atria, increasing the risk of stroke.    unknown/200,000    Unlike AF, atrial
flutter arises from a
single electrical wave
that circulates rapidly
throughout the right
side of the heart.
Ablation is used to
interrupt this circuit
and is successful in
approximately 90% of
cases.
Atrioventricular Nodal Reentrant Tachycardia (AVNRT)    In AVNRT the abnormal signal begins in the atria and transfers to the atrioventricular node, or AV node. Instead of conducting down to the ventricle, the signal is returned to the atria.    570,000/89,000    In AVNRT, the
ablation therapy is
performed in the right
atrium. Treatment
success rate is
approximately 95%.

 

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Form of Arrhythmia

  

Definition

   U.S. Prevalence/Incidence    Location and Success Rate
of Ablation Therapy
Ventricular Tachycardia (VT)    Ventricular tachycardia arises from the lower chambers of the heart. It is characterized by heart rates over 100 beats per minute, but heart rates often approach 200 beats per minute. At this rate, very little blood is pumped out of the heart to the brain and other organs. Extremely fast VT can be fatal.    uncertain due to
overlap with
ventricular fibrillation
   Lesions are placed in
either the left or right
ventricle depending on
where the arrhythmia
arises. Treatment
success rate is
approximately 75%.
Wolff-Parkinson-White    An arrhythmia caused by an abnormal bridge of tissue that connects the atria and ventricles of the heart. This accessory pathway allows electrical signals to go back and forth between the atria and the ventricles without passing through the AV node. If the signal travels back and forth, very fast heart rates and life threatening arrhythmias can develop.    up to 3% of the general
population/ 200,000
   Lesions for this
arrhythmia are placed
in the right side of the
heart. Ablation is the
accepted form of
curative therapy for
symptomatic patients
with success rates from
approximately 88% to
99%.

Vascular Market

We are currently developing a new robotic platform and catheter set to facilitate vessel navigation, selective angiogram generation, robotic guide-wire control, and therapeutic device placement and delivery. We believe that our technology has the potential to improve efficacy, safety and efficiency for a number of procedures that can generally be grouped into the category of endovascular therapies. From simple, straightforward procedures, to complex, challenging endovascular procedures, we believe robotic catheter control may (1) allow clinicians to perform procedures less invasively, (2) reduce radiation exposure to patient and physician, and (3) reduce the likelihood of failure, complications, and prolonged procedure times. Endovascular procedures are catheter-based procedures done in the arterial and venous vasculatures and include interventions involving the abdominal and thoracic aortic grafting as well as access and stenting of branches of the aorta and arterial system including the coronary and carotid arteries and the iliac, femoral, popliteal, renal and mesenteric vessels. There are approximately 2 million of these procedures performed in the United States alone each year, with approximately half of these procedures performed in the heart. For comparison, there are approximately 150,000 electrophysiology procedures performed in the United States per year with approximately one third to one quarter of those for atrial fibrillation. Peripheral vascular procedures, which account for about half of total vascular procedures volume, are growing at between 10 to 40 percent year over year, depending upon the type of procedure.

Complex vascular procedures, which we estimate range from 10% to 20% of endovascular interventions, have limited technical success, longer procedure times, and fluoroscopy use, and expose the patient to

 

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significantly increased risks of adverse events and extended hospitalizations. We believe that robotic control of the tip of the catheter can make navigation to the anatomical area of interest inside an artery both easier for the physician and safer for the patient, as well as facilitate the proper placement of a stent, graft or other therapeutic or implantable device. In particularly diseased or tortuous arteries, facilitation of steering of the catheter and providing the precision to avoid point contact with atheromatous disease present in the vessel wall may facilitate procedures that are now difficult to do and could positively impact outcomes by avoiding the dislodgement of embolic debris inside the vessel which can lead to vessel perforation, embolization or stroke. For some patients with particularly challenging anatomy or lesions, robotic catheter control may enable endovascular procedures in situations that might conventionally have been treated surgically. In these circumstances, we believe there may be significant clinical and economic benefits to the patient, physician, and hospital. In addition, as with EP applications, we believe the use of robotic catheter control can lead to material reductions in radiation exposure to the physician, and potentially, the patient. Remote navigation using the Sensei system has already demonstrated significant reductions in radiation exposure to patient and physician in electrophysiology applications. Finally, robotic catheter control (for simpler or off-the-shelf devices) has the potential to provide the improvements in radiation exposure reduction and 3D visualization of anatomic targets for more straightforward endovascular or interventional cases.

We also believe there is the potential to convert surgical cases to endovascular cases using robotic catheter control, an innovation that could, if achieved, materially affect the course of endovascular disease management.

Our new vascular robotic system is being designed and engineered to meet the needs of vascular surgeons, interventional cardiologists and interventional radiologists, and will extend the current Hansen Sensei architectural achievements in robotic catheter manipulation, catheter design, robotic capabilities, instinctive control, and data visualization. The architecture is intended to constitute a platform that we believe will extend our robotic capabilities significantly, and therefore depart from the current Sensei architecture in the following ways:

 

  1. Novel catheter architectures will be employed which will require innovations in both the catheter and control architectures. We expect the catheters will be smaller in diameter, have thinner walls, be more flexible, and will be able to accommodate standard therapeutic device delivery.

 

  2. We believe novel robotic technology with substantially more control mechanisms and sensing technology will provide a broader base of capabilities to selectively employ in a suite of tools for endovascular intervention and, in the future, structural heart interventions. The bedside core system and manipulator, which will include the rack, bedside robot, setup joint and bedside box, is being designed to manipulate more delicate catheters with more degrees of freedom over longer travel distances.

We anticipate the vascular robotic system to be used in a variety of endovascular interventions, which may encompass the vascular applications described below. We will first focus on addressing the lower extremity and thoraco-abdominal markets, which include endovascular treatment of the ilio-femoro-popliteal disease, and renal, celiac and mesenteric artery disease. We also intend to pursue robotic catheters for the diagnosis and treatment of disease in the coronary, carotid, and neurovascular areas with future development.

Potential endovascular interventions

Lower Extremity Artery Stenting. Critical limb ischemia, or CLI, occurs when the patient’s lower extremity arteries, such as femoral, popliteal, and below-the-knee arteries, cannot carry sufficient oxygen to ensure proper metabolism. This may limit the patient’s ability to perform common activities such as walking or climbing stairs. If untreated, CLI often results in limb amputation. According to Millennium Research Group, the number of stenting procedures of the ilio-femoro-popliteal segment in the US and in Europe in 2009 approximate 300,000 and 250,000, respectively. The lower extremity market continues to be a fast-growing market showing constant device and technique innovation. While a broad range of therapeutic tools is available to the endovascular specialist, acute iliac bifurcations, tortuous iliac arteries, and chronic total occlusions, or CTOs, appear to remain key contributors to procedure complexity and unpredictability. We believe that the control at the catheter tip and

 

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the increased stability provided by the vascular system may simplify the navigation of complex iliac bifurcation and other anatomic branch points and areas of tortuosity, minimize time from femoral stick to angioplasty or stenting, and result in shorter, more consistent procedure times. In addition, the vascular system has the potential to provide a systematic approach for navigation of the iliac bifurcations and access to the contralateral leg, which may reduce the physician’s dependency on proper wire and catheter selection, and alleviate physician’s stress and frustration and opportunity for delay, complication, or technical failure. We also believe that by providing user-friendly control of a guidewire and the catheter tip and through the provision of increased catheter support, the vascular system may increase the success rate of crossing CTOs, reduce the volume of conversions to bypass surgery, reduce procedure time and radiation exposure by limiting uncontrolled guidewire fishing, and enable more endovascular specialists to expand their practice to include the treatment of CTOs.

Renal, Mesenteric and Celiac Artery Stenting. According to Millennium Research Group, the number of renal artery stenting procedures performed in 2009 in the US and in Europe was approximately 140,000 and 40,000, respectively. There has been an ongoing controversy on the superiority of renal artery stenting over medical therapy, and one of the concerns associated with renal artery stenting has been the risk of embolization caused by the dislodgement of embolic debris during manipulation of conventional catheters. We believe that providing instinctive steering of the catheter and accurate manipulation of the catheter tip to avoid point contact with atherosclerotic plaque present in the vessel wall may limit the risk of distal embolization during vessel access and navigation, and could positively impact clinical outcomes of renal, mesenteric and celiac artery stenting.

Abdominal and Thoracic Aortic Aneurysm Repair. Abdominal aortic aneurysms, or AAAs, are the 13th-leading cause of death in the US. There are over 1.2 million people with an AAA in the US and only about 180,000 (15%) are diagnosed. About 1/3 of AAAs will rupture if untreated. According to Millennium Research Group, in 2009, the number of abdominal and thoracic aneurysm endovascular repairs performed in the US and in Europe was approximately 50,000 and 20,000, respectively. Endovascular aneurysm repair, or EVAR, has been growing rapidly and cannibalizing surgical repair, because it has proven to be a minimally invasive procedure with similar effectiveness to surgical grafting and faster recovery times, which reduce costs of convalescence and perioperative complications and make EVAR a cost-effective solution to medical institutions.

EVAR, however, is in part technically challenging in situations where cannulation of portions of the graft must be achieved under fluoroscopy, or vessel embolization must be achieved prior to deployment of the endograft. The complex anatomy and the difficulty of controlling wires and catheters in an enlarged, diseased aorta may produce significant variability in procedure times, fluoroscopy use, and complication rates in patients needing pant leg grafts, or fenestrated or branched grafts. We believe that our vascular system may be able to provide a more systematic approach to vessel and graft cannulation, which may result in shorter, more consistent procedure times, improve radiation exposure and use of contrast, and reduce the level of stress and frustration of the operator.

Carotid Artery Stenting. Carotid artery stenting, or CAS, is an alternate therapy to surgical carotid endarterectomy, and may be performed by the interventional cardiologist, the interventional radiologist, or the vascular surgeon. According to Millennium Research Group, the number of carotid artery stenting procedures performed in 2009 in the US and in Europe was approximately 70,000 and 30,000, respectively. The growth of CAS has been hindered by controversial clinical results. Carotid artery stenting is a procedure that requires, in many cases, navigation of tortuous anatomy, placement of multiple devices in sequence to achieve procedural success, and manipulation of these devices at a distance to achieve appropriate placement and long term efficacy. Studies by Faggioli et al. have shown that common carotid tortuosity and complex aortic arch anatomy, such as Type II and Type III aortic arches, which tend to be seen in the elderly and patients at high risk for surgical complications, seemed to be key contributors to procedure complexity and unpredictability, and significant drivers of technical failure and neurologic complications. We believe that by enabling fine control of the catheter tip and increased catheter stability, the vascular system could provide a safer, systematic approach for navigation of the aortic arch, improve access consistency for physicians treating complex arches and tortuous carotid anatomy, resulting in more consistent procedure times, and reducing physician’s fatigue caused by the lack of control of the distal end of conventional catheters

 

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Coronary Artery Stenting and Chronic Total Occlusion Crossing. According to Millennium Research Group, the number of percutaneous coronary interventions in 2009 in the US and in Europe was approximately 1,000,000 and 700,000, respectively.

Based on physician interviews we have conducted, technical difficulties associated with coronary artery stenting seem to originate from the lack of stability of the distal section of the guiding catheter and from limited ability of catheters and guidewires to cannulate acutely angulated coronary branches. We believe that by providing stability and steering at the tip of the catheter, as well as instinctive driving of the catheter, the vascular system may be able to cannulate branches more effectively. We also believe that active catheter control through tip steering and catheter pull wire manipulation can provide increased stability at the site of intervention and may decrease the risk of having the guiding catheter be dislodged out of the coronary artery during wire manipulation and therapy delivery.

Value of vascular robotic system

Value to the hospital. We believe a vascular robotic system may provide hospitals with the opportunity to deliver better patient care, by providing a safer alternative to conventional endovascular technique using flexible robotic technology. By reducing procedure times and streamlining endovascular interventions, our vascular system could help hospitals increase their catheter laboratory utilization and throughput and manage case scheduling more efficiently. We also believe that converting surgical cases to endovascular cases may have a significant effect on length of stay, the likelihood of costly and time consuming complications, and may reduce the risk of complication related and radiation exposure related lawsuits. The vascular system also has the potential to improve inventory management, by reducing the number of conventional catheters and guidewires required to be in stock.

Value to the physician. We believe that by providing an instinctive, controlled, systematic approach to vessel navigation, a robotic system for vascular applications may reduce the number of catheter and guidewire exchanges required to complete endovascular interventions, simplify catheter and guidewire selection, and minimize the challenges provided by the lack of control of the distal end of conventional catheters. The vascular system also has the potential to lower the learning curve for endovascular interventions and enable physicians to perform more complex cases. Finally, by enabling remote catheter control and vessel navigation, and by providing an ergonomically friendly environment, the vascular system may help reduce physician’s back pain and exposure to harmful radiation.

Value to the patient. We believe that a robotic system for vascular applications may be able to provide patients with a safer alternative to conventional catheter-based interventions. By limiting the need for the operator to rely on vessel wall interactions to cannulate and navigate vessels with the catheter, patients may benefit from lower intra-procedural complications, lower radiation exposure and contrast use, shorter procedure time, and superior delivery of therapy. In addition, we believe that a robotic system for vascular applications may reduce the volume of conversions to surgery, and allow more complex cases to be performed using the less invasive, endovascular approach, which will result in shorter recovery times.

Other potential applications in interventional cardiology

Percutaneous Aortic Valve Replacement. Percutaneous valve replacement represents an emerging alternative therapy for high-risk and inoperable patients with severe valve disease, and may offer advantages over open heart surgery. For example, non-surgical heart valve replacement may minimize complications associated with general anesthesia, opening the chest wall and the use of heart-lung bypass machines. Percutaneous aortic valve replacement using a catheter-based approach may enable surgeons to perform procedures under local anesthesia in a cardiac catheterization lab. This may be a preferred alternative for high-risk valve disease patients who otherwise have no choice but open heart surgery, and more importantly, for those patients with life-threatening valve disease who cannot undergo surgery. We believe that the controlled and precise access and deployment that robotics can provide in an endovascular aortic valve replacement has the potential for enabling current surgical valve candidates to be treated less invasively.

 

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Valve Repair. Heart valve disease is a common disorder which affects millions of patients and is characterized by a progressive deterioration of one or more of the heart’s valvular mechanisms. Repair of heart valves has historically been accomplished by open heart surgery. Although often very successful in improving valve function, surgery of heart valves is associated with a risk of death and even if successful requires a long post-operative recovery. As a result, cardiologists tend to wait as long as possible before resorting to surgery in patients with deteriorating valve function. There is increasing interest in treating valve disease with less invasive means in order to enable treatment earlier in the disease and potentially slow or stop the progression of heart failure. In recent years, catheter-based procedures have been developed to repair valves in a surgical manner. We believe that as these procedures develop, physicians will require a new generation of catheters that can be used like surgical tools and which can be precisely controlled. As a result, we believe that we can participate in the development of a new generation of procedures in cardiac valve intervention as an alternative to conventional cardiac surgery, potentially offering a safer and more cost-effective approach to the early treatment of heart valve disease.

Patent Foramen Ovale. A patent foramen ovale, or PFO, is an abnormal opening in the atrial septum which results in shunting of blood between the atrial chambers. PFOs are believed to be present in as many as 20% of the adult population and there is strong evidence that PFOs are responsible for the occurrence of a type of stroke, known as cryptogenic stroke, which occurs as a result of a blood clot in an otherwise healthy individual. Additionally, there is increasing evidence that the presence of a PFO is in some way related to the occurrence of migraine headache with aura in certain patients. Migraine headaches affect more than 28 million people in the United States alone, according to the Mayo Clinic.

Historically, closing PFOs has required open heart surgery, a traumatic procedure, requiring significant post-operative recovery. More recently, PFOs have been closed successfully with prosthetic patches that are delivered via catheter-based procedures. These procedures offer a minimally invasive approach, but require that the clinician leave a prosthesis inside the heart to cover and occlude the PFO defect. The presence of foreign material inside the heart can lead to significant complications including infection, thrombus formation leading to stroke, development of cardiac arrhythmias, and dislodgment or migration necessitating surgical removal of the device. In the future, we believe that our Sensei system, because of the increased control of the catheter tip, may give the clinician the ability to close a PFO without the use of patches or prosthetic material.

Left Atrial Appendage Occlusion. One of the significant clinical risks associated with atrial rhythm abnormalities is the development of blood clots in the atrial chamber which can result in stroke. The anatomic portion of the left atrium, referred to as the left atrial appendage, or LAA, is particularly susceptible to clot formation. One approach to elimination of the risk of clot formation in the LAA is the use of catheter-based devices that block blood flow and pooling of blood in the LAA, and thereby reduce clotting risk in the atrium. These devices are believed to work well if they are properly positioned and oriented at the opening of the LAA, however, placement can be exceedingly challenging with conventional catheter techniques. We believe that our Sensei system may simplify the process of delivering these devices, enabling their widespread use.

Biventricular Lead Placement. Pacemakers have been used in cardiology for many years to treat rhythm abnormalities and improve cardiac function. More recently, many physicians have concluded that pacing of both ventricles of the heart in synchrony is, in many patients, more effective than pacing one ventricular location. This technique requires that one of the pacing leads be positioned at an optimal location in the wall of the left ventricle. In order to deliver the left ventricular lead, cardiologists often use a catheter based approach that delivers the pacing lead by introducing a cannula or tube into the coronary sinus, a vein that runs along the outside of the heart. Navigating this coronary sinus vein requires significant catheter manipulation, and also requires stability of the catheter tip when the proper anatomic location is reached. We believe that our Sensei system may be able to simplify the placement of biventricular leads in their optimal location, particularly for physicians with limited experience with this technique.

 

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Ventricular Injection Therapy. Many chronic heart conditions lead to progressive deterioration in heart function, often resulting in a debilitating and eventually fatal disease referred to as congestive heart failure, or CHF. In CHF, the heart muscle becomes less efficient, the chambers of the heart begin to dilate and cardiac function tends to deteriorate. As the heart muscle becomes weaker, the heart has to work harder to pump an adequate amount of blood. The harder the heart works, the more damage is done to its structure and function. Clinicians treat CHF with a variety of drugs that decrease blood volume and increase contractility of the heart muscle. However, there is increasing investigation into techniques which attempt to repair the muscle cells that have been damaged through the direct injection of growth factors or healthy cells into injured muscle. These techniques have shown some ability to replace damaged muscle but often demand the precise control of a needle injector inside the heart. We believe that our Sensei system may be able to provide a very efficient means for more easily performing ventricular injection at the specific locations where clinicians desire to deliver drug and cell therapies.

Although the FDA has granted 510(k) clearance for the use of the Sensei system in mapping heart anatomy, we will not be able to label or promote the Sensei system or train physicians in its use for any of the above applications unless separate 510(k) clearance or premarket application, or PMA, approval from the FDA is obtained for each such application.

Collaboration with St. Jude

On April 30, 2007, we entered into a Joint Development Agreement and a Co-Marketing Agreement with the Atrial Fibrillation Division of St. Jude Medical, Inc., or St. Jude. Pursuant to the joint development agreement we will work together with St. Jude to develop certain mutually agreed-upon products. The first product developed under the joint development agreement is our CoHesion Module, a newly-integrated EP solution that offers physicians a software interface between our Sensei system and the St. Jude Medical EnSite System. The EnSite system provides visualization and localization or detection of EP catheters in 3D space within the heart chamber. The integrated CoHesion Module is designed to allow physicians to remotely manipulate catheters with more accuracy because it provides 3D information regarding the actual position of catheters inside a patient’s heart. The CoHesion Module expands the utility of the EnSite and Sensei systems with the goal of providing physicians with a more comprehensive and easy-to-use remote navigation and mapping system for EP procedures. The CoHesion Module became commercially available in the European Union in the first quarter of 2008 and we obtained FDA approval for the CoHesion Module in the United States at the end of the second quarter of 2008. As of December 31, 2009, 50 of the 81 systems we have shipped are configured with the CoHesion Module.

The EnSite system is a computer-based technology marketed worldwide that facilitates EP procedures by creating real-time 3D graphical displays or maps of cardiac structures and arrhythmias. These maps are designed to provide the visual guidance necessary to navigate catheters used during EP procedures. Two-dimensional technologies such as fluoroscopy or ultrasound can also be used to assist physicians with guiding catheters inside the heart, but provide limited information regarding the three-dimensional space inside the heart. Combining the Sensei and EnSite technologies provides physicians with 3D visualization that augments their ability to confidently move a catheter throughout the heart, as well as increase control over placement of the catheter in specific locations. The EnSite System is used by EP clinicians during EP procedures to create 3D models of their patients’ cardiac anatomy and then to visualize catheters used in those procedures as they are navigated to critical anatomical targets. The system collects and organizes activation and voltage data from the inner surface of the heart, which allows physicians to visualize arrhythmias on the 3D model and more easily determine a treatment strategy. Localization of our Artisan catheter within the EnSite System’s 3D map gives physicians the ability to move the catheter deliberately and accurately while seeing specifically, in three dimensions, the location of the catheter inside the heart. We believe this integrated functionality enables clinicians of varying skill levels to more effectively and safely treat complex cardiac arrhythmias.

Other than the integration of the Sensei system with the EnSite technology, we are not obligated to undertake any other development projects under the joint development agreement with St. Jude, although we and St. Jude may decide to do so. Under the joint development agreement, we will be required to maintain

 

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compatibility of our Sensei system with St. Jude’s EnSite system for a defined period of time after our agreements with St. Jude expire. Under the joint development agreement, we retain the right to maintain compatibility with catheters from any other manufacturers. We are solely responsible for gaining regulatory approvals for and all costs associated with our portion of products developed under the joint development agreement. The joint development agreement continues in effect until the completion of all development work contemplated by any agreed development plan prior to termination of the joint development agreement. Either party may terminate the joint development agreement without cause upon not less than 90 days prior written notice to the other party. The joint development agreement also terminates upon written notice to the other party if our co-marketing agreement with St. Jude terminates due to uncured material breach or if the products under the program are subject to significant regulatory limitations.

Under the terms of our co-marketing agreement, we granted St. Jude the exclusive right to distribute products developed under the joint development agreement when ordered with St. Jude products worldwide, excluding certain specified countries, for the diagnosis and/or treatment of electrophysiologic cardiac conditions. Pursuant to a separate agreement, St. Jude is the exclusive distributor for our Sensei system in France. We maintain the right to sell the integrated system and retain additional exclusive rights in specified countries outside of the U.S. In addition, we retain the unrestricted right to market our Sensei system and Artisan catheter without St. Jude products. The initial term of the co-marketing agreement is until May 31, 2010.

Collaboration with Philips

We have also entered into agreements with Royal Philips Electronics, or Philips, to co-develop integrated products that we hope will simplify complex cardiac procedures to diagnose and treat arrhythmias. The agreements are intended to lead to the creation of integrated product solutions by combining Philips’ Allura Xper X-Ray system with our Sensei system. The resulting innovations will seek to enable electrophysiologists to perform complex procedures with greater confidence and improved efficiency. We believe that closer integration between robotics and imaging systems will afford greater clinical capability in endovascular procedures.

Additionally, in the fourth quarter of 2009, we entered into an extended joint development agreement with Philips. Under the terms of the extended joint development agreement, we will, with support and collaboration from Philips, seek to develop a vascular robotics platform and associated catheters, or “Vascular System”. The Vascular System will not include our Sensei Robotic Catheter System or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips will partially fund our development costs based upon our achievement of development milestones for the Vascular System. For up to five years after the initial commercial shipment of the Vascular System, we will pay Phillips royalties based on the number of Vascular Systems and associated catheters that are sold, subject to caps based on the amounts Philips contributes to the development. The extended joint development agreement will remain in effect until the earlier of April 1, 2012 or the completion of the Vascular System, provided that either party may terminate the Agreement in the event of the other party’s uncured failure to perform a material obligation. Philips may also terminate the Agreement for convenience upon 60 days prior written notice and the payment of a variable termination fee.

Research and Development

As of December 31, 2009, our research and development team, excluding those who are now involved primarily in regulatory and quality functions, consisted of 55 people. We have assembled an experienced team with recognized expertise in robotics, mechanical and electrical engineering, software, control algorithms, systems integration and disposable device design, as well as significant clinical knowledge and expertise.

Our research and development efforts are focused in four major areas:

 

   

continuing to enhance the capabilities of our existing Sensei system and Artisan catheter through ongoing product and software development;

 

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designing a new platform for using our technology for endovascular procedures;

 

   

developing new capabilities for our Sensei system;

 

   

designing new proprietary disposable interventional devices for use with our system; and

 

   

developing new applications for our technology and related additions to our Sensei system, new control catheters, or integration with other imaging technologies or other modalities.

Our research and development team works independently and with other manufactures of EP lab equipment to integrate our open architecture platform with key imaging, location sensing and information systems in the EP labs. We also collaborate with a number of highly regarded electrophysiologists and cardiologists in key clinical areas in search of new applications for our technology.

We have historically spent a significant portion of our capital resources on research and development. Our research and development expenses were $19.8 million $25.6 million and $19.0 million in 2009, 2008 and 2007, respectively.

Sales and Marketing

We market, sell and support our products in the United States through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products. We have established sales subsidiaries in the United Kingdom and Germany and have hired sales representatives in the UK and Germany. We currently have distribution agreements in Canada, Czech Republic, France, Italy, Portugal, Russia and Spain.

We are still gaining experience as a company in the marketing, sale and distribution of our products. As of December 31, 2009, we had a direct sales force, clinical support team and marketing team of 31 employees, but we intend to continue to grow this team, which can be expensive and time consuming.

Our sales and marketing process consists of two important steps: selling systems directly to the customer, and leveraging our installed base of systems to drive recurring sales of disposable interventional devices, software and services.

Through December 31, 2009, our end users fall into three broad categories:

 

   

leading academic institutions with physician thought leaders who are interested in performing complex new procedures enabled by our system;

 

   

high-volume non-academic regional centers interested in the benefits of our system; and

 

   

medium and low volume community hospitals that are competing intensely for patients, attempting to minimize referrals of complex cases to other centers and focusing on gaining market share in their regional markets.

Many hospitals are part of an integrated delivery network, or IDN, and/or a group purchasing organization, or GPO. When possible, we focus on leveraging opportunities in which we believe a sale to one member of an IDN or GPO creates interest and drives competition within that group. We also focus sales and marketing development activities where strategic synergies or competition exist between our current installed base and other area hospitals.

Following the initial sale of a system to a given hospital, we endeavor to expand the number of physicians who use our Sensei system. We believe these efforts will benefit early-adopting hospitals by increasing their market share in the procedures and specialties that benefit from procedures performed with our Sensei system. We expect these efforts to increase demand for our disposable products among hospitals, physicians and referring physicians.

 

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Sales of medical capital equipment generally follow a staged sales process that includes the following:

 

   

generating initial customer interest;

 

   

gaining commitment from the customer, which often involves a formal written proposal;

 

   

helping the customer secure formal budget approval for the system purchase;

 

   

receiving a formal purchase order from the customer after its approval process is complete and after sales terms have been agreed upon; and

 

   

installation of the system at the customer’s site and providing physician and staff training so it is used properly.

Our system utilizes proprietary control catheters, as well as software tailored to specific clinical applications. After a system is installed and initial training has been completed, we provide ongoing support in order to increase customers’ familiarity with system features and benefits, with the goal of increasing usage of the system. More frequent usage will result in increased consumption of our disposable Artisan catheter. A basic one-year warranty is included with each system. We believe that service contracts providing for enhanced levels of support and service beyond the basic warranty could become an important additional source of revenue in the future.

We expect that our relationships with physician thought leaders in the field of electrophysiology will continue to be an important element of our selling efforts. These relationships are often built around research collaborations that enable us to better understand and articulate the most useful features and benefits of our system as well as to develop new solutions to long-standing challenges in interventional electrophysiology. We plan to continue to provide support for and collaborate with highly regarded physicians in order to accelerate market awareness and adoption of our systems.

Hansen Medical has invested in and has completed redevelopment on the Flexible Robotics program for customer hospitals. We have devoted considerable effort in 2009 in developing a comprehensive solution to improve the tools available to our customers in marketing their new Sensei system and robotic electrophysiology program. The Flexible Robotics program is a broad based and robust toolkit designed to assist our customer hospitals in using the development of a robotic electrophysiology program as a celebration of the hospital’s quality, commitment to patient care and innovation. The program is a virtual toolbox that contains both the programmatic and content elements necessary to plan, initiate, and execute public relations and outreach campaigns, influence and change referral patterns to improve market share in the hospital’s catchment area, enliven hospital personnel and patients around the benefits of our innovative robotic technology, and develop substantial awareness of the technology and the physicians employing it. We have experienced a number of hospital level examples of the benefits that this program brings to all of our constituents and believe it will be an important component of the drive to adoption and utilization of the technology. We have also developed these tools for use in our distributor channels.

Customer Service and Support

We are building an infrastructure for customer service and support activities to address the needs of our growing installed base. As of December, 31, 2009, we had a customer service and support team of 14 employees. These employees form a call center, a network of field service engineers and a service parts logistics repair and delivery system. We also outsource the after-hours portion of our call center, including weekends and holidays, to an answering service. This infrastructure provides a single point of contact for our customers in the United States and the European Union via telephone and email and enables us to provide online, telephone and on-site technical support services 24 hours a day, seven days a week. In addition, we now offer post-warranty maintenance plans for our customers to manage their on-going support needs. We plan to expand our technical training and support capabilities as our installed base continues to grow.

 

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Manufacturing

At December 31, 2009, we had a manufacturing team of 48 employees. We manufacture our Sensei systems and Artisan catheters using a combination of in-house manufacturing and third-party contract manufacturers. Some of the components for our Sensei system are single sourced. We may not be able to quickly establish additional or replacement suppliers for our single-source components, in part because of FDA requirements and because of the custom nature of the parts we utilize. Any supply interruption for any of these components or interruptions at our contract manufacturers could limit our ability to manufacture our products, which could have a material adverse effect on our business.

We are still gaining experience in manufacturing, assembling and testing our products on a commercial scale. In 2008, we moved into a new facility, thus increasing our ability to produce Sensei systems and Artisan catheters in quantities sufficient to meet our anticipated market demand. However, we still face technical challenges in our manufacturing processes, including manufacturing cost reductions, equipment design and automation, material procurement, problems with production yields and quality control and assurance. Developing our current manufacturing capacity has required the investment of substantial funds and additional changes in the future to reduce manufacturing costs or to adapt our capacity to market fluctuations may require the investment of substantial additional funds and the hiring and retaining of management and technical personnel who have the necessary manufacturing experience. We may not successfully complete any future required change in manufacturing ability on a timely basis or at all.

Lead times for materials and components ordered by us and our contract manufacturers vary and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We and our contract manufacturers acquire materials, complete standard subassemblies and assemble fully configured systems based on sales forecasts. If orders do not match forecasts, we and our contract manufacturers may have excess or inadequate inventory of materials and components.

The Sensei system

Our Sensei system incorporates a number of custom parts and components that we have designed and which are manufactured to our specifications by third parties. Our manufacturing strategy for our Sensei system is to assemble some critical subsystems in-house while outsourcing less critical subsystems, and to complete the final assembly and testing of those components in-house in order to control quality.

Artisan catheter and guide catheter assembly

Our Artisan catheter consists almost entirely of custom parts which we have designed and are manufactured either by us or by contract manufacturers to our specifications. We currently assemble Artisan catheters in-house. We outsource the manufacture of certain other disposable products, including sterile drapes used with our system in EP procedures. We also manufacture prototype disposables to facilitate future product development.

Software

We develop the software components of our Sensei system, including control and application software, both internally and with integrated modules which we purchase or license from third parties. We perform final testing of software products in-house prior to commercial release.

Regulatory framework

Our manufacturing facilities operate under processes designed to meet the FDA’s requirements under the Quality System Regulation. We underwent an FDA inspection, which employed the Quality System Inspection Technique, or QSIT, from November 29, 2007 through December 4, 2007. This was the first FDA inspection of our company. The inspection has closed and the FDA did not identify any deficiencies in our quality systems or

 

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operations as a result of that inspection. Our existing quality management system passed European Notified Body audits in 2006, 2007, 2008 and 2009, and it was determined that we are in compliance with the requirements of ISO 13485. If we fail to comply with the FDA requirements or maintain ISO 13485 standards in the future, we may be subject to FDA enforcement action or required to cease all or part of our manufacturing operations for some period of time until we can demonstrate that appropriate steps have been taken to comply with such standards.

Our manufacturing facility also has been inspected and licensed by the California Department of Health Services, or CDHS, and remains subject to re-inspection at any time. Failure to maintain a license from the CDHS or to meet the inspection criteria of the CDHS would disrupt our manufacturing processes. If an inspection by the CDHS were to indicate that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

Force Dimension Development and Supply Agreement

On November 9, 2004, we entered into a Development and Supply Agreement with Force Dimension Sàrl, a Swiss limited liability company. Pursuant to the terms of the agreement, Force Dimension manufactures and supplies to us specially-configured motion controllers in accordance with a predefined pricing matrix. We may terminate the agreement for any reason upon 30 days notice to Force Dimension, provided that we will remain obligated to purchase all delivered and ordered master input devices at the time of such termination. Either party may terminate the agreement for a material breach by the other party if the material breach is not cured within 90 days of notice of the material breach. Force Dimension is a single-source supplier for the motion controllers in our Sensei system.

Plexus Purchase Agreement

In October 2007, we entered into a purchase agreement with Plexus Services Corp., or Plexus. Under the agreement, Plexus manufactures parts for us in quantities determined by a non-binding forecast and by purchase orders. The agreement contains no minimum purchase quantities; however, we may be liable for certain components purchased by Plexus in the event that such items become obsolete or exceed demand as a result of an engineering change or demand cancellation from us. The agreement was extended in September 2009 and will remain in effect through September 2011 unless terminated sooner according to provisions in the agreement. The agreement may be extended upon mutual agreement by both Plexus and us. If we are unable to extend this agreement we may not be able to identify alternative sources in a timely fashion and the resulting transition to alternative manufacturers would likely result in operational problems and increased expenses and could delay the shipment of, or limit our ability to provide, our products.

Reimbursement

We expect that healthcare facilities and physicians in the United States will continue to bill various third-party payors, such as Medicare, Medicaid, other governmental programs and private insurers, for services performed using our products. We believe that procedures targeted for use with our products are generally already reimbursable under governmental programs and most private plans, and we anticipate that third-party payors will continue to cover and reimburse hospitals and physicians under existing coverage and reimbursement policies for the vast majority of procedures that would use our products. In addition, claims for services using our products are reimbursed under existing billing codes. These billing codes differ based on the place of service. For hospital inpatient departments, the billing codes generally are reported using the International Classification of Disease, Ninth Revision, Clinical Modification, or ICD-9-CM, procedure codes. The coding classification for hospital outpatient services and physician professional services is based on the coding system established by the American Medical Association under the Current Procedural Terminology, or CPT. Currently there are ICD-9-CM codes for cardiac mapping, a CPT code for mapping arrhythmias and a separate CPT code for combination mapping/ablation procedures. Accordingly, we believe hospitals and physicians in the United States

 

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will generally not require new billing authorizations or codes in order to be compensated for performing medically necessary procedures using our products on insured patients. We cannot be certain, however, that current coverage, coding and reimbursement policies of third-party payors will continue or the extent to which future changes to coverage, coding and reimbursement policies will affect some or all of the procedures that would use the Sensei system.

We are aware that physicians may elect to use products we sell for off-label indications, including, for example, for procedures to treat atrial fibrillation. Currently there is only one catheter which is approved by the FDA for the treatment of a particular sub-set of patients with atrial fibrillation. In February 2009, Biosense Webster, a Johnson & Johnson company, was granted marketing approval to the NAVISTAR® THERMOCOOL® Catheter for the treatment of drug refractory recurrent symptomatic paroxysmal atrial fibrillation, when used with compatible three-dimensional electroanatomic mapping systems. We believe that both physicians and hospitals are currently reimbursed for these and certain other procedures even when the procedures are performed off-label using other manufacturers’ products. We cannot be certain, however, that third-party payors will continue to provide coverage and/or reimbursement to physicians and hospitals for off-label use of products to treat atrial fibrillation or any other procedures. In addition, we cannot be certain that third-party payors will not require extensive clinical support showing the efficacy and cost effectiveness of off-label uses of our products before providing coverage and reimbursement for such procedures. If such support is required, we may not be able to satisfy such requests within the limitations of our FDA cleared labeling.

Future legislation, regulation or coverage and reimbursement policies of third-party payors may adversely affect the demand for our products currently under development and limit our ability to profitably sell our products. For example, under recent regulatory changes to the methodology for calculating payments for current inpatient procedures in certain hospitals, Medicare payment rates for surgical and cardiac procedures have been decreased, including those procedures targeted for use of our products. The reductions are to be transitioned over three years, beginning in fiscal year 2007. Further, physicians are paid for their professional services to Medicare beneficiaries under the Medicare Physician Fee Schedule, which is updated on an annual basis. Under the Medicare statutory formula, payments under the fee schedule would have decreased for the past several years if Congress failed to intervene. For example, for 2008, the fee schedule rates were to be reduced by approximately 10.1 percent. Section 101 of the Medicare, Medicaid and SCHIP Extension Act of 2007 eliminated the 10.1 percent reduction for 2008 and increased the annual payment rate update by 0.5 percent. This increase to the annual Medicare Physician Fee Schedule was effective only for Medicare claims with dates of service between January 1, 2008 and June 30, 2008. Beginning July 1, 2008, under the Medicare Improvement for Patients and Providers Act of 2008, or MIPPA, the 0.5 percent increase was continued for the rest of 2008.

Also with respect to the Medicare Physician Fee Schedule, MIPPA established a 1.1 percent increase to the update factor for 2009. MIPPA also modified the methodology by which the budget neutrality formula was applied to the 2009 physician fee schedule payment rates, however, resulting in an overall reduction in payment rates for services performed by some specialties, including an estimated 2% reduction for cardiology but a 2% increase in cardiac surgery.

For 2010, the Centers for Medicare & Medicaid Services, or CMS, the agency responsible for administering the Medicare program, calculated a rate reduction of 21.2%. The Department of Defense Appropriations Act of 2010 established a zero percent Medicare physician update through February 28, 2010. This was further extended through March 31, 2010 by the Temporary Extension Act of 2010. On March 10, 2010, the U.S. Senate approved the American Workers, State and Business Relief Act of 2010 (H.R. 4213) which would delay the rate reduction until October 1, 2010. The U.S. House of Representatives is currently considering this same bill. In addition, currently pending in the Senate is the House of Representatives’ Medicare Physician Payment Reform Act of 2009 (H.R. 3961), which would prevent the rate reduction by restructuring the formula that forms the basis of the Medicare Physician Fee Schedule payments. If Congress fails to intervene to prevent the 21.2% rate reduction, the resulting decrease in payment could adversely impact our business.

 

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In addition, CMS also implemented revised reimbursement codes that better reflect the severity of patients’ conditions in the hospital inpatient prospective payment system for fiscal year 2008. These changes took effect on October 1, 2007. The majority of the procedures performed with our Sensei system and Artisan catheter are done on an in-patient basis and thus are paid under the revised Medicare-severity diagnosis related group, or MS-DRG system. We believe that the majority of procedures performed using our technology fall under MS-DRG 251, percutaneous cardiovascular procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication, with an average reimbursement of $9,260 for fiscal year 2008. CMS updates the MSDRG annually effective October 1 through September 30th of the following year. Because hospital inpatient reimbursement is largely dependent on geographical location and other hospital-specific factors, an individual hospital’s revenues from ablation procedures to treat atrial fibrillation using our technology can vary significantly.

Although currently procedures using our products are performed in the hospital inpatient setting, as discussed above, CPT codes describing procedures using our products in the outpatient setting exist. In September 2007, the Company consulted with the American Hospital Association’s, or AHA’s, Central Office on how hospitals should code for using the Sensei system with the Artisan catheter. In its response, the AHA advised that it appears that “the Hansen Medical Catheter Control System, Accessories, and Steerable Guide and Sheath are considered as one device and would be appropriately reported with the Healthcare Common Procedure Coding System “C” codes developed for new devices and used for Medicare claims for hospital outpatient service reporting HCPCS code C1766, introducer/sheath, guiding, intracardiac electrophysiological, steerable, other than peel away. This code identifies the entire system and is reported in addition to the procedure described by the appropriate CPT code. While this code does not correspond to a specific payment for our products, it does allow for hospitals to report the use of the products and may result in more accurate reimbursement once claims data has been developed.

Intellectual Property

Since our inception, our strategy has been to patent the technology, inventions and improvements that we consider important to the development of our business and technology. Our intellectual property portfolio, including patents and patent applications that we own or license, covers key aspects of our Sensei system and Artisan catheter products, as well as other technology that we have under development. As a result, we believe that we are building an extensive intellectual property portfolio to protect the fundamental scope of our technology, including our robotic technology, navigational methods, procedures, systems, disposable interventional devices and our three dimensional integration technology. As of December 31, 2009, we licensed or owned 25 issued U.S. patents and over 110 pending U.S. patent applications, 10 granted foreign patents and over 35 pending foreign applications. We also share the rights to over 240 issued U.S. patents, over 80 pending U.S. patent applications and over 140 pending or granted foreign applications under the September 2005 cross license agreement and the January 2010 cross license agreement with Intuitive Surgical, Inc., or Intuitive, which in turn shares rights to certain of our patents and pending patent applications pursuant to the cross license agreements. In addition, we received a license to certain patents and patent applications licensed or owned by Luna Innovations Inc., as part of the litigation settlement entered in January 2010. We also have a number of invention disclosures under consideration and several new patent applications that are being prepared for filing, and we continue to gain the benefit of certain new patent applications and patents by virtue of the cross license agreement with Intuitive. Accordingly, we anticipate that the number of pending patent applications and patents in our portfolio will increase.

In addition to our existing patent coverage that we expect to build upon, we believe it would be technically difficult and costly to reverse engineer our products and technology. Further, we have developed substantial know-how in robotic design and robotic instrument control which we maintain as trade secrets or copyrighted software.

Further successful commercializing of our Sensei system, and any other products we may develop, will depend in part on our not infringing patents held by third parties. It is possible that one or more of our products,

 

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including those that we have developed in conjunction with third parties, infringes existing patents. From time to time, we receive letters from one or more third parties alleging that certain aspects of our Sensei system infringe issued patent(s) or asking us to consider licensing their patent rights. While we do not believe that the Sensei system infringes any valid and enforceable patent of any third party, there can be no assurance that any third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the manufacture and sale of our Sensei system in the United States or elsewhere. There also can be no assurance that we will not seek to take the initiative in defending ourselves by instituting litigation against such third party challenges.

We have applied for trademark registration of, and claim trademark rights in, “Artisan,” “Artisan Extend,” “Hansen Artisan,” “Instinctive Motion,” “Lynx” and “CoolSense,” We have obtained trademark registration in the United States for, and claim trademark right in “Hansen Medical,” “Hansen Medical (with Heart Design),” “Heart Design (Logo),” “Sensei,” “Fine Force Technology” and “IntelliSense.”

Cross License Agreement with Intuitive Surgical

On September 1, 2005, we entered into a cross license agreement with Intuitive. Pursuant to this agreement, Intuitive granted us a co-exclusive, worldwide license in the field of intravascular approaches for the diagnosis and treatment of cardiovascular, neurovascular and peripheral vascular diseases. In return, we granted Intuitive a co-exclusive, worldwide license in the fields of endoscopic, laparoscopic, thoracoscopic or open diagnosis and/or surgical procedures, including endoluminal applications in gastrointestinal, respiratory, ear, nose and throat, urologic and gynecologic surgery. These licenses cover our and Intuitive’s patents and patent applications that were filed on or prior to the date of the agreement, as well as later filed divisionals, continuations and continuations in part with respect to the matters that were part of the original patents and patent applications as of the date of the agreement, but not any other later-filed patents and patent applications. In addition, these licenses cover all trade secrets and other know-how that we and Intuitive disclosed to each other prior to the date of the agreement. Each party retained full rights to practice its own technology for all purposes. As consideration for the licenses granted by Intuitive, we issued 125,000 shares of our Series B preferred stock to Intuitive in 2005 (which converted into 125,000 shares of our common stock at the time of our initial public offering) and owe royalties to Intuitive on certain product sales, including annual minimum royalties of $200,000. We will not receive any royalties or other compensation from Intuitive under the agreement.

Each party has agreed not to engage in activities outside its licensed field that, to its knowledge, would infringe the other party’s licensed patents. Although we believe that there are opportunities for us to operate outside the licensed field of use without the use of the Intuitive intellectual property, Intuitive, from time to time has told us that it believes certain of our past activities that have fallen outside the licensed field have infringed its intellectual property rights. Although we disagree with Intuitive’s position, we presently remain focused within our licensed field and so have agreed to inform Intuitive before commencing any further outside clinical investigations for endoluminal applications or engaging in external technology exhibitions at non-intravascular conferences. There can be no assurance that Intuitive will not challenge any activities we engage in outside the intravascular space and we cannot be sure that in the event of such a challenge we would be able to reach agreement with Intuitive on whether activities outside our licensed field may be conducted without the use of Intuitive’s intellectual property. Any disputes regarding a party’s potential infringement of the other party’s licensed patents that cannot be resolved through discussions between the parties will be settled by litigation. If such litigation results in a judgment of infringement that cannot be appealed and the infringing party fails to cease such infringement within a specified cure period, the non-infringing party will have the right to terminate the agreement. The parties have also agreed on a procedure under which either party may, but is not obligated to, ask an arbitration panel to make a binding determination as to whether or not a new product being developed by such party would, if commercialized outside such party’s licensed field, infringe any issued patents of the other party.

The agreement may be terminated by either party for bankruptcy of the other party. We also have the right to terminate the agreement at any time on or after March 1, 2018, and if we exercise this termination right, the

 

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licenses granted to us by Intuitive will terminate, but the licenses granted by us to Intuitive will survive. Neither party is permitted to terminate the agreement based on a breach by the other party, except in the event of the other party’s failure to cease infringing activity as described above or to remedy a significant payment default that has been established through a court judgment that cannot be appealed. If a party terminates the agreement for one of these types of breaches, the licenses granted by this party will terminate, but the licenses granted to this party will survive. In the absence of any early termination, the agreement will expire upon the expiration of the last to expire of the patents licensed under the agreement.

On January 12, 2010, in association with the agreements signed as a result of our settlement with Luna Innovations, Inc, we entered into a cross license agreement with Intuitive, under which we and Intuitive granted each other royalty-free, non-exclusive licenses within the medical robotics field to certain fiber optic shape sensing/localization technology owned or in-licensed by each party as of the effective date of the agreement or within the five-year period after the effective date of the agreement. The non-exclusive licenses can only be sublicensed in connection with each party’s respective products, except for our right to sublicense for single degree of freedom medical devices.

In addition, we and Intuitive granted each other royalty-free, co-exclusive licenses within the medical robotics field to certain fiber optic shape-sensing/localization technology developed in whole or in part by Luna for each party. The co-exclusive licenses can only be sublicensed in connection with each party’s respective products, except that we may freely sublicense single degree of freedom medical devices. We have the right, along with Intuitive, to enforce the co-exclusively licensed intellectual property. The term of this agreement is until the expiration of the last to expire of the patents licensed under the agreement, unless extended or shortened by mutual agreement.

License Agreement with Mitsubishi Electric Research Laboratories

On March 7, 2003, we entered into a License Agreement with Mitsubishi Electric Research Laboratories, Inc., or Mitsubishi. Pursuant to this agreement, we obtained an exclusive, worldwide license to certain Mitsubishi patents and related know-how for use in the field of therapeutic or diagnostic vascular or endoluminal intervention involving robotics, automation or telemanipulation. In consideration for such license, we issued 9,375 shares of our common stock to Mitsubishi and paid commercialization milestones. Additionally, we owe minimum annual royalties of $100,000 which reduces to $55,000 if the license becomes non-exclusive and royalties on certain product sales, subject to an annual royalty cap. Under the agreement, we are obligated to use reasonable commercial efforts to commercialize royalty-bearing products. The agreement may be terminated by Mitsubishi in the event of an uncured material breach by us. In addition, we can terminate the agreement for any reason with advanced written notice to Mitsubishi.

License Agreement with Luna Innovations, Inc.

On January 12, 2010, we entered into license agreement with Luna Innovations, Inc., or Luna. Under the license agreement, Luna granted us a co-exclusive (with Intuitive), royalty-free, fully paid, perpetual and irrevocable license to Luna’s fiber optic shape sensing/localization technology within the medical robotics field. The license can only be sublicensed in connection with our products, except that we can grant full sublicenses to third parties for single degree of freedom medical devices. Intuitive received a corresponding co-exclusive license within the medical robotics field from Luna under a separate license agreement between Intuitive and Luna. Under the license agreement, Luna also granted to us a royalty-free, fully paid, perpetual and irrevocable license to Luna’s fiber optic shape-sensing/localization technology for non-robotic medical devices, which license is exclusive (and fully sublicenseable) within the orthopedics, vascular, and endoluminal fields and otherwise co-exclusive with Luna. We have the right along with Intuitive to enforce the intellectual property licensed by Luna within the medical robotics field, and the Company has the sole right to enforce such intellectual property for non-robotic devices in the orthopedics field, the vascular field and the endoluminal field.

The license agreement provides for the Company to grant to Luna a nonexclusive, sublicenseable, royalty-free, fully paid, perpetual and irrevocable license under certain of our fiber optic shape sensing/localization

 

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technology outside of the medical robotics field and outside the orthopedics, vascular and endoluminal fields. In this agreement, Luna confirmed the our ownership of certain intellectual property developed in whole or in part by Luna under the parties’ prior development agreement as well as ownership of certain Hansen patents in the event it is determined that any Luna personnel are inventors with respect to such patents.

Competition

The markets for medical devices are intensely competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards and price erosion.

We believe that the principal competitive factors in our market include:

 

   

safety, efficacy and high-quality performance of products;

 

   

integration with a three-dimensional visualization methodology;

 

   

ease of use and comfort for the physician;

 

   

cost of capital equipment and disposable products, including the cost of installation and maintenance;

 

   

eligibility for coverage and reimbursement;

 

   

procedure times and improved clinical outcomes for patients;

 

   

effective sales, marketing and distribution;

 

   

brand awareness and strong acceptance by healthcare professionals and patients;

 

   

training, service and support and comprehensive education for patients and physicians; and

 

   

intellectual property leadership and superiority.

We consider our primary competition in EP, our first market, to be in the following areas:

 

   

Drug therapies. Drug therapy is currently considered the first line treatment for electrophysiological conditions such as atrial fibrillation. As a result, physicians typically attempt to treat these conditions with drugs designed to control heart rate and heart rhythm before indicating interventional procedures. Among atrial fibrillation patients, approximately 40 percent respond to drug therapies and, as a result, are not considered candidates for interventional treatment. Therefore, we face competition with the companies who currently market or are developing drugs or gene therapies to treat electrophysiological conditions such as atrial fibrillation. We are not currently aware of drug therapies under development that have the potential to improve the success rate of drug treatment for electrophysiological conditions such as atrial fibrillation. However, to the extent that more effective drug therapies are developed and approved for use in treating these conditions, we will face increased competition.

 

   

Manual catheter-based interventional techniques. The vast majority of interventional EP procedures performed today are performed with several types of hand-held catheters. These products evolve rapidly, and their manufacturers are constantly attempting to make them easier to use or more efficacious in performing procedures.

 

   

Minimally invasive surgical procedures. A number of manufacturers are marketing devices that access the heart through an endoscopic surgical technique called thoracoscopy to treat atrial fibrillation. While less invasive than open surgery, these still require a surgical incision and general anesthesia, and therefore are more traumatic to the patient than an interventional EP procedure.

 

   

Magnetic guidance systems for steering catheters. Stereotaxis, Inc. markets a system that has been on the market in the United States and in Europe since 2003 and that uses magnets to control the working tip of catheters and other control catheters during interventional EP and other procedures. Because the system was introduced prior to our Sensei system and has a significant installed base, we believe it currently leads the market for guidance systems for controlling the working tip of catheters and catheter-based technologies.

 

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New approaches. We expect to face competition from companies that are developing new approaches and products for use in interventional procedures. Some of these companies may attempt to use robotic techniques to compete directly with us, such as Corindus, Inc. and Catheter Robotics, Inc. We believe, however, that several of these solutions merely involve robotic control of typical manual devices like off the shelf wires and catheters. We believe that, solely from a clinical perspective, the inability to more effectively control these devices robotically at their tip is a significant departure from the value we have realized through the application of flexible robotics. Many potential competitors also have an established presence in the field of interventional cardiology, including the major imaging, capital equipment and disposables companies that are currently selling products in the EP lab.

For applications outside of EP, we expect to face similarly intense competition. The use of catheters and catheter-based technologies is common for a broad range of interventional procedures in cardiology and in other medical specialties. Other companies may market guidance systems for use outside of EP. In addition, we believe that Intuitive is developing a system to guide flexible medical devices in fields such as urology, gynecology, gastrointestinal disease, and other medical fields outside of cardiology. While they may not use our patents in EP and cardiology procedures, Intuitive may attempt to compete directly with us in EP and cardiology, and will likely compete with us if we decide to offer products outside of our licensed field of treating cardiovascular, neurovascular and peripheral vascular diseases. We also face competition from large medical device companies that have significantly greater financial and human resources for product development, sales and marketing, and patent litigation. Large medical device companies such as Johnson & Johnson, St. Jude Medical, Boston Scientific and others, as well as a variety of smaller innovative companies, are also expected to be targeting the EP and cardiology markets for guiding flexible medical devices.

Government Regulation

The healthcare industry, and thus our business, is subject to extensive federal, state, local and foreign regulation. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In addition, these laws and their interpretations are subject to change.

Both federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. As indicated by work plans and reports issued by these agencies, the federal government will continue to scrutinize, among other things, the billing practices of healthcare providers and the marketing of healthcare products. The federal government also has increased funding in recent years to fight healthcare fraud, and various agencies, such as the U.S. Department of Justice, the Office of Inspector General of the Department of Health and Human Services, or OIG, and state Medicaid fraud control units, are coordinating their enforcement efforts.

We believe that we have structured our business operations and relationships with our customers to comply with all applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently and assert otherwise. In addition, because our products are used off label, we believe we are subject to increased risk of prosecution under these laws and by these entities even if we believe we are acting appropriately. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited in enforcement actions.

U.S. Food and Drug Administration Regulation

The FDA strictly regulates medical devices under the authority of the Federal Food, Drug and Cosmetic Act, or FFDCA, and the regulations promulgated under the FFDCA. The FFDCA and the implementing regulations govern, among other things, the following activities relating to our medical devices: preclinical and clinical testing, design, manufacture, safety, efficacy, labeling, storage, record keeping, sales and distribution, postmarket adverse event reporting, recalls, and advertising and promotion.

 

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Our medical devices are categorized under the statutory framework described in the FFDCA. This framework is a risk-based system that classifies medical devices into three classes from lowest risk (Class I) to highest risk (Class III). In general, Class I devices are subject to only general controls (e.g., labeling, medical devices reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the 510(k) premarket clearance requirements. Class II devices generally require 510(k) premarket clearance before they may be commercially marketed in the United States. Class II devices also may be subject to special controls such as performance standards and FDA guidelines that are not applied to Class I devices. Class III devices require FDA approval of a premarket application, or PMA, prior to commercial distribution. Class III devices are those deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device. Both premarket clearance and PMA applications are subject to the payment of user fees paid at the time of submission for FDA review. The current use of our Sensei/Artisan is classified in Class II, but future applications for ablation in treatment of specific arrhythmias could be Class III.

The 510(k) Clearance Process. In the 510(k) process, the FDA reviews a premarket notification and determines whether or not a proposed device is “substantially equivalent” to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications, referred to as a “predicate device.” In making this determination, the FDA compares the proposed device to the predicate device. If the two devices are comparable in intended use and safety and effectiveness, the device may be cleared for marketing. The FDA’s 510(k) clearance pathway usually takes from four to 12 months, but it can last longer and clearance is never guaranteed. In reviewing a premarket notification, the FDA may request additional information, including clinical data. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require PMA approval. The FDA requires each manufacturer to make this determination in the first instance, but the agency can review any such decision. If the FDA disagrees with a manufacturer’s decision not to seek a new 510(k) clearance, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. Also, the manufacturer may be subject to significant regulatory fines or penalties.

In May 2007, the FDA provided 510(k) clearance of our Sensei system and Artisan catheter for use in mapping the heart anatomy with two specified mapping catheters. When the FDA cleared our technology for promotion in the U.S., it concluded that there is a reasonable likelihood that our products will be used for an intended use not identified in the proposed labeling and that such uses could cause harm. The FDA therefore required that we label our products with language spelling out that the safety and effectiveness of our products for use with cardiac ablation catheters, in the treatment of cardiac arrhythmias including atrial fibrillation, have not been established. Although this is not a formal contraindication, the FDA, with supporting data (for example, based on observed trends in postmarket adverse event reports,) could later choose to require a specific contraindication for use in cardiac ablation procedures. We plan to seek FDA clearance for labeling that includes ablation procedures.

We cannot assure you that the FDA will grant 510(k) clearance to our Sensei system and disposable Artisan catheter for other uses including for ablation procedures, or what additional data, beyond the planned clinical trial, the FDA will require us to submit data as part of the 510(k) process for other uses. The FDA could even deny 510(k) clearance for other uses and require us to seek PMA approval.

The PMA Approval Process. A PMA must be submitted if the device cannot be cleared through the 510(k) process. The PMA process is generally more costly and time consuming than the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use. After a premarket approval application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180

 

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days to review the “accepted application”, although, generally, review of the application can take between one and three years and it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Typically, the FDA will convene an advisory panel meeting to seek review of the data presented in the PMA for novel devices. The panel’s recommendation is given great weight, but is not dispositive of the agency’s decision. Prior to approving the PMA, the FDA will conduct an inspection of the manufacturing facilities and a number of the clinical sites where the supporting study was conducted. The facility inspection evaluates the company’s compliance with the Quality System Regulation, or QSR, which impose elaborate testing, control, documentation and other quality assurance procedures in the manufacturing process. The FDA may approve the PMA with postapproval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Even after approval of a PMA, a new PMA or PMA supplement is required in the event of a modification to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA.

Clinical Trials. Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance. Such trials, if conducted in the United States, generally require an investigational device exemption application, or IDE, approved in advance by the FDA for a specified number of patients and study sites, unless the product is deemed an nonsignificant risk device eligible for more abbreviated IDE requirements. We have submitted an IDE with a proposed clinical trial to the FDA for the use of our Artisan catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the U.S. beyond mapping. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an institutional review board, or IRB, for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we also are required to obtain the patients’ informed consent that complies with FDA requirements, state and federal privacy regulations and human subject protection regulations. We, the FDA or the IRB could suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the U.S. Following completion of a study, we would need to collect, analyze and present the data in an appropriate submission to the FDA, either a 510(k) premarket notification or a PMA. Even if a study is completed and submitted to the FDA, the results of our clinical testing may not demonstrate the safety and efficacy of the device, or may be equivocal or otherwise not be sufficient to obtain approval of our product.

Pervasive and Continuing Regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:

 

   

product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;

 

   

Quality System Regulation, or QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 

   

labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;

 

   

clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of cleared devices;

 

   

approval of product modifications that affect the safety or effectiveness of approved devices;

 

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medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;

 

   

post-approval restrictions or conditions, including post-approval study commitments;

 

   

post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device;

 

   

the FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations;

 

   

regulations pertaining to voluntary recalls; and

 

   

notices of corrections or removals.

Advertising and promotion of medical devices, in addition to being regulated by the FDA, are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, promotional activities for FDA-regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act and similar state laws, competitors and others can initiate litigation relating to advertising claims. Accordingly, we may not market or promote our Sensei system for any off-label use. For example, we are not permitted to promote our system for use with any other mapping catheter other than the two specified in our 510(k) clearance, use with any ablation catheters, or in any other procedure such as ablation procedures. The FDA has specifically indicated that the commercial distribution of these devices for use in ablation procedures will require us to obtain a new 510(k) clearance or PMA approval with significant clinical data. Nonetheless, physicians are using our devices off-label for these indications within their practice of medicine. If the FDA determines that our promotional materials or training constitutes promotion of an unapproved 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 or 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 under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products would be impaired.

Furthermore, our products could be subject to voluntary recall if we or the FDA determine, for any reason, that our products pose a risk of injury or are otherwise defective. Moreover, the FDA can order a mandatory recall if there is a reasonable probability that our device would cause serious adverse health consequences or death.

The Medical Device Reporting regulation (21 CFR 803), or MDR regulation, requires device manufacturers and U.S.-designated agents of foreign manufacturers to report to the FDA whenever they receive or become aware of information that reasonably suggests that a device marketed by the manufacturer “may have caused or contributed to a death or serious injury” or has malfunctioned and, if the malfunction were to recur, likely would cause or contribute to a death or serious injury (21 CFR 803.50(a)). Adverse event reporting, under the MDR regulation, is subject to two different time frames and report types, depending on the nature of the event. Once reportable events have been identified, we must decide which individual adverse event report to file: a five-day report or a 30-day report. For events involving deaths, serious injuries or malfunctions that require remedial action to prevent an unreasonable risk of substantial harm to the public health, a five-day report must be filed. If remedial action is not necessary, a 30-day report must be filed. MDRs are disclosed to the public via the Manufacturer and User Facility Device Experience (MAUDE) database, which is maintained by the FDA. All of the procedures performed using our technology have involved a combination of mapping and ablation of one sort or another.

 

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The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of some of our subcontractors. We underwent an FDA inspection, which employed QSIT, from November 29, 2007 through December 4, 2007. This was the first FDA inspection of our company. The inspection has closed and the FDA did not identify any deficiencies in our operations. Later discovery of previously unknown problems with our Sensei system, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, or observations found during a future inspection, could result in enforcement action by the FDA or other regulatory authorities, which may result in sanctions including, but not limited to:

 

   

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

 

   

unanticipated expenditures to address or defend such actions;

 

   

customer notifications for repair, replacement, refunds;

 

   

recall, detention or seizure of our products;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;

 

   

operating restrictions;

 

   

withdrawing 510(k) clearances on PMA approvals that have already been granted;

 

   

refusal to grant export approval for our products; or

 

   

criminal prosecution.

Foreign Regulation

In order for us to market our products in other countries, we must obtain regulatory approvals and comply with extensive safety and quality regulations in other countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review, vary from country to country. Failure to obtain regulatory approval in any foreign country in which we plan to market our products may harm our ability to generate revenue and harm our business.

The primary regulatory environment in Europe is that of the European Union, which currently consists of 27 countries encompassing most of the major countries in Europe. The European Union 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 European Union. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification that its processes meet certain European quality standards. Compliance with the Medical Device Directive, as certified by a recognized European Notified Body, permits the manufacturer to affix the CE mark on its products and commercially distribute those products throughout the European Union.

In September 2006, we received the CE mark for the sale of our Sensei system, and in May 2007 we received the CE mark for our Artisan catheter which allows us to market our system for ablation procedures in Europe. If we modify existing products or develop new products in the future, including new devices, we will need to apply for permission to affix the CE mark to such products. We will be subject to regulatory audits, currently conducted biannually, in order to maintain any CE mark permissions we have already obtained. We cannot be certain that we will be able to obtain permission to affix the CE mark for new or modified products or that we will continue to meet the quality and safety standards required to maintain the permissions we have

 

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already received. If we are unable to maintain permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the European Union. We will evaluate regulatory approval in other foreign countries on an opportunistic basis.

Anti-Kickback Statutes and Federal False Claims Act

In the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration in exchange for the referral of patients or other health-related business. For example, the federal healthcare program Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, some kickback allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.

The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the OIG to issue a series of regulations, known as the “safe harbors” which it did, beginning in July of 1991. These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.

Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

Another trend affecting the healthcare industry is the increased use of the False Claims Act and, in particular, actions under the False Claims Act’s “whistleblower” or “qui tam” provisions. Those provisions allow a private individual to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. In addition, various states have enacted laws modeled after the False Claims Act and some states’ laws may apply to claims for items or services reimbursed under Medicare, Medicaid and/or commercial insurance.

When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim. Sanctions under false claims laws may also include exclusion of a manufacturer’s products from reimbursement under government programs and imprisonment. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, improper referrals, and improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as to misrepresentations with respect to the services rendered and promotion of products for off-label uses. We are unable to predict whether

 

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we could be subject to actions under the False Claims Act or any comparable state laws, or the impact of such actions. However, the costs of defending claims under the False Claims Act or any comparable state laws, as well as sanctions imposed under the Act, could significantly affect our financial performance.

Our activities relating to the reporting of wholesale or estimated retail prices for our products, the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws. In addition, companies have been prosecuted under the False Claims Act in connection with alleged off-label promotion of products.

Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently have brought cases against sales personnel who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business. As part of our compliance program, we plan to review our sales contracts and marketing materials and practices to assure compliance with these federal and state laws, and will inform employees and marketing representatives of the Anti-Kickback Statute and their obligations thereunder. However, we cannot rule out the possibility that the government or other third parties could interpret these laws differently and challenge our practices under one or more of these laws. If our past or present operations are found to be in violation of any of these laws, we could be subject to civil and criminal penalties, which could hurt our business, results of operations and financial condition.

Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

In addition to creating the two new federal healthcare crimes, HIPAA, and the regulations promulgated thereunder, also establish uniform standards for certain covered entities governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information, or PHI, maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses. Three standards have been promulgated under HIPAA: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, and the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information.

The American Recovery and Reinvestment Act of 2009, or ARRA, commonly referred to as the economic stimulus package, includes sweeping changes to HIPAA that expand HIPPA privacy and security standards and will likely lead to increased federal and state enforcement standards. The legislation, which was signed into law on February 17, 2009, includes the Health Information Technology for Economic and Clinical Health Act. Among other things, the new law makes HIPAA’s privacy and security standards directly applicable to covered entities’ “business associates”—independent contractors of those covered entities that receive or obtain protected health information in connection with providing a service on their behalf. Accordingly, this new legislation effectively expands HIPAA as a vehicle to regulate anyone servicing the healthcare industry that has access to protected health information. ARRA also increases the civil and criminal penalties that may be imposed and

 

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gives state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions.

Although we believe we are not a covered entity and therefore do not need to comply with these standards at this time, we expect that our customers generally will be covered entities and may obligate us to contractually comply with certain aspects of these standards. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards may entail significant costs for us. If we fail to comply with these standards, we may be subject to liability for violation of related contractual obligations we have with our customers. When the provisions of ARRA extending direct liability under HIPAA to business associates become effective February 17, 2010, we will be subject to HIPAA security and privacy standards as if we were a covered entity. Our compliance with these standards may entail significant costs for us and we cannot predict the effect of increased enforcement efforts in this area.

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.

Certificate of Need Laws

In approximately two-thirds of the states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or various types of advanced medical equipment, such as our system. At present, many of the states in which we expect to sell our system have laws that require institutions located in those states to obtain a certificate of need in connection with the purchase of our system, and we anticipate that some of our purchase orders may be conditioned upon our customer’s receipt of necessary certificate of need approval. Certificate of need laws were enacted to contain rising healthcare costs, prevent the unnecessary duplication of health resources, and increase patient access for health services. In practice, certificate of need laws have prevented hospitals and other providers who have been unable to obtain a certificate of need from acquiring new equipment or offering new services. A further increase in the number of states regulating our business through certificate of need or similar programs could adversely affect us. Moreover, some states may have additional requirements. For example, we understand that California’s certificate of need law also incorporates seismic safety requirements which must be met before a hospital can acquire our system.

Employees

As of December 31, 2009, we had 173 employees, 42 of whom were engaged directly in research and development, 62 in manufacturing and service, 25 in general administrative and accounting activities, 13 in regulatory, clinical affairs and quality activities and 31 in sales and marketing activities. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.

Additional Information

Hansen Medical, Inc. was incorporated in Delaware in 2002 under the name AutoCath, Inc. We file reports and other information with the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy or information statements. Those reports and statements as well as all amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (1) are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, (2) are available at the SEC’s internet site (www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and (3) are available free of charge through our website as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

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Our website address is www.hansenmedical.com. Information on our website is not incorporated by reference nor otherwise included in this report. Our principal executive offices are located at 800 East Middlefield Road, Mountain View, California 94043 and our telephone number is (650) 404-5800.

 

ITEM 1A. RISK FACTORS

Risks Related to Our Business

We have material weaknesses in internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified or develop in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting.

In assessing the results of an investigation conducted by the audit committee of our board in 2009 as well as the internal review and recertification procedures performed for purposes of the preparation and certification of our restated consolidated financial statements in November 2009, our management has identified material weaknesses as of December 31, 2008 and December 31, 2007 that resulted in errors in our financial reporting with regard to our accounting for revenue recognition with respect to the sale of our Sensei Robotic Catheter Systems. Such errors resulted in a restatement of the Company’s audited annual financial statements as of and for the years ended December 31, 2008 and December 31, 2007 and the unaudited interim financial statements as of and for the quarterly periods ended June 30, 2009, March 31, 2009, September 30, 2008, June 30, 2008 and March 31, 2008. Additionally, audit adjustments identified in connection with the audit of our December 31, 2009 financial statements resulted in material weaknesses. We evaluated our controls in association with our assessment of the effectiveness of internal control over financial reporting as of December 31, 2009. While many remedial measures were undertaken to correct the control structure under which the errors occurred, not all remedial measures were complete as of December 31, 2009 and not enough time had passed under those remedial measures. As such, we continue to report material weaknesses in our internal control over financial reporting as of December 31, 2009. A description of the material weakness related to our inadequate controls over the accounting for, and disclosure of, the application of our control environment, information and communication, revenue recognition process and complex arrangements is set forth in Part II Item 9A “Controls and Procedures.”

We have adopted, or are in the process of adopting, various remedial measures that are designed to improve our internal controls over the accounting for and disclosure of compliance with our revenue recognition process and accounting for complex arrangements. We cannot assure you, however, that these remedial measures will be effective. We also cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not exist in the future. Any failure to maintain or implement new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

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We have been named as a defendant in three class action lawsuits and three shareholder derivative lawsuits that may adversely affect our financial condition, results of operations and cash flows.

We and certain of our executive officers and directors, are defendants in three securities class action lawsuits and three shareholder derivative lawsuits. These lawsuits are described under the heading Item 3. “Legal Proceedings.” Our attention may be diverted from our ordinary business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors and our underwriters who may be parties to such action). Depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on our results of operations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading price of our common stock.

The matters relating to the investigation by the audit committee of our board of directors and the restatement of our consolidated financial statements may result in governmental enforcement actions and additional litigation.

On October 15, 2009, the audit committee of our board of directors, upon the recommendation of management, concluded that the previously issued financial statements contained in our annual report on Form 10-K for the year ended December 31, 2008, and our quarterly reports on Form 10-Q for the quarters ended March 31, 2008, June 30, 2008, September 30, 2008, March 31, 2009 and June 30, 2009 (collectively, the “Prior Periods”) should no longer be relied upon because of errors in those financial statements, some of which arose from potential irregularities outside of the accounting department. On November 9, 2009, the audit committee of our board of directors, upon recommendation of management, concluded that the previously issued financial statements contained in our annual report on Form 10-K for the year ended December 31, 2007 should also no longer be relied upon because of an error in those financial statements regarding the recognition of revenue on one Sensei Robotic Catheter System sold to a distributor in the quarter ending December 31, 2007. As a result of our investigation, we have identified systems for which revenue should have been recognized in a later period than the period in which it was recognized and revenue on systems that should have been deferred.

For more information on these matters, see Part II Item 9A, “Controls and Procedures.”

The internal review, the independent investigation, and related activities have required us to incur substantial expenses for legal, accounting, tax and other professional services, and have diverted management’s attention from our business. As a result of the restatement, we have become subject to a number of risks and uncertainties, including the possibility of further governmental investigations and enforcement actions and additional stockholder litigation and the possibility that the restatement could impact our relationship with customers and our ability to generate revenue and we will continue to incur additional restatement-related accounting and legal costs.

Continuing negative publicity may adversely affect our business.

As a result of the Audit Committee-led investigation, restatement of our financial statements and related matters as discussed herein, we have been the subject of negative publicity. This negative publicity may have an effect on the terms under which some customers, lenders, landlords and suppliers are willing to continue to do business with us and could affect our financial performance and financial condition. We also believe that certain of our employees perceive themselves to be operating under stressful conditions, which may cause them to terminate their employment or, if they remain, result in reduced morale that could adversely affect our business. Continuing negative publicity also could have a material adverse effect on our business.

 

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Potential indemnification obligations and limitations of our current and former director and officer liability insurance and contractual indemnification obligations to underwriters of our securities offerings could adversely affect us.

One of our current officers and employees and the current members of our Board of Directors are the subject of pending lawsuits related to our restatement and other current or former officers, employees or directors may become the subject of lawsuits. Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers and employees and directors in relation to these matters on certain terms and conditions. In addition, we have contractual indemnification obligations to the underwriters of our April 2008 and April 2009 public offerings of shares of our common stock. These indemnification obligations to directors, officers, employees and our underwriters are generally unlimited in nature and some of these indemnification obligations may not be covered by our directors’ and officers’ insurance policies. If we incur significant uninsured indemnity obligations, this could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We have a debt facility with Silicon Valley Bank that requires us to meet certain restrictive covenants that may limit our operating flexibility.

In August 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment loan and a one-year $10 million revolving credit line, which expired in August 2009. We have drawn down approximately $12.5 million on the term equipment loan and, per the original agreement terms, the remainder of the term equipment loan is no longer available. The facility is collateralized by substantially all of our assets, excluding intellectual property, and is subject to certain covenants, including maintaining the required liquidity, achieving EBITDA amounts to be specified and fulfilling certain reporting requirements. The liquidity covenants require us to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. Silicon Valley Bank has yet to determine the quarterly EBITDA covenant amounts with us. As of December 31, 2009, we were in compliance with all specified financial covenants. However, we anticipate that, by the end of the second quarter of 2010, if we are unable to raise sufficient additional capital, we will violate the liquidity covenants of the loan and security agreement. At such time, Silicon Valley Bank could exercise their remedies, including their right to accelerate the debt. If we were required to repay all the amounts then outstanding under the loan and security agreement, our ability to continue as a going concern would be significantly impacted. Additionally, the continuing liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, we have classified all of our outstanding debt balance and related accrued interest as a current liability as of December 31, 2009. Moreover, the agreement limits our ability to take the following corporate actions without prior consent from Silicon Valley Bank:

 

   

transfer all or any part of our business or properties, other than transfers made in the ordinary course of business;

 

   

engage in any business other than the business in which we are currently engaged;

 

   

merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain exceptions;

 

   

create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;

 

   

pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;

 

   

create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to receive income;

 

   

directly or indirectly enter into or permit to exist any material transaction with any of our affiliates, subject to certain exceptions; and

 

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make or permit any payment on any subordinated debt.

Complying with these covenants may make it more difficult for us to successfully execute our business strategy.

We are a company with a limited history of operations, which makes our future operating results difficult to predict.

We are a medical device company with a limited operating history and first recognized revenues in the second quarter of 2007. Prior to the second quarter of 2007, we were a development stage company. We have been engaged in research and product development since our inception in late 2002. Our Sensei Robotic Catheter System, or Sensei system, and our corresponding disposable Artisan catheter received FDA clearance in May 2007 for commercialization to facilitate manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. We also received the CE Mark in Europe for our Sensei system in September 2006 and for our Artisan catheter in May 2007. As of December 31, 2009, we have also received regulatory approvals in Russia, Thailand and Australia. The future success of our business will depend on our ability to manufacture and assemble our current and future products in sufficient quantities in accordance with applicable regulatory requirements and at lower costs, increase product sales and successfully introduce new products, all of which we may be unable to do. We have a limited history of operations upon which you can evaluate our business and our operating expenses have increased significantly. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects. If we are unable to successfully operate our business, our business and financial condition will be harmed.

We may be unable to complete our trial for the treatment of atrial fibrillation or other future trials, or we may experience significant delays in completing our clinical trials, which could prevent or delay regulatory approval of our Sensei system and impair our financial position.

We are currently finalizing an IDE for an approximately 300 patient study for the treatment of atrial fibrillation and expect to enroll our first patient in the second quarter of 2010 and complete enrollment by the end of 2010.

Enrollment of patients in trial could be delayed for a variety of reasons, including:

 

   

obtaining FDA IDE approval for the study;

 

   

reaching agreement on acceptable terms with prospective clinical trial sites;

 

   

obtaining additional institutional review board approval to conduct the trial at a prospective site; and

 

   

obtaining sufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the willingness of patients to randomize to manual catheter control, the proximity of patients to clinical sites and the eligibility criteria for the trial.

Once our trial has begun, the completion of the trial, and any future clinical trials, could be delayed, suspended or terminated for several reasons, including:

 

   

ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental information with respect to our preclinical results or clinical trial results;

 

   

our failure or inability to conduct the clinical trials in accordance with regulatory requirements;

 

   

sites participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number of sites that are permitted to be involved in the trial;

 

   

patients may not enroll in, remain in or complete, the clinical trial at the rates we expect;

 

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patients in either the control or test arm of the trial may experience serious adverse events or side effects during the trial, which, whether or not related to our products, could cause the FDA or other regulatory authorities to place the clinical trial on hold; and

 

   

clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices.

If our clinical trials are delayed it will take us longer to ultimately commercialize a product for the treatment of atrial fibrillation and generate revenues from such product. Moreover, our development 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.

Even if we complete our trial for the treatment of atrial fibrillation or other clinical trials, these trials may not produce results that are sufficient to support approval of a PMA or 510(k) application.

We will consider our Sensei system to be effective if the trial for the treatment of atrial fibrillation demonstrates non-inferiority to manual control of the NaviStar Thermocool catheter, but there is a risk that, even if we achieve our endpoints, the FDA may not approve our Sensei system for use in the treatment of atrial fibrillation. In addition, there is a risk that the FDA may require us to conduct a longer clinical trial, submit additional follow-up data, or engage in other costly and time consuming activities that may delay the FDA’s approval of the Sensei system for use in atrial fibrillation. Although we plan to file a 510(k) application based on data from our trial for the use of Sensei system in the treatment of atrial fibrillation, the FDA may require a us to file a PMA, which is more time consuming and costly. If our clinical trials fail to produce sufficient data to support a PMA or 510(k) application, it will take us longer to ultimately commercialize a product for the treatment of atrial fibrillation, or any other intended treatment, and generate revenue or the delay could result in our being unable to do so. Moreover, our development costs will increase if we need to perform more or larger clinical trials than planned.

Even if we obtain the necessary regulatory approvals, our efforts to commercialize our Sensei system for atrial fibrillation or vascular disease, we may not succeed or may encounter delays which could significantly harm our ability to generate revenue.

If we obtain regulatory approval to market our Sensei system for uses other than mapping electrophysiology procedures, such as the treatment of atrial fibrillation or vascular disease, our ability to generate revenue will depend upon the successful commercialization of our Sensei system for such indications. Our efforts to commercialize our Sensei system may not succeed for a number of reasons, including:

 

   

our Sensei system may not be accepted in the marketplace for other treatments by physicians;

 

   

we may not be able to sell our Sensei system and Artisan catheter at a price that allows us to meet the revenue targets necessary to generate revenue for profitability;

 

   

we, or the investigators of our product, may not be able to have information on the outcome of the trials published in medical journals;

   

the availability and perceived advantages and disadvantages of alternative treatments;

 

   

any rapid technological change may make our products obsolete;

 

   

we may not be able to have our Sensei system manufactured in commercial quantities or at an acceptable cost;

 

   

we may not have adequate financial or other resources to complete the development and commercialization of our Sensei system; and

 

   

we may be sued for infringement of intellectual property rights and could be enjoined from manufacturing or selling our products.

If we are not successful in the commercialization of our Sensei system for uses other than for mapping in electrophysiology procedures, we may never achieve profitability and may be forced to cease operations.

 

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Credit, financial market and general economic conditions could delay or prevent potential customers from purchasing our products, which would adversely affect our sales, financial condition and results of operation.

The sale of a Sensei system often represents a significant capital purchase for our customers and many customers finance their purchase of a Sensei system through a credit facility or other financing. If prospective customers that need to finance their capital purchases are not able to access the credit or capital markets on terms that they consider acceptable, they may decide to postpone or cancel a potential purchase of a Sensei system. Potential customers with limited capital budgets may decide to spend those dollars on proven technologies rather than on our products. Also, even customers with sufficient financial resources to make such purchases without resorting to the credit and capital markets may be less likely to make capital purchases during periods when they view the overall economic conditions unfavorably or with uncertainty. Financial market conditions in the U.S. and the European Union, including especially the credit and capital markets, continue to be highly volatile and uncertain. As a result, many potential customers delayed making a decision to purchase a Sensei system, which has significantly impacted our sales, financial condition and results of operations. Financial market conditions are likely to continue to be volatile into the future. We believe that the macroeconomic environment and the deterioration in confidence and spending have impacted and will continue to impact potential customers and their decisions to purchase our products into the foreseeable future. We cannot predict the timing, strength or duration of any economic slowdown or subsequent recovery, whether worldwide, regional or specific to our industry, nor the extent of its potential impact on our future sales, financial condition and results of operations.

We have limited sales, marketing and distribution experience and capabilities, which could impair our ability to achieve profitability.

In the second quarter of 2007, we received clearance to market, sell and distribute our Sensei system for use in the mapping of electrophysiology procedures in the United States and Europe. We had no prior experience as a company in undertaking these efforts. In the United States, we market our Sensei system and Artisan catheter through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Our direct sales force competes against the experienced and well-funded sales organizations of our competitors. Our revenues will depend largely on the effectiveness of our sales force. We face significant challenges and risks related to our direct sales force and the marketing of our current and future products, including, among others:

 

   

the ability of sales personnel to obtain access to or persuade adequate numbers of hospitals to purchase our system and catheters or physicians to use our system and catheters;

 

   

our ability to retain, properly motivate, recruit and train adequate numbers of qualified sales and marketing personnel;

 

   

the costs associated with an independent sales and marketing organization, hiring, maintaining and expanding an independent sales and marketing organization; and

 

   

our ability to promote our products effectively while maintaining compliance with government regulations and labeling restrictions with respect to the healthcare industry.

Outside the United States, primarily in the European Union, we are establishing a combination of a direct sales force and distributors to market, sell and support our current and future products. If we fail to select appropriate distributors or effectively use our distributors or sales personnel and coordinate our efforts for distribution of our Sensei system and Artisan catheter in the European Union or if their and our sales and marketing strategies are not effective in generating sales of our system, our revenues would be adversely affected and we may never become profitable.

 

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We have limited experience in manufacturing and assembling our products and may encounter problems at our manufacturing facilities or otherwise experience manufacturing delays that could result in lost revenue or diminishing margins.

We do not have significant experience in manufacturing, assembling or testing our current products on a commercial scale. In addition, for our Sensei system, we subcontract the manufacturing of major components and complete the final assembly and testing of those components in-house. We face challenges in order to produce our Sensei system and disposable Artisan catheters effectively, to appropriately phase in new products and product designs, to efficiently utilize our new manufacturing facility and to achieve planned manufacturing cost reductions. These challenges include equipment design and automation, material procurement, low or variable production yields on Artisan catheters and quality control and assurance. The costs resulting from these challenges and our relocation to a larger facility have had and will continue to have a significant impact on our gross margins and may result in significant fluctuations of gross margins from quarter to quarter. We may not successfully complete required manufacturing changes or planned improvements in manufacturing efficiency on a timely basis or at all. For example, as we were increasing our manufacturing capacity for Artisan catheters, we shipped a limited number in late 2007 and early 2008 that were later identified as having a potential leak. Although no patient is known or suspected to have experienced any consequences associated with this possible leak nor has it significantly impacted our business, these events were reported to the FDA in accordance with applicable regulations and we subsequently initiated a voluntary recall of the affected devices. This recall was closed in June 2008. Also, following the introduction of a new catheter in the fall of 2009, some of the new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any consequences associated with the new catheters, we voluntarily recalled all of the catheters and reported the events to the FDA in accordance with applicable regulations. Our manufacturing group is testing a revised catheter design which we believe we will be able to ship to customers later this year. This catheter redesign or other manufacturing issues may result in our being unable to meet the expected demand for our Artisan catheters or our Sensei system, maintain control over our expenses or otherwise successfully manage our manufacturing capabilities. If we are unable to satisfy demand for our Sensei system or Artisan catheters, our ability to generate revenue could be impaired and hospitals may instead purchase, or physicians may use, our competitors’ products. Since our Sensei system requires the use of disposable Artisan catheters, our failure to meet demand for Artisan catheters from hospitals that have purchased our Sensei system could adversely affect the market acceptance of our products and damage our commercial reputation.

In addition, all of our operations are conducted at our facilities leased in Mountain View, California. We could encounter problems at these facilities, which could delay or prevent us from manufacturing, assembling or testing our products or maintaining our manufacturing capabilities or otherwise conducting operations.

We may not be able to develop and commercialize the robotic platform and catheter suite for endovascular procedures as planned.

We intend to develop and commercialize a novel robotic platform for vascular intervention. Due to the advanced electrical, mechanical, and sensing capabilities of the new robotic platform, we may encounter challenges in designing the platform to function as intended, which may lead to performance errors or other defects in the platform. Any such malfunctions could result in delays in our 510(k) submission to the FDA, negative press, lack of physician adoption of our system, higher than expected service claims and litigation. Furthermore, we have not previously manufactured the robotic platform for vascular intervention on a commercial scale and we may encounter unexpected manufacturing problems when scaling up the production of the new platform. Any of these issues could negatively impact out business financial condition and results of operations.

Our reliance on third-party manufacturers and on suppliers, and in one case, a single-source supplier, could harm our ability to meet demand for our products in a timely manner or within budget, and could cause harm to our business and financial condition.

We depend on third-party manufacturers to produce most of the components of our Sensei system and other current products, and have not entered into formal agreements with several of these third parties. We also depend

 

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on various third-party suppliers for various components we use in our Sensei systems and for our Artisan catheters and sheaths. For example, Force Dimension Sàrl, a single-source supplier, manufactures customized motion controllers that are a part of our Sensei system. We also obtain the motors for our Sensei system from a single supplier, Maxon Motor AG, from whom we purchase on a purchase order basis, and we generally do not maintain large volumes of inventory. Additionally, in October 2007, we entered into a purchase agreement with Plexus Services Corp., or Plexus, under which Plexus will manufacture certain components for us in quantities determined by a non-binding forecast and by purchase orders.

Our reliance on third parties involves a number of risks, including, among other things, the risk that:

 

   

suppliers may fail to comply with regulatory requirements or make errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in or prevent shipments of our products;

 

   

we may not be able to respond to unanticipated changes and increases in customer orders;

 

   

we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;

 

   

we may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems and other products;

 

   

our suppliers manufacture products for a range of customers, and fluctuations in demand for products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner;

 

   

our suppliers may wish to discontinue supplying goods or services to us;

 

   

we may not be able to find new or alternative components for our use or reconfigure our system and manufacturing processes in a timely manner if the components necessary for our system become unavailable; and

 

   

our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.

If any of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products.

In addition, if these manufacturers or suppliers stop providing us with the components or services necessary for the operation of our business, we may not be able to identify alternative sources in a timely fashion. Any transition to alternative manufacturers or suppliers or a decision to discontinue our relationship with a current manufacturer or supplier could result in operational problems, increased expenses or write-down of capitalized assets that would adversely affect operating results and could delay the shipment of, or limit our ability to provide, our products. We cannot assure you that we would be able to enter into agreements with new manufacturers or suppliers on commercially reasonable terms or at all. Additionally, obtaining components from a new supplier may require qualification of a new supplier in the form of a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume product sales. Any disruptions in product supply may harm our ability to generate revenues, lead to customer dissatisfaction, damage our reputation and result in additional costs or cancellation of orders by our customers. We currently purchase a number of the components for our Sensei system in foreign jurisdictions. Any event causing a disruption of imports, including the imposition of import restrictions, could adversely affect our business and our financial condition.

If we fail to maintain necessary FDA clearances and CE marks for our medical device products, or if future clearances are delayed, we will be unable to commercially distribute and market our products.

The process of seeking regulatory clearance or approval to market a medical device is expensive and time-consuming and clearance or approval is never guaranteed and, even if granted, clearance or approval may be

 

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suspended or revoked. In May 2007, we received FDA clearance in the United States to commercialize our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control, for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems. Because the FDA has determined that there is a reasonable likelihood that our products could be used by physicians for uses not encompassed by the scope of the present FDA clearance and that such uses may cause harm, we are required to label our products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. Accordingly, the scope of the current label may be an obstacle to our ability to successfully market and sell our products in the United States to a broader group of potential customers. We will be required to seek a separate 510(k) clearance or PMA approval to market our Sensei system for uses other than those currently cleared by the FDA. We cannot assure you that the FDA would not impose a more burdensome level of premarket review on other intended uses or modifications to approved products. We plan to seek future approval of our Sensei system for other indications, including atrial fibrillation and other cardiac ablation procedures. We are currently finalizing the protocol for an approximately 300 patient study for the treatment of atrial fibrillation and hope to enroll our first patient in the second quarter of 2010 and complete enrolment by the end of 2010. The study will include a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days. We cannot assure the timing or potential for success of those efforts if undertaken. The FDA can delay, limit or deny clearance of a 510(k), or PMA approval, for many reasons, including:

 

   

our inability to demonstrate safety or effectiveness to the FDA’s satisfaction;

 

   

the data from our preclinical studies and clinical trials may be insufficient to support approval;

 

   

the facilities of our third-party manufacturers or suppliers may not meet applicable requirements;

 

   

our compliance with preclinical, clinical or other regulations;

 

   

our inability to meet the FDA’s statistical requirements or changes in statistical tests or significance levels the FDA requires for approval of a medical device, including ours; and

 

   

changes in the FDA approval policies, expectations with regard to the type or amount of scientific data required or adoption of new regulations may require additional data or additional clinical studies.

Furthermore, in order to market our Sensei system outside of the United States, we will need to establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. We received the CE Mark in Europe for our Sensei system in September 2006 and for our Artisan catheters in May 2007, but we may be required to seek separate clearances from the European Union in order to market our Sensei system for any additional uses. Such approval may be difficult and costly to achieve, or may not be granted at all.

Seeking to obtain future clearances or approvals from the FDA and other regulatory authorities could result in unexpected and significant costs for us and consume management’s time and other resources. The FDA or other regulatory authorities could ask us to supplement our submissions, collect non-clinical data, conduct

clinical trials or engage in other time-consuming or costly actions, or it could simply deny our applications. Seeking new approvals could also result in the FDA or other regulatory authorities reviewing prior submissions and modifying or revoking prior approvals. In addition, clearance or approval could be revoked or other restrictions imposed if post-market data demonstrates safety issues or lack of effectiveness. We cannot predict with certainty how, or when, the FDA or other regulatory authorities will act. If we are unable to maintain our regulatory clearances and obtain future clearances for our Sensei system and other products, including our proposed vascular system, our financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.

 

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If physicians and hospitals do not believe that our Sensei system and Artisan catheters are a safe and effective alternative to existing technologies used in atrial fibrillation and other cardiac ablation procedures, they may choose not to use our Sensei system.

We believe that physicians will not use, and hospitals will not purchase, our Sensei system and Artisan catheters unless they determine that our Sensei system provides a safe and effective alternative to existing treatments. Since we have received FDA clearance to market our Sensei system and disposable Artisan catheters only for guiding catheters to map the heart anatomy, we will not be able to label or promote these products, or train physicians, for use in guiding catheters for cardiac ablation until such clearance or approval is obtained. Currently, there is only limited clinical data on our Sensei system with which to assess its safety and efficacy in any procedure, including atrial fibrillation and other cardiac ablation procedures. A number of recent studies have been published on the efficacy, safety and efficiency of our products, especially by comparison to manual techniques. While we believe many of those studies have validated our assessment of the benefits of our products, some of these studies have been cited by our competitors to portray our products in an unfavorable light. A number of additional studies are underway both in the United States and Europe assessing early clinical experience with our products and continuing to compare usability and success of treatment between procedures performed with our Sensei system and manual technique. If these studies, or other clinical studies performed by us or others, or clinical experience indicate that procedures with our Sensei system or the type of procedures that can be performed with the Sensei system are not effective or safe for such uses, physicians may choose not to use our Sensei system. For example, one unpublished study reported a statistically insignificant higher rate of major complications for patients treated with our system than those treated manually and one patient in the robotic arm of the study died. This study or other studies may create a perception that our system is not as effective and safe as manual technique. Reluctance by physicians to use our Sensei system or to perform procedures enable by the Sensei system would harm sales. Furthermore, we plan to develop a robotic system for the treatment of vascular diseases, and there is no clinical data for the proposed systems safety and efficacy. Reluctance by physicians to use our Sensei system or to perform procedures enabled by the Sensei system would harm sales. Further, unsatisfactory patient outcomes or patient injury could cause negative publicity for our products, particularly in the early phases of product introduction. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from the use of these new products. It is also possible that as our products become more widely used, latent or other defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If physicians do not use our products in cardiac ablation procedures, we likely will not become profitable and our business will be harmed.

In addition, our research and development efforts and our marketing strategy depend heavily on obtaining support and collaboration from highly regarded physicians at leading hospitals. If we are unable to gain or maintain such support and collaboration, our ability to market our Sensei system and, as a result, our business and results of operations, could be harmed.

We expect to derive substantially all of our revenues from sales of our Sensei system and Artisan catheters. If hospitals do not purchase our system, we may not generate sufficient revenues to continue our operations.

Our initial commercial offering consists primarily of two products, our Sensei system and our corresponding disposable Artisan catheters. The Sensei system has recently been supplemented by an optional CoHesion Module. In order for us to achieve sales, hospitals must purchase our Sensei system and Artisan catheters. Our Sensei system is a novel device, and hospitals are traditionally slow to adopt new products and treatment practices. In addition, our Sensei system is an expensive capital equipment purchase, representing a significant portion of an electrophysiology laboratory’s annual budget. In addition, because it has only recently been commercially introduced, our Sensei system has limited product and brand recognition. Furthermore, particularly in this period of economic volatility and uncertainty, we do not believe hospitals will purchase our products unless the physicians at those hospitals express a strong desire to use our products and we cannot predict whether or not they will do so. If hospitals do not widely adopt our Sensei system, or if they decide that it is too

 

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expensive, we may never achieve significant revenue or become profitable. Such a failure to adequately sell our Sensei system would have a materially detrimental impact on our business, results of operations and financial condition.

We have incurred substantial losses since inception and anticipate that we will incur continued losses for the foreseeable future, we may not be able to raise additional financing to fund future losses and we may not be able to continue to operate as a going concern.

We have experienced substantial net losses since our inception in late 2002. At December 31, 2009, we had an accumulated deficit of $220.2 million. We have funded our operations to date principally from the sale of our securities and through issuance of debt. In 2008, we both issued equity and entered into a new debt facility and, in 2009, we issued additional equity; however, we may at any time sell additional securities resulting in further dilution to existing stockholders and we may at any time incur additional indebtedness. If we are unable to raise sufficient additional capital in the second quarter of 2010, we anticipate that we will violate the liquidity covenants of our loan and security agreement with Silicon Valley Bank. At such time, Silicon Valley Bank could exercise their remedies, including their right to accelerate the debt. If we were required to repay all the amounts then outstanding under the loan and security agreement, our ability to continue as a going concern would be significantly impacted. Additionally, the continuing liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, we have classified all of our outstanding debt balance and related accrued interest as a current liability as of December 31, 2009. The recent turmoil in the global financial and credit markets may limit our ability to raise additional funds. We cannot guarantee that future equity or debt financing will be available in amounts or on terms acceptable to us, if at all. Further, even if financing becomes available, the cost to us may be significantly higher than in the past. We will continue to face significant challenges if conditions in the financial markets do not improve or continue to worsen. In particular, our ability to access the capital markets and raise funds required for our operations may be severely restricted at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on our flexibility to react to changing economic and business conditions. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future.

We expect to incur substantial additional net losses for at least the next year as we continue our manufacturing, marketing and sales operations to commercialize our products and seek additional regulatory clearances. We expect our research and development expenses to increase moderately and general and administrative expenses to decrease moderately in 2010 from 2009 levels as we continue our product engineering efforts to develop a new platform for use in vascular surgery, develop our intellectual property portfolio, maintain the infrastructure necessary to support operating as a public company and incur other intellectual property related legal expenses, including litigation expenses. Because we may not be successful in significantly increasing sales of our products, the extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. If we require more time than we expect to generate significant revenue and achieve profitability, we may not be able to continue our operations. Even if we achieve significant revenues, we may never become profitable or we may choose to pursue a strategy of increasing market penetration and presence at the expense of profitability.

We may incur significant liability if it is determined that we are promoting off-label use of our products in violation of federal and state regulations in the United States or elsewhere.

We have received FDA clearance of our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems, which is a critical step in the identification of the heart tissue generating abnormal heart rhythms that may require ablation or other treatment. Because the FDA has determined that there is a reasonable likelihood that physicians may choose to use our products off-label, and that harm may result, we are required to label our products to state that their safety and effectiveness for use with cardiac ablation catheters

 

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in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. We have proposed a clinical trial to the FDA for the use of our Artisan catheter in the treatment of atrial fibrillation as part of our process to expand our current labeling in the U.S. beyond mapping. Thus, efforts are underway to eventually seek regulatory clearance for the use of our Sensei system in atrial fibrillation procedures. We may subsequently seek regulatory clearance for use of our Sensei system for use with other catheters. Our business and future growth will depend primarily on the use of our Sensei system in the treatment of atrial fibrillation and other cardiovascular procedures, for which we do not yet, and may never, have FDA clearance or approval.

Unless and until we receive regulatory clearance or approval for use of our Sensei system with ablation catheters or in these procedures, uses in these procedures will be considered off-label uses of our Sensei system. Under the Federal Food, Drug, and Cosmetic Act and other similar laws, we are prohibited from labeling or promoting our products, or training physicians, for such off-label uses. This prohibition means that the FDA could deem it unlawful for us to make claims about the safety or effectiveness of our Sensei system for use with ablation catheters and in cardiac ablation procedures and that we may not proactively discuss or provide information or training on the use of our product in cardiac ablation procedures or use with unapproved catheters, with very limited exceptions. We presently believe that to date, all of the procedures in which our products have been used in the United States have included off-label uses such as cardiac ablation, for which our Sensei system and Artisan catheters have not been cleared by the FDA.

The FDA and other regulatory agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance or approval has not been obtained. Moreover, scrutiny of such practices by the FDA and other federal agencies has recently increased. Promotional activities for FDA regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies under the Federal False Claims Act and various other federal and state laws, as well as criminal sanctions.

Due to these legal constraints, our sales and marketing efforts focus on the general technical attributes and benefits of our Sensei system and the use of this device to guide two specific catheters for heart mapping. If we are perceived not to be in compliance with all of the restrictions limiting the promotion of our products for off-label use, we could be subject to various enforcement measures, including investigations, administrative proceedings and federal and state court litigation, which would likely be costly to defend and harmful to our business. If the FDA or another governmental authority ultimately concludes we are not in compliance with such restrictions, we could be subject to significant liability, including civil and administrative remedies, injunctions against sales for off-label uses, significant monetary and punitive penalties and criminal sanctions, any or all of which would be harmful to our business and in certain instances may cause us to have to cease operations.

The training required for physicians to use our Sensei system could reduce the market acceptance of our system and reduce our revenue.

It is critical to the success of our sales efforts to ensure that there are a sufficient number of physicians familiar with, trained on and proficient in the use of our Sensei system. Convincing physicians to dedicate the time and energy necessary for adequate training in the use of our system is challenging, and we cannot assure you that we will be successful in these efforts.

It is our policy to only train physicians to insert, navigate, map and remove catheters using our Sensei system. Physicians must obtain training elsewhere to learn how to ablate cardiac tissue to treat atrial fibrillation, which is an off-label procedure. This training may be provided by third parties, such as hospitals and universities and through independent peer-to-peer training among doctors. We cannot assure you that a sufficient number of physicians will become aware of training programs or that physicians will dedicate the time, funds and energy necessary for adequate training in the use of our system. Additionally, we will have no control over the quality of these training programs. If physicians are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which

 

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could negatively affect our reputation and sales of our products. Furthermore, our inability to educate and train physicians to use our Sensei system for atrial fibrillation or other cardiac ablation procedures may lead to inadequate demand for our products and have a material adverse impact on our business, financial condition and results of operation.

Training in the use of our products is regulated by the FDA. Our physician training and the training provided by third parties typically includes facilitating an observation of a Sensei case by the trainee physician. We monitor our training to ensure that off-label use is not promoted or enabled. However, from time to time, we may sponsor third party training. There is a risk that independent peer-to-peer interaction between physicians and other third party training may include discussion or observation of off-label procedures because most procedures performed to date using the Sensei system involve both mapping and cardiac ablation. If any such activities are attributed to us, the FDA or other governmental entities could conclude that we have engaged in off-label promotion of our products, which could subject us to significant liability.

Because our markets are highly competitive, customers may choose to purchase our competitors’ products, which would result in reduced revenue and harm our financial results.

Our Sensei system is still considered a new technology and must compete with established manual interventional methods and methods of our competitors, such as Stereotaxis, Inc., in remote navigation. Conventional manual methods are widely accepted in the medical community, have a long history of use and do not require the purchase of additional, expensive capital equipment. The Stereotaxis Niobe® system, which has been in the market since 2003, four years earlier than our Sensei system, has been adopted by a number of leading clinicians. In addition, many of the medical conditions that can be treated using our products can also be treated with existing drugs or other medical devices and procedures. Many of these alternative treatments are widely accepted in the medical community and have a long history of use.

We also face competition from companies that are developing drugs or other medical devices or procedures to treat the conditions for which our products are intended. The medical device and pharmaceutical industries make significant investments in research and development and innovation is rapid and continuous. If new products or technologies emerge that provide the same or superior benefits as our products at equal or lesser cost, they could render our products obsolete or unmarketable. We cannot be certain that physicians will use our products to replace or supplement established treatments or that our products will be competitive with current or future products and technologies.

Most of our competitors enjoy several competitive advantages over us, including:

 

   

significantly greater name recognition;

 

   

longer operating histories;

 

   

established relations with healthcare professionals, customers and third-party payors;

 

   

established distribution networks;

 

   

additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;

 

   

greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory clearance for products and marketing approved products; and

 

   

greater financial and human resources for product development, sales and marketing, and patent litigation.

In addition, as the markets for medical devices develop, additional competitors could enter the market. As a result, we cannot assure you that we will be able to compete successfully against existing or new competitors. Our revenues would be reduced or eliminated if our competitors develop and market products that are more effective and less expensive than our products.

 

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We expect to continue to experience extended and variable sales cycles, which could cause significant variability in our results of operations for any given quarter.

Our Sensei system has a lengthy sales cycle because it involves a relatively expensive capital equipment purchase, which generally requires the approval of senior management at hospitals, inclusion in the hospitals’ electrophysiology laboratory budget process for capital expenditures and, in some instances, a certificate of need from the state or other regulatory clearance. We continue to estimate that this sales cycle may take between six and 18 months. Beginning with the fourth quarter of 2008 and continuing during 2009, in a period of economic uncertainty, we have seen sales cycles for many potential customers lengthen and purchase decisions postponed. Additionally, the majority of our revenue is shipped in the last weeks of a given quarter. Any disruption in our supply chain during those critical weeks or an inability to fulfill our deliverables during that compressed time frame could significantly impact the timing of our ability to recognize revenue on those items. These factors have contributed in the past and may contribute in the future to substantial fluctuations in our quarterly operating results, particularly in the near term and during any other periods in which our sales volume is relatively low. As a result, in future quarters our operating results could differ from our announcements of guidance regarding future operating or financial results or may fail to meet the expectations of securities analysts or investors, in which event our stock price would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance. In addition, the introduction of new products could adversely impact our sales cycle, as customers take additional time to assess the benefits and investments on capital products.

The use of our products could result in product liability claims that could be expensive, divert management’s attention and harm our reputation and business.

Our business exposes us to significant risks of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. Moreover, the FDA has expressed concerns regarding the safety and efficacy of our Sensei system for ablation and other therapeutic indications, including for the treatment of atrial fibrillation and has specifically instructed that our products be labeled to inform our customers that the safety and effectiveness of our technology for use with cardiac ablation catheters in the treatment of cardiac arrhythmias, including for atrial fibrillation, have not been established. We presently believe that to date, all of the procedures in which our products have been used in the United States have included off-label uses such as cardiac ablation, for which our Sensei system and Artisan catheters have not been cleared by the FDA and which therefore could increase the risk of product liability claims. The medical device industry has historically been subject to extensive litigation over product liability claims. We may be subject to claims by consumers, healthcare providers, third-party payors or others selling our products if the use of our products were to cause, or merely appear to cause, injury or death. Any weakness in training and services associated with our products may also result in product liability lawsuits. Although we maintain clinical trial liability and product liability insurance, the coverage is subject to deductibles and limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts. A product liability claim, regardless of its merit or eventual outcome could result in:

 

   

decreased demand for our products;

 

   

injury to our reputation;

 

   

diversion of management’s attention;

 

   

withdrawal of clinical trial participants;

 

   

significant costs of related litigation;

 

   

payment of substantial monetary awards to patients;

 

   

product recalls or market withdrawals;

 

   

loss of revenue; and

 

   

the inability to commercialize our products under development.

 

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We may be unable to complete the development and commercialization of our existing and anticipated products without additional funding.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on research and development. We expect to spend significant additional amounts on the continuing commercialization of our products and the development and introduction of new products. In particular, we have recently begun development of a new robotic system to be used in endovascular applications. We expect to spend considerable amount in the development of this device and in obtaining regulatory approval. In the year ended December 31, 2009, net cash used in operating activities was $39.2 million. We expect that our cash used by operations will be significant in each of the next several years, and we will need additional funds to continue the commercialization of our Sensei system. If we are unable to raise sufficient additional capital in the second quarter of 2010, we will violate the liquidity covenants of the loan and security agreement. At such time, Silicon Valley Bank could exercise their remedies, including their right to accelerate the debt. If we were required to repay all the amounts then outstanding under the loan and security agreement, our ability to continue as a going concern would be significantly impacted. Additionally, the continuing liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, we have classified all of our outstanding debt balance and related accrued interest as a current liability as of December 31, 2009.

Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Furthermore, even if financing becomes available, the cost to us may be significantly higher than in the past. Any additional financing may be dilutive to stockholders or may require us to grant a lender a security interest in our intellectual property assets. The amount of funding we will need will depend on many factors, including:

 

   

the success of our research and product development efforts;

 

   

the expenses we incur in selling and marketing our products;

 

   

the costs and timing of future regulatory clearances;

 

   

the revenue generated by sales of our current and future products;

 

   

the gross margins generated by our revenues and cost of sales;

 

   

the rate of progress and cost of our clinical trials and other development activities;

 

   

the emergence of competing or complementary technological developments;

 

   

the cost of legal fees relating to shareholder lawsuits;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in litigation-related activities;

 

   

the terms and timing of any collaborative, licensing or other arrangements that we may establish; and

 

   

the acquisition of businesses, products and technologies.

If adequate funds are not available, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial condition.

Our products and related technologies can be applied in different applications, and we may fail to focus on the most profitable areas or we may be unable to address successfully financial and technology risks associated with new applications, including applications for the vascular market.

Our Sensei system is designed to have the potential for applications beyond electrophysiology, including in a variety of endoscopic procedures which require a control catheter to approach diseased tissue. We further

 

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believe that our Sensei system can provide multiple opportunities to improve the speed and capability of many diagnostic and therapeutic procedures. We will be required to seek a separate 510(k) clearance or PMA approval from the FDA for these applications of our Sensei system. However, we have limited financial and managerial resources and therefore may be required to focus on products in selected applications and to forego efforts with regard to other products and industries including expansion of our electrophysiology applications as well as the development of non-electrophysiology applications.

We are dedicating significant resources to the development of a product for vascular applications. Such development efforts may not be successful, may not achieve regulatory approval, may not produce viable commercial products and may divert our limited resources from more profitable market opportunities. Moreover, we may devote resources to developing products in additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products we develop in these areas, if any. In that case, the return on investment in these additional areas may be limited, which could negatively affect our results of operations.

If we fail to maintain collaborative relationships with providers of imaging and visualization technology on terms favorable to us, or at all, our Sensei system may not be able to gain market acceptance and our business may be harmed.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. We believe that integrating our Sensei system with key imaging and visualization technologies using an open architecture approach is a key element in establishing our Sensei system as important for complex interventional procedures. Our Sensei system currently utilizes a variety of imaging means to visualize and assist in navigating our Artisan catheters. These imaging systems include fluoroscopy, intravascular ultrasound and electro-anatomic mapping systems, as well as pre-operatively acquired three-dimensional computed tomography and magnetic resonance imaging. We believe that in the future, as imaging companies develop increasingly sophisticated three-dimensional imaging systems, we will need to integrate advanced imaging into our Sensei system in order to compete effectively. There can be no assurance that we can timely and effectively integrate these systems or components into our Sensei system in order to remain competitive. We expect to face competition from companies that are developing new approaches and products for use in interventional procedures and that have an established presence in the field of interventional cardiology, including the major imaging, capital equipment and disposables companies that are currently selling products in the electrophysiology laboratory. We may not be able to acquire or develop three-dimensional imaging and visualization technology for use with our Sensei system. In addition, developing or acquiring key imaging and visualization technologies could be expensive and time-consuming and may not integrate well with our Sensei system. If we are unable to timely acquire, develop or integrate imaging and visualization technologies, or any other changing technologies, effectively, our revenue may decline and our business will suffer.

In April 2007, we entered into agreements with St. Jude Medical, Inc., or St. Jude, to integrate our Sensei system with St. Jude’s Ensite system and to co-market the integrated product. We are not obligated to undertake any other development projects except for the integration of the Sensei system with the EnSite system. We are solely responsible for gaining regulatory approvals for, and all costs associated with, our portion of the integrated products developed under the arrangement. At the end of the second quarter of 2008, the FDA cleared for marketing in the United States our CoHesion Module, which provides an interface between our Sensei system and the EnSite system; however, there can be no assurance that we will successfully maintain necessary regulatory clearances or that we and St. Jude will maintain compatibility of our products under the collaboration or that the CoHesion Module will gain market acceptance. St. Jude has introduced and is promoting a new version of its Ensite system that initially is not compatible with our CoHesion Module; however, St. Jude continues to promote its early version of Ensite and has indicated that it plans to achieve compatibility with the new Ensite system over time. The initial lack of compatibility may adversely affect the sales of the CoHesion Module and the Sensei system until compatibility is achieved.

 

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In addition, under the terms of the co-marketing agreement, we granted St. Jude the exclusive right to distribute products developed under the joint development agreement when ordered with St. Jude products worldwide, excluding certain specified countries, for the diagnosis and/or treatment of certain cardiac conditions. There can be no assurance that we will successfully collaborate or that St. Jude will generate significant sales under this arrangement. If we are not able to successfully collaborate with St. Jude or are unable to successfully integrate our systems, we may not be able to effectively compete with new technologies and our business may be harmed.

Future acquisitions could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our offerings and markets and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, solutions or technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of the company that we acquired, particularly if key personnel of an acquired company decide not to work for us. In addition, we may issue equity securities to complete an acquisition, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock. Acquisitions may also involve the entry into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of the acquisitions which could harm our operating results.

Software defects may be discovered in our products.

Our Sensei system incorporates sophisticated computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software and other defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:

 

   

loss of revenue;

 

   

an increase in reportable adverse events to applicable authorities such as the FDA;

 

   

delay in market acceptance of our products;

 

   

damage to our reputation;

 

   

additional regulatory filings;

 

   

product recalls;

 

   

increased service or warranty costs; and/or

 

   

product liability claims relating to the software defects.

Our costs could substantially increase if we receive a significant number of service claims.

We typically provide post-contract customer service for each of our products against defects in materials and workmanship for a period of approximately 12 months from the delivery or acceptance of our product by a customer which is normally when the system is installed. The associated expenses are charged to cost of goods sold as incurred. We have a very limited history of commercial placements from which to judge our rate of claims against our service contracts. Our obligation under these service contracts may be impacted by product failure rates, material usage and service costs. Unforeseen exposure under these post-contract customer service contracts could negatively impact our business, financial condition and results of operations.

 

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Hospitals or physicians may be unable to obtain coverage or reimbursement from third-party payors for procedures using our Sensei system, which could affect the adoption or use of our Sensei system and may cause our revenues to decline.

We anticipate that third-party payors will continue to reimburse hospitals and physicians under existing billing codes for the vast majority of the procedures involving our products. We expect that healthcare facilities and physicians in the United States will continue to bill various third-party payors, such as Medicare, Medicaid, other governmental programs and private insurers, for services performed using our products. We believe that procedures targeted for use with our products are generally already reimbursable under government programs and most private plans. Accordingly, we believe providers in the United States will generally not be required to obtain new billing authorizations or codes in order to be compensated for performing medically necessary procedures using our products on insured patients.

There can be no assurance, however, that coverage, coding and reimbursement policies of third-party payors will not change in the future with respect to some or all of the procedures that would use our Sensei system. Additionally, in the event that a physician uses our Sensei system for indications not approved by the FDA, there can be no assurance that the coverage or reimbursement policies of third-party payors will be comparable to FDA-approved uses. Future legislation, regulation or coverage, coding and reimbursement policies of third-party payors may adversely affect the demand for our products currently under development and limit our ability to profitably sell our products. For example, under recent regulatory changes to the methodology for calculating payments for current inpatient procedures in certain hospitals, Medicare payment rates for surgical and cardiac procedures have been decreased, including those procedures for which our products are targeted. The majority of the procedures performed with our Sensei system and Artisan catheter are done on an in-patient basis and thus are paid under the Medicare-severity diagnosis related group, or MS-DRG system. We believe that the majority of procedures performed using our technology fall under MS-DRG 251, percutaneous cardiovascular procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication, with an average reimbursement of $9,260 for fiscal 2008. The Centers for Medicare & Medicaid Services update the MSDRG annually effective October 1 through September 30th of the following year. Because hospital inpatient reimbursement is largely dependent on geographical location and other hospital-specific factors, an individual hospital’s revenues from ablation procedures to treat atrial fibrillation using our technology can vary significantly. At this time, we cannot predict the full impact any rate reductions will have on our future revenues or business.

Our success in international markets also depends upon the eligibility of our products for coverage and reimbursement by government-sponsored healthcare payment systems and third-party payors. Recent legislative proposals in the United States to reform healthcare and government insurance programs have included a focus on healthcare costs which could limit the coverage and reimbursement for procedures utilizing our products. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue and may increase. The failure of our customers to obtain sufficient reimbursement could have a material adverse impact on our financial condition and harm our business.

We have incurred substantial management and employee turnover and we may lose additional key personnel or fail to attract and retain additional personnel needed for us to operate our business effectively.

We currently have an interim Chief Financial Officer and are actively conducting searches for additional senior management personnel, including a search for a Chief Operating Officer or Chief Executive Officer. We are conducting a search for a Chief Operating Officer or Chief Executive Officer in order to augment our experience in managing emerging businesses and to enable Frederic Moll, M.D., our founder and current Chief Executive Officer, to dedicate more effort towards formulating our clinical product development strategy, particularly as it relates to our opportunity in vascular applications. Additionally, in the third quarter of 2008 and the first and third quarters of 2009, we reduced our work force. These reductions in force may make it more difficult to retain and attract the qualified personnel required, placing a significant strain on our management. Accordingly, retaining such personnel and recruiting necessary new employees in the future will be critical to our

 

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success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled management and personnel, we may be unable to continue our development and commercialization activities and our business will be harmed.

We are highly dependent on the principal members of our management and scientific staff. We do not carry “key person” insurance covering any members of our senior management. Each of our officers and key employees may terminate his employment at any time without notice and without cause or good reason. The loss of any of these persons could prevent the implementation and completion of our objectives, including the development and introduction of our products, and could require the remaining management members to direct immediate and substantial attention to seeking a replacement.

If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.

Our future revenue and operating results will depend on our ability to manage the possible future growth of our business. We have experienced significant growth in the scope of our operations since our inception. This growth has placed significant demands on our management, as well as our financial and operations resources. In order to achieve our business objectives, however, we will need to continue to grow, which presents numerous challenges, including:

 

   

implementing appropriate operational and financial systems and controls;

 

   

expanding manufacturing capacity, increasing production and improving margins;

 

   

developing our sales and marketing infrastructure and capabilities;

 

   

identifying, attracting and retaining qualified personnel in our areas of activity; and

 

   

training, managing and supervising our personnel worldwide.

Any failure to effectively manage our growth could impede our ability to successfully develop, market and sell our products and our business will be harmed.

We commenced sales of our Sensei system internationally and are subject to various risks relating to such international activities which could adversely affect our international sales and operating performance.

A portion of our current and future revenues will come from international sales. To expand internationally, we will need to hire, train and retain additional qualified personnel. Engaging in international business inherently involves a number of difficulties and risks, including:

 

   

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

 

   

export or import restrictions and controls relating to technology;

 

   

pricing pressure;

 

   

laws and business practices favoring local companies;

 

   

longer payment cycles;

 

   

the effects of fluctuations in foreign currency exchange rates;

 

   

shipping delays;

 

   

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

 

   

political and economic instability;

 

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potentially adverse tax consequences, tariffs and other trade barriers;

 

   

international terrorism and anti-American sentiment;

 

   

difficulties in penetrating markets in which our competitors’ products are more established;

 

   

difficulties and costs of staffing and managing foreign operations; and

 

   

difficulties in enforcing intellectual property rights.

If one or more of these risks are realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding a solution, our revenue may decline.

Our business may be harmed by a natural disaster, terrorist attacks or other unanticipated problems.

Our manufacturing and office facilities are located in Mountain View, California. Despite precautions taken by us, a natural disaster such as fire or earthquake, a terrorist attack or other unanticipated problems at our facilities could interrupt our ability to manufacture our products or operate our business. These disasters or problems may also destroy our product inventories. While we carry insurance for certain natural disasters and business interruption, any prolonged or repeated disruption or inability to manufacture our products or operate our business could result in losses that exceed the amount of coverage provided by this insurance, and in such event could harm our business.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our research and development, manufacturing and clinical processes involve the handling of potentially harmful biological materials as well as other hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Changes to existing accounting pronouncements or taxation rules or practices may affect how we conduct our business and affect our reported results of operations.

A change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. During the first quarter of fiscal 2006, we adopted the provisions of the stock compensation accounting required for publicly-traded companies found in ASC 985-605. The adoption of this accounting treatment has had a significant impact on our financial statements since 2006 and is expected to have a significant impact on our future financial statements, as we are now required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our net loss within our footnotes. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. Changes to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

 

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Risks Related to Our Intellectual Property

If we are unable to protect the intellectual property contained in our products from use by third parties, our ability to compete in the market will be harmed.

Our commercial success will depend in part on obtaining patent and other intellectual property protection for the technologies contained in our products, and on successfully defending our patents and other intellectual property against third party challenges. We expect to incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will be able to obtain the patent protection we seek, or whether the protection we do obtain will be found valid and enforceable if challenged. We also do not know whether we will be able to develop additional patentable proprietary technologies. If we fail to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to voluntarily challenge a third party’s products or patents in litigation or administrative proceedings, including patent interferences or reexaminations. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.

We cannot assure you that we will obtain the patent protection we seek, that any protection we do obtain will be found valid and enforceable if challenged or that such patent protection will confer any significant commercial advantage. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination proceedings in the United States Patent and Trademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.

Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures.

Our trade secrets, nondisclosure agreements and other contractual provisions to protect unpatented technology provide only limited and possibly inadequate protection of our rights. As a result, third parties may be able to use our unpatented technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in developing our products or in commercial relationships with us may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach.

 

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Third parties may assert that we are infringing their intellectual property rights which may result in litigation.

Successfully commercializing our Sensei system, and any other products we may develop, will depend in part on our not infringing patents held by third parties. It is possible that one or more of our products, including those that we have developed in conjunction with third parties, infringes existing patents. From time to time, we have received, and likely will continue to receive, communications from third parties inviting us to license their patents or accusing us of infringement. There can be no assurance that a third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the manufacture and sale of our Sensei system in the United States or elsewhere. We may also choose to defend ourselves by initiating litigation or administrative proceedings to clarify or seek a declaration of our rights. As competition in our market grows, the possibility of a patent infringement claim against us or litigation we will initiate increases.

There may be existing patents which may be broad enough to cover aspects of our future technology. In addition, because patent applications in many countries such as the United States are maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware and which may later result in issued patents that our products infringe. We do not know whether any of these patents, if challenged, would be upheld as valid, enforceable and infringed by our products or technology. From time to time, we receive, and likely will continue to receive, letters from third parties accusing us of infringing their patents or inviting us to license their patents. We may be sued by, or become involved in an administrative proceeding with, one or more of these or other third parties. We cannot assure you that a court or administrative body would agree with any arguments or defenses we may present concerning the invalidity, unenforceability or noninfringement of any third-party patent. In addition to the issued patents of which we are aware, other parties may have filed, and in the future are likely to file, patent applications covering products that are similar or identical to ours. We cannot assure you that any patents issuing from applications will not cover our products or will not have priority over our own products and patent applications.

We may not be able to maintain or obtain all the licenses from third parties necessary or advisable for promoting, manufacturing and selling our Sensei system, which may cause harm to our business, operations and financial condition.

We rely on technology that we license from others, including technology that is integral to our Sensei system, such as patents and other intellectual property that we have co-exclusively licensed from Intuitive. Under our agreement with Intuitive, we received the right to apply Intuitive’s patent portfolio in the field of intravascular approaches for the diagnosis or treatment of cardiovascular, neurovascular and peripheral vascular diseases. To the extent that we develop or commercialize robotic capability outside the field of use covered by our license with Intuitive, which we may choose to do at some time in the future, we may not have the patent protection and the freedom to operate outside the field which is afforded by the license inside the field. Although we believe that there are opportunities for us to operate outside the licensed field of use without using Intuitive’s intellectual property, Intuitive from time to time has told us that it believes certain of our past activities that have fallen outside the licensed field have infringed its intellectual property rights. Although we disagree with Intuitive’s position, we presently remain focused within our licensed field and so have agreed to inform Intuitive before commencing any further outside clinical investigations for endoluminal applications or engaging in external technology exhibitions at non-intravascular conferences. There can be no assurance that Intuitive will not challenge any activities we engage in outside the intravascular space, and we cannot assure you that in the event of such a challenge we would be able to reach agreement with Intuitive on whether activities outside our licensed field may be conducted without the use of the Intuitive’s intellectual property. If Intuitive asserts that any of our activities outside the licensed field are infringing their patent or other intellectual property rights or commences litigation against us, we will incur significant costs defending against such claims or seeking an additional license from Intuitive, and we may be required to limit use of our Sensei system or future products and technologies within our licensed intravascular field if any of our activities outside the licensed field are judged to infringe Intuitive’s intellectual property, any of which could cause substantial harm our business, operations and financial condition. Although Intuitive is restricted in how it can terminate our license, if Intuitive were ever to

 

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successfully do so, and if we are unable to obtain another license from Intuitive, we could be required to abandon use of our existing Sensei technology completely and could have to undergo a substantial redesign and design-around effort, which we cannot assure you would be successful.

The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of management’s attention, require us to pay damages and discontinue selling our products.

The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. Our competitors may assert, and have asserted in the past, that our products or the use of our products are covered by United States or foreign patents held by them. This risk is heightened due to the numerous issued and pending patents relating to the use of robotic and catheter-based procedures in the medical technology field. For example, we have received correspondence from a third party indicating it believes it holds a patent that our Sensei system may infringe. While we do not believe that the Sensei system infringes this patent, there can be no assurance that the third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the manufacture and sale of our Sensei system in the United States.

If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our system unless we can obtain a license to use technology or ideas covered by such patent or are able to redesign our Sensei system to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. In addition, our patents may be subject to various invalidity attacks, such as those based upon earlier filed patent applications, patents, publications, products or processes, which might invalidate or limit the scope of the protection that our patents afford.

Infringement actions, validity challenges and other intellectual property claims and proceedings, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. We have incurred, and expect to continue to incur, substantial costs in obtaining patents and expect to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.

We cannot be certain that we will successfully defend our patents from infringement or claims of invalidity or unenforceability, or that we will successfully defend against allegations of infringement of third-party patents. In addition, any public announcements related to litigation or administrative proceedings initiated or threatened by us, or initiated or threatened against us, could cause our stock price to decline.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An

 

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inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.

Additional Risks Related to Regulatory Matters

If we fail to obtain regulatory clearances in other countries for products under development, we will not be able to commercialize these products in those countries.

In order to market our products outside of the United States, 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. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA clearance in the United States. 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 described above regarding FDA clearance in the United States.

For example, the European Union requires that medical products receive the right to affix the CE mark. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to our products, we will need to obtain certification that our processes meet European quality standards. These standards include certification that our product design and manufacturing facility complies with ISO 13485 quality standards. We received CE mark approval for our Artisan catheters in May 2007. However, future regulatory approvals may be needed. We cannot be certain that we will be successful in meeting European quality standards or other certification requirements.

We may fail to comply with continuing postmarket regulatory requirements of the FDA and other authorities and become subject to substantial penalties, or marketing experience may show that our device is unsafe, forcing us to recall or withdraw it permanently from the market.

We must comply with continuing regulation by the FDA and other authorities, including the FDA’s Quality System Regulation, or QSR, requirements, labeling and promotional requirements and medical device adverse event and other reporting requirements. If the adverse event reports we file with the FDA regarding death, serious injuries or malfunctions indicate or suggest that the device presents an unacceptable risk to patients, including when used off-label by physicians, we may be forced to recall the device and/or modify the device or its labeling, or withdraw it permanently from the market. The FDA has expressed concerns regarding the safety of the device when used with catheters and in procedures not specified in the indication we are seeking, such as ablation catheters and ablation procedures, and we have already filed Medical Device Reports reporting adverse events during procedures utilizing our technology. Physicians are using our device off-label with ablation catheters in ablation procedures, as well as in other electrophysiology procedures for which we have not collected safety data, and we therefore cannot assure you that clinical experience will demonstrate that the device is safe for these uses.

Any failure to comply, or any perception that we are not complying, with continuing regulation by the FDA or other authorities, including restrictions regarding off-label promotion, could result in enforcement action that may include suspension or withdrawal of regulatory clearances or approvals, recalling products, ceasing product marketing, seizure and detention of products, paying significant fines and penalties, criminal prosecution and similar actions that could limit product sales, delay product shipment and harm our profitability.

 

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In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of the FDA. In addition, in many countries the national health or social security organizations require our products to be qualified before procedures performed using our products become eligible for coverage and reimbursement. Failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standards in the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide single regulatory system. The timing of this harmonization and its effect on us cannot currently be predicted. Adapting our business to changing regulatory systems could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory clearances, product recalls, seizure of products, operating restrictions and criminal prosecution.

If we or our contract manufacturers fail to comply with the FDA’s Quality System Regulations or California Department of Health Services requirements, our manufacturing operations could be interrupted and our product sales and operating results could suffer.

Our manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDA’s Quality System Regulations, or QSR, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces the QSR through periodic inspections of manufacturing facilities. We and our contract manufacturers are subject to such inspections. If our manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an adverse QSR inspection, the FDA could take enforcement action, including any of the following sanctions, which could have a material impact on our operations:

 

   

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

 

   

unanticipated expenditures to address or defend such actions;

 

   

customer notifications for repair, replacement, refunds;

 

   

recall, detention or seizure of our products;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;

 

   

operating restrictions;

 

   

withdrawing 510(k) clearances on PMA approvals that have already been granted;

 

   

refusal to grant export approval for our products; or

 

   

criminal prosecution.

We are subject to the licensing requirements of the California Department of Health Services, or CDHS. We have been inspected and licensed by the CDHS and remain subject to re-inspection at any time. Failure to maintain a license from the CDHS or to meet the inspection criteria of the CDHS would disrupt our manufacturing processes. If an inspection by the CDHS indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

 

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If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. An increased frequency of filing Medical Device Reports concerning adverse events occurring during procedures performed with our technology could result in increased regulatory scrutiny of our products and could delay or prevent the adoption of our products.

Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

We have filed Medical Device Reports, or MDRs, reporting adverse events during procedures utilizing our technology and have developed internal systems and processes that are designed to evaluate future events that may require adverse event reporting to the FDA. As the frequency of use of our technology in electrophysiology procedures increases, we are experiencing, and anticipate continuing to experience, it being necessary to file an increased number of MDRs. An increased frequency of filing MDRs or a failure to timely file MDRs may result in FDA requests for further information, which could delay other matters that we may have pending before the FDA, or result in additional regulatory action. An increased frequency of MDRs could also reduce confidence in the safety of our products and delay or prevent the acceptance of our products by physicians and hospitals, which would harm our business and cause our stock price to decline.

Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. For example, in May 2008, we initiated a voluntary recall of a limited number of our Artisan Control Catheters that were subject to potential leakage, and reported the recall to FDA in accordance with applicable regulations. No patient is known or suspected to have experienced any consequences associated with the recalled devices and the recall was closed in June 2008. Also, following the introduction of a new catheter in the fall of 2009, some of the new catheters experienced a leak in the flush assembly. Although no patient is known or suspected to have experienced any consequences associated with the new catheters, we voluntarily recalled all of the new catheters and reported the events to the FDA in accordance with applicable regulations. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations. The FDA requires that certain classifications of recalls be reported to FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.

 

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Modifications to our products may, and in some instances, will, require new regulatory clearances or approvals and may require us to recall or cease marketing our products until clearances or approvals are obtained.

Modifications to our products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or PMAs, and may require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document in a “letter to file” a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer of a 510(k) cleared product may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required.

We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals because we believe they can be made on a letter-to-file approach. There can be no assurance that the FDA will agree with our approach in such matters or that, if required, subsequent requests for 510(k) clearance will be received in a timely fashion, if at all. The FDA may require us to recall and to stop marketing our products as modified or to disable features pending clearance or approval which would significantly harm our ability to sell our products and cause harm to our existing customer relationships and business. Even if we are not required to take such action, delays in obtaining clearances or approvals for features would adversely affect our ability to introduce enhanced products in a timely manner and would harm our revenue and operating results. The FDA could also take other enforcement action, including but not limited to, issuing a warning letter relating to our decision to implement features and other product modifications via a letter to file rather than submission of a new 510(k) notice.

Clinical trials necessary to support any future 510(k) or PMA application will be expensive and may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials may prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.

Initiating and completing clinical trials necessary to support a 510(k) or PMA application for expanded indications for use of our existing products, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials.

Conducting successful clinical studies 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 participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and able to comply with the eligibility and exclusion criteria for participation in the clinical trial 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 or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. We are currently finalizing the protocol for an approximately 300 patient study for the treatment of atrial fibrillation and hope to enroll our first patient in the second quarter of 2010 and complete enrolment by the end of 2010. The study will include a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days.

Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy may be required and we may not adequately develop such protocols to support clearance or approval. Delays in patient

 

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enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in our clinical trials, FDA may not consider our data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.

If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, due to the breadth of many healthcare laws and regulations, we cannot assure you that they will not apply to our business. We could be subject to healthcare fraud and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include:

 

   

the federal healthcare program Anti-Kickback Law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

   

federal false claims 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 payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers or whose products are frequently used off-label;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;

 

   

federal self-referral laws, such as STARK, which prohibit a physician from making a referral to a provider of certain health services with which the physician or the physician’s family member has a financial interest, and prohibits submission of a claim for reimbursement pursuant to a prohibited referral; and

 

   

state 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 payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

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 civil and criminal penalties, damages, fines, exclusion of our products from reimbursement under Medicare and Medicaid programs and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, to achieve compliance with applicable federal and state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing these modifications may prove costly. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of these various federal and state laws.

 

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The application of state certificate of need regulations and compliance with federal and state licensing requirements could substantially limit our ability to sell our products and grow our business.

Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items such as our Sensei system. In many cases, a limited number of these certificates are available and, as a result, hospitals and other healthcare providers may be unable to obtain a certificate of need for the purchase of our Sensei system. Further, our sales cycle for our system is typically longer in certificate of need states due to the time it takes our customers to obtain the required approvals. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive reimbursement from government-sponsored healthcare programs such as Medicare and Medicaid and other third-party payors. Any lapse by our customers in maintaining appropriate licensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under government-sponsored healthcare programs, could cause our sales to decline.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has been volatile and is likely to be volatile in the future.

The trading price of our common stock has been highly volatile. Further, our common stock has a limited trading history. Since our initial public offering in November 2006 through February 26, 2010, our stock price has fluctuated from a low of $2.21 to a high of $39.32. The market price for our common stock may be affected by a number of factors, including:

 

   

the announcement of our operating results, including the number of our Sensei systems sold during a period and our resulting revenue for the period, and the comparison of these results to the expectations of analysts and investors;

 

   

sales of common stock or other debt or equity securities by us or our stockholders in the future;

 

   

additions or departures of key scientific or management personnel;

 

   

the receipt, denial or timing of regulatory clearances, approvals or actions of our products or competing products;

 

   

changes in policies affecting third-party coverage and reimbursement in the United States and other countries;

 

   

ability of our products to achieve market success;

 

   

the performance of third-party contract manufacturers and component suppliers;

 

   

our ability to develop sales and marketing capabilities;

 

   

our ability to manufacture our products to meet commercial and regulatory standards;

 

   

our ability to manage costs and improve margins;

 

   

the success of any collaborations we may undertake with other companies;

 

   

our ability to develop, introduce and market new or enhanced versions of our products on a timely basis;

 

   

actual or anticipated variations in our results of operations or those of our competitors;

 

   

announcements of new products, technological innovations or product advancements by us or our competitors;

 

   

announcements of acquisitions or dispositions by us or our competitors;

 

   

developments with respect to patents and other intellectual property rights;

 

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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

   

trading volume of our common stock;

 

   

our announcements of guidance regarding future operating or financial results which fails to meet investor or analyst expectations or which differs from our previously-announced guidance;

 

   

changes in earnings estimates or recommendations by securities analysts, failure to obtain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;

 

   

public statements by analysts or clinicians regarding their perceptions of the effectiveness of our products;

 

   

developments in our industry;

 

   

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

 

   

the impact of shareholder lawsuits both on the Company and on the public perception of the Company.

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 these companies. Following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Additional class action securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources, which could significantly harm our business.

Securities analysts may not continue, or additional securities analysts may not initiate, coverage for our common stock or may issue negative reports, and this may have a negative impact on the market price of our common stock.

Currently, several securities analysts provide research coverage of our common stock. Several analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the future. If we are unable to educate those who publicize such reports about the benefits we believe our technology provides, or if one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If sufficient securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. It may be difficult for companies such as ours, with smaller market capitalizations, to attract and maintain sufficient independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

Our principal stockholders, directors and management own a large percentage of our voting stock, which allows them to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and stockholders holding 5 percent or more of our outstanding common stock beneficially own or control approximately 44.0 percent of the outstanding shares of our common stock as of February 26, 2010. Accordingly, these executive officers, directors and principal stockholders, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

 

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We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock.

We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. Pursuant to our agreement with Silicon Valley Bank, we must obtain Silicon Valley Bank’s prior written consent in order to pay any dividends on our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions:

 

   

permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;

 

   

provide that the authorized number of directors may be changed only by resolution of the board of directors;

 

   

provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

 

   

divide our board of directors into three classes;

 

   

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

 

   

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;

 

   

do not provide for cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose;

 

   

provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and

 

   

provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 66 2/3 percent of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any stockholder who owns, or at any time in the last three years owned, 15 percent or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

 

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Future sales of a substantial number of shares of our common stock in the public market, the announcement to undertake such sales, or the perception that they may occur, may depress the market price of our common stock.

Sales of substantial amounts of our common stock by us or by our stockholders, announcements of the proposed sales of substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock in follow-on offerings to raise additional capital or in connection with acquisitions or corporate alliances and we plan to issue additional shares to our employees, directors or consultants in connection with their services to us. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our directors, officers and certain greater than 5 percent stockholders, which may be subject to volume limitations. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. Such sales could reduce the market price of our common stock.

Our financial results may vary significantly from period to period, which may reduce our stock price.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control, which may cause the market price of our common stock to fall. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our financial results may be negatively affected by any of the risk factors listed in this “Risk Factors” section.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the United States Securities and Exchange Commission and the Nasdaq Global Market, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, requires, among other things, that we maintain effective internal control for financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2007, we were required to perform a system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As a result of our compliance with Section 404, we have incurred and will continue to incur substantial accounting expense and expend significant management efforts and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure continuing compliance.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

We lease approximately 63,000 square feet of manufacturing, laboratory and office space in Mountain View, California. The lease ends in November 2014, but the Company has an option to extend the lease until approximately November 30, 2019.

 

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ITEM 3. LEGAL PROCEEDINGS

On June 22, 2007, we filed suit in Santa Clara Superior Court against Luna Innovations Incorporated (“Luna”) alleging that Luna had, among other things, breached a 2006-2007 development and intellectual property agreement with the Company. On July 17, 2009, following a jury award in our favor, and while certain post-trial motions were pending, Luna filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Virginia, automatically staying the motions pending in Santa Clara Superior Court. On December 11, 2009, We entered into a settlement agreement with Luna, and on January 12, 2010, following the bankruptcy court’s approval of Luna’s plan of reorganization, the parties executed a mutual release of claims, including our claims against Luna in the Santa Clara Superior Court action, as well as claims brought in Luna’s bankruptcy action. In connection with the settlement and release, Luna issued us a secured promissory note in the principal amount of $5,000,000, 1,247,330 shares of Luna common stock (representing 9.9% of the outstanding shares of Luna common stock) and a warrant to purchase additional shares of Luna common stock. We also entered into a license agreement and a development and supply agreement with Luna. In connection with the settlement, we also entered into a cross license agreement with Intuitive Surgical, Inc. Pursuant to the settlement agreement, the Santa Clara action was dismissed on January 14, 2010.

Following our October 19, 2009 announcement that we would restate certain of our financial statements, a securities class action lawsuit was filed on October 23, 2009 in the United States District Court for the Northern District of California, naming us and certain of our officers: Curry v. Hansen Medical, Inc. et al., Case No. 09-05094. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of our stock between May 1, 2008 and October 18, 2009, inclusive, and alleges, inter alia, that defendants made false and/or misleading statements and/or failed to make disclosures regarding our financial results and compliance with Generally Accepted Accounting Principles (“GAAP”) while improperly recognizing revenue; that these misstatements and/or nondisclosures resulted in overstatement of our revenue and financial results and/or artificially inflated our stock price; and that following our October 19, 2009 announcement, the price of our stock declined. On November 4, 2009 and November 13, 2009, substantively identical complaints were filed in the Northern District of California by other purported Hansen stockholders asserting the same claims on behalf of the same putative class of Hansen stockholders: Livingstone v. Hansen Medical, Inc. et al., Case No. 09-05212 and Prenter v. Hansen Medical, Inc., et al., Case No. 09-05367. All three complaints seek certification as a class action and unspecified compensatory damages plus interest and attorneys fees. On December 22, 2009, two purported Hansen stockholders, Mina and Nader Farr, filed a joint application for appointment as lead plaintiffs and for consolidation of the three actions. On February 25, 2010, the Court issued an order granting Mina and Nader Farr’s application for appointment as lead plaintiffs and consolidating the three securities class actions. Lead plaintiffs have until April 26, 2010 to file a consolidated amended complaint. We and the named officers intend to defend ourselves vigorously against these actions.

On November 12, 2009, Dawn Cates, a purported stockholder of Hansen, filed a shareholder derivative complaint in the Superior Court of the State of California, County of Santa Clara, against the current members of our board of directors and certain current and former officers of Hansen (the “Individual Defendants”), as well as our independent auditor, PricewaterhouseCoopers LLP (“PwC”): Cates v. Moll, et al., Case No 09cv157170 (the “Cates Action”). The Cates Action purports to be brought on behalf of Hansen. The complaint asserts claims for breach of fiduciary duties and waste of corporate assets against the Individual Defendants, and professional negligence against PwC. The complaint alleges that the Individual Defendants disseminated false and misleading information in our SEC filings, public statements and other disclosures, failed to maintain adequate internal controls and willfully ignored problems with accounting and internal control practices and procedures, mismanaged and failed appropriately to oversee our operations, and wasted corporate assets. The complaint further alleges that the director defendants breached their fiduciary duties by allowing defendant Christopher Sells to resign from Hansen. The complaint seeks unspecified damages, internal control and corporate governance reforms, restitution and an award of costs and fees incurred in bringing the action. A substantively identical complaint (although without any claims against PwC) was filed in Santa Clara Superior Court on

 

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November 19, 2009: Daneshmand v. Moll, et al., Case No. 09cv157592 (the “Daneshmand Action”). On December 22, 2009, the Santa Clara Superior Court entered an order consolidating the Cates and Daneshmand Actions and renaming the actions as In re Hansen Medical, Inc. Shareholder Derivative Litigation, Case No. 09cv157170. To date, the plaintiffs have not announced whether they will be filing a consolidated amended complaint and the deadline for defendants to respond to the complaint(s) has not been set.

On December 15, 2009, Michael Brown, a purported stockholder of Hansen, filed a shareholder derivative complaint in the United States District Court for the Northern District of California: Brown v. Moll, et al., Case No. 09-05881 (the “Brown Action”). The allegations of complaint in the Brown Action are substantively identical to the allegations of the Cates and Daneshmand complaints (the Brown Action does not name PwC as a defendant). Our current deadline for responding to the complaint is April 7, 2010.

The Individual Defendants deny the allegations made in the Cates, Daneshmand and Brown Actions and intend to defend themselves vigorously against those claims.

On December 1 and December 14, 2009, we received letters from counsel for purported Hansen stockholders Naoum Baladi and Robert Rogowski demanding that our Board of Directors take action to “remedy breaches of fiduciary duty by the directors and certain officers of Hansen and professional negligence by the Company’s outside auditor PricewaterhouseCoopers, LLP.” These letters recite essentially the same allegations as are contained in the Cates complaint and demand that the Board take action against the officers and directors, and PwC, to recover damages incurred by us and to correct deficiencies in our internal controls. The letters state that if, within a reasonable time, the Board has not commenced the requested action or if the Board refuses to commence the requested action, the named stockholders will commence derivative actions. We have responded in writing to counsel for Ms. Baladi and Mr. Rogowski, stating that the Board is considering the demands and will respond in a reasonable time.

 

ITEM 4. (REMOVED AND RESERVED)

 

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PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market For Our Common Stock

Our common stock is traded on The Nasdaq Global Market under the symbol “HNSN.”

As of February 26, 2010, there were approximately 278 holders of record of our common stock and 37,534,916 shares of common stock outstanding. No dividends have been paid on our common stock to date, and we do not anticipate paying any dividends in the foreseeable future.

The following table lists the low and high sales prices for each period indicated:

 

     2009    2008
     Low    High    Low    High

First quarter

   $ 2.65    $ 8.52    $ 13.48    $ 30.93

Second quarter

     3.29      7.30      13.66      19.97

Third quarter

     2.55      5.22      11.72      20.20

Fourth quarter

     2.41      3.82      6.00      13.77

The closing price for our common stock as reported by the Nasdaq Global market on February 26, 2010 was $2.29 per share.

Securities Authorized for Issuance Under Equity Compensation Plan

The following table provides certain information regarding our equity compensation plans in effect as of December 31, 2009:

Equity Compensation Plan Information

 

Plan Category

   Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
    Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
    Number of Securities
Remaining Available for
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
 
     (a)     (b)     (c)  

Equity compensation plans approved by security holders

   3,705,613 (1)    $ 10.54 (2)    1,512,271 (3) 

Equity compensation plans not approved by security holders

   —          —        —     
                    

Total

   3,705,613      $ 10.54      1,512,271   
                    

 

(1) Includes 3,705,613 shares issuable upon exercise of outstanding options.
(2) Does not take into account restricted stock units, which have no exercise price.
(3)

On January 1st of each year, the number of authorized shares under (a) the 2006 Equity Incentive Plan automatically increases by a number of shares equal to the lesser of (i) 3,500,000 shares, (ii) 4% of the outstanding shares on December 31st of the preceding calendar year, and (iii) such other number as determined by the board of directors and (b) the 2006 Employee Stock Purchase Plan automatically increases by a number of shares equal to the lesser of (i) 2% of the outstanding shares on December 31st of the preceding calendar year, and (ii) such other number as determined by the board of directors.

 

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Recent Sales of Unregistered Securities

Not applicable

Uses of Proceeds from Sale of Registered Securities

Not applicable

Issuer Purchases of Equity Securities

None

 

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Performance Graph1

The following graph shows a comparison of cumulative total return for the Company’s common stock, the Nasdaq Composite Index, and the Nasdaq Medical Equipment Index. Such returns are based on historical results and are not intended to suggest future performance. The graph assumes $100 was invested in the Company’s common stock and in each of the indexes on November 16, 2006 (the date the Company’s common stock commenced trading on The Nasdaq Global Market).

Data for the Nasdaq Composite Index and the Nasdaq Medical Equipment Index assume reinvestment of dividends. The Company has never paid dividends on its common stock and has no present plans to do so.

The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.

LOGO

 

     November 16,
2006
   December 31,
2006
   December 31,
2007
   December 31,
2008
   December 31,
2009

Hansen Medical, Inc

   $  100.00    $ 94.59    $  245.41    $  59.18    $ 24.84

Nasdaq Composite

     100.00      102.56      111.98      65.24      95.08

Nasdaq Medical Equipment

     100.00      101.56      129.57      71.36      101.67

 

1

This Section is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Hansen Medical under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain financial data with respect to our business. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and the financial statements and related notes thereto in Item 8.

 

     2009(1)     2008(1)     2007(1)(2)     2006(1)     2005(3)  
     (In thousands, except per share data)  

Operations:

          

Revenues

   $ 22,203      $ 23,446      $ 9,464      $ —        $ —     

Loss from operations

     (51,296     (58,413     (54,040     (26,683     (21,664

Net loss

     (52,449     (57,868     (50,859     (26,004     (21,403

Basic and diluted net loss per share

     (1.55     (2.39     (2.35     (7.09     (19.14

Shares used to compute basic and diluted net loss per share

     33,892        24,232        21,603        3,670        1,118   

Financial Position:

          

Cash and cash equivalents

     9,553        17,377        30,404        88,911        15,561   

Short-term investments

     18,726        17,846        18,148        989        20,341   

Working capital

     21,004        35,687        47,131        86,393        33,175   

Total assets

     60,741        74,134        60,031        92,790        37,641   

Debt

     9,803        12,476        3,309        5,223        6,541   

Redeemable convertible preferred stock

     —          —          —          —          61,316   

Accumulated deficit

     (220,190     (167,741     (109,873     (59,014     (33,010

Stockholders’ equity (deficit)

     33,753        42,843        48,626        84,772        (32,343

 

(1) Loss from operations, net loss and basic and diluted net loss per share for 2009, 2008, 2007 and 2006 include the impact of stock-based compensation charges following our adoption as of January 2006 of current stock-based compensation standards, which were not present in 2005. Refer to Notes 2 and 10 of our Notes to the Financial Statements.
(2) Loss from operations, net loss and basic and diluted net loss per share for 2007 include the impact of the write-off of acquired in-process research and development related to the acquisition of AorTx of $11.4 million.
(3) Loss from operations, net loss and basic and diluted net loss per share for 2005 include the impact of the write-off of acquired in-process research and development related to the acquisition of the assets of endoVia of $4.7 million.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K are forward-looking statements that involve risks and uncertainties. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.

Overview

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report on Form 10-K.

We develop, manufacture and sell a new generation of medical robotics designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Our Sensei™ Robotic Catheter System, or Sensei system, is designed to allow physicians to instinctively navigate flexible catheters with greater stability and control in interventional procedures. We believe our Sensei system and its corresponding disposable Artisan catheter will enable physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with manually-controlled, hand-held catheters and catheter-based technologies, or that we believe could be accomplished only by the most skilled physicians. We believe that our Sensei system has the potential to benefit patients, physicians, hospitals and third-party payors by improving clinical outcomes and permitting more complex procedures to be performed interventionally.

We were formerly known as Autocath, Inc. and were incorporated in Delaware on September 23, 2002. In March 2007, we established Hansen Medical UK Ltd, a wholly-owned subsidiary located in the United Kingdom and, in May 2007, we established Hansen Medical Deutschland, GmbH, a wholly-owned subsidiary located in Germany. Since inception, we have devoted the majority of our resources to the development and commercialization of our Sensei system. Prior to the second quarter of 2007, we were a development stage company with a limited operating history. In the second quarter of 2007 we obtained the necessary regulatory approvals and recorded our initial product revenues. To date, we have incurred net losses in each year since our inception and, as of December 31, 2009, we had an accumulated deficit of $220.2 million. We expect our losses to continue through at least 2010 as we continue to expand the commercialization of our Sensei system and Artisan catheter and continue to develop new products. We have financed our operations primarily through the sale of public and private equity securities and the issuance of debt.

We received CE Mark approval for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. We deferred all revenue associated with those shipped systems as we had not yet received CE Mark approval for our Artisan catheters. In May 2007, we received CE Mark approval for our Artisan catheter and also received FDA clearance for the marketing of our Sensei system and Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result, we recorded our first revenues in the second quarter of 2007.

We market our products in the United States primarily through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products. We have increased our manufacturing capacity to enable production of commercial quantities of our Sensei system and Artisan catheter.

In April 2007, we entered into development and marketing agreements with St. Jude Medical, Inc., or St. Jude. Pursuant to these agreements, we have introduced our CoHesionTM 3D Visualization Module, or CoHesion Module, which integrates our Sensei system with St. Jude’s Ensite® system. Under the agreements, we

 

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are solely responsible for obtaining regulatory approvals for, and all costs associated with, our portion of the integrated products developed under the arrangement. In addition, under the terms of the co-marketing agreement, we granted St. Jude the exclusive right to distribute products developed under the joint development agreement when ordered with St. Jude products worldwide, excluding certain specified countries, for the diagnosis and/or treatment of electrophysiologic cardiac conditions.

In November 2007, we acquired AorTx, Inc., or AorTx, an early stage company developing heart valves to be delivered in minimally invasive surgery by catheters through the skin and blood vessels. We have eliminated the research and development positions focused on developing the AorTx valve technology and in 2009, we entered into an agreement to license the acquired AorTx technologies back to an entity formed by the former AorTx stockholders.

In November 2009, we entered into agreements with Royal Philips Electronics, or Philips, to co-develop integrated products that we hope will simplify complex cardiac procedures to diagnose and treat arrhythmias. The agreements are intended to lead to the creation of integrated product solutions by combining Philips’ Allura Xper X-Ray system with our Sensei system. The resulting innovations will seek to enable electrophysiologists to perform complex procedures with greater confidence and improved efficiency. We believe that closer integration between robotics and imaging systems will afford greater clinical capability in endovascular procedures.

Additionally, in December 2009, we entered into an extended joint development agreement with Philips. Under the terms of the extended joint development agreement, we will, with support and collaboration from Philips, develop a vascular robotics platform and associated catheters, or “Vascular System”. The Vascular System will not include our Sensei Robotic Catheter System or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips will partially fund our development costs based upon our achievement of development milestones for the Vascular System. For up to five years after the initial commercial shipment of the Vascular System, we will pay Phillips royalties based on the number of Vascular Systems and associated catheters that are sold, subject to caps based on the amounts Philips contributes to the development. The extended joint development agreement will remain in effect until the earlier of April 1, 2012 or the completion of the Vascular System, provided that either party may terminate the Agreement in the event of the other party’s uncured failure to perform a material obligation. Philips may also terminate the Agreement for convenience upon 60 days prior written notice and the payment of a variable termination fee.

Critical Accounting Policies, Estimates and Judgments

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. We base our estimates on our past experience and on other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.

While our significant accounting policies are fully described in Note 2 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition

Our revenues are primarily derived from the sale of our Sensei system and the associated Artisan catheters as well as the sale of post-contract customer service. As computer software is more than incidental to the

 

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functioning of those products, our revenue recognition policy is based on authoritative accounting guidance regarding software revenue recognition. Under our policy, revenues are recognized when persuasive evidence of an arrangement exists, delivery to the customer has occurred or the services have been fully rendered, the sales price is fixed or determinable and collectability is probable.

 

   

Persuasive Evidence of an Arrangement. Persuasive evidence of an arrangement for sales of Sensei systems is generally determined by a sales contract signed and dated by both the customer and us, including approved terms and conditions, and the receipt of an approved purchase order. Evidence of an arrangement for the sale of disposable products is determined through an approved purchase order from the customer. Evidence of an arrangement for the sale of post-contract customer service is determined through either a signed sales contract or an approved purchase order from the customer.

 

   

Delivery.

 

   

Multiple-element Arrangements. Typically, all products and services sold to customers are itemized and priced separately. In arrangements that include multiple elements, we allocate revenue based on vendor-specific objective evidence of fair value, or VSOE, and defer revenue for undelivered items. VSOE for each element is based on the price for which the item is sold separately, determined based on historical evidence of stand-alone sales of these elements or stated renewal rates for the element. When contracts contain multiple elements wherein VSOE exists for all undelivered elements, we account for the delivered elements in accordance with the residual method prescribed by authoritative guidance. Under the residual method, the full VSOE of the undelivered element is deferred until that element is delivered and any residual revenue is recognized. When we are not able to reasonably determine the VSOE of an undelivered element, we defer the entire arrangement fee until all elements are delivered. If we cannot establish VSOE for an element of the arrangement and the only undelivered element is post-contract customer support, or PCS, the arrangement fee is recognized ratably over the term of the PCS.

 

   

Systems. Typically, ownership of our Sensei systems passes to our customers upon shipment. When no further obligations exist subsequent to the shipment of the system, we recognize system revenues upon shipment. However, substantially all of the sales contracts for our systems require installation and training. As these services are not deemed to be perfunctory, we currently defer all such system revenues until training and installation are completed.

 

   

Disposable Products. Ownership of our Artisan catheters and other disposable products typically passes to our customers upon shipment, at which time delivery is deemed to be complete.

 

   

Post-contract Customer Service Revenue. We recognize post-contract customer service revenue from the sale of product maintenance plans. Revenue from post-contract customer services, whether sold individually or as a separate unit of accounting in a multi-element arrangement, is deferred and amortized over the service period, which is typically one year.

 

   

Sales Price Fixed or Determinable. We assess whether the sales price is fixed or determinable at the time of the transaction. Sales prices are documented in the executed sales contract or purchase order received prior to shipment. If a significant portion of the sales price is considered to have extended payment terms, we account for the sales price as not being fixed or determinable and recognize revenue as payments become due. Our standard terms do not allow for contingencies, such as trial or evaluation periods, refundable orders, payments contingent upon the customer obtaining financing or other contingencies which would impact the customer’s obligation. In situations where contingencies such as those identified are included, we defer all related revenue until the contingency is resolved.

 

   

Collectability. We assess whether collection is probable based on a number of factors, including the customer’s past transaction history and credit worthiness. If we determine that collection of a sales price is not probable, we defer the revenue and recognize it at the time collection becomes probably, which is usually upon receipt of cash. Our sales contracts generally do not allow the customer the right of cancellation, refund or return, except as provided under our standard warranty. If such rights were allowed, we would defer all related revenues until such rights expired.

 

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Significant management judgments and estimates are made in connection with the determination of revenue to be recognized and the period in which it is recognized. If we were to make different judgments or utilize different estimates, the amount of revenue to be recognized and the period in which it is recognized could differ materially from the amounts reported.

Short-Term Investments

We determine the appropriate classification of investments at the time of purchase and evaluate such designation as of each balance sheet date. We classify all investments with maturities greater than three months at the time of purchase as short-term investments as they are subject to use within one year in current operations. We make investments based on specific guidelines approved by our board of directors with a view to liquidity and capital preservation and regularly review our investments for performance. As of December, 31, 2009, all our investments have been classified as available-for-sale and are carried on the balance sheet at fair value with unrealized gains and losses, if any, included in other comprehensive income within stockholders’ equity. Any unrealized losses which are determined to be other than temporary will be included in earnings. Realized gains and losses are recognized on the specific identification method.

We periodically evaluate our investments for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other than temporary, we evaluate many factors, including the following: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2009, we had not experienced other-than-temporary declines in fair value in any of our investments. Significant management judgment is required in determining whether an other-than-temporary decline in the fair value of an investment exists. Changes in our assessment of the valuation of our investments could materially impact our future operating results and financial position.

Allowance for Doubtful Accounts

We establish allowances for doubtful accounts based on our review of the credit profiles of our customers, contractual terms and conditions, current economic trends and historical collection experience. We reassess the allowance for doubtful accounts for each period. If we were to make different judgments or utilize different estimates, the amount or timing of bad debt expense or revenue recognized could differ materially from the amounts reported. In our limited historical experience, our actual losses and credits related to our accounts receivable have been consistent with the recorded provisions. If, however, our actual future receipts differ materially from our current assessments due, among other things, to unexpected events or significant changes in trends, additional provisions may be necessary and our future cash flows and statements of operations could be materially negatively impacted. Our allowances for doubtful accounts as a percentage of revenues have been immaterial.

Inventories

We record inventory, which includes material, labor and overhead costs, at standard cost, which approximates actual cost, determined on a first-in, first-out basis, not in excess of market value. We record reserves, when necessary, to reduce the carrying value of excess or obsolete inventories to their net realizable value. These reserves are based on our best estimates after considering projected future demand. In the event that actual demand for our inventory differs from our best estimates or we fail to receive the necessary regulatory approvals, increases to inventory reserves may become necessary.

Impairment of Long-Lived Assets

We evaluate the recoverability of our long-lived assets in accordance with authoritative accounting guidance. When events or changes in circumstances indicate that the carrying value of long-lived assets may not

 

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be recoverable, we recognize such impairment if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows attributable to the assets. In the second quarter of 2009, we recorded an impairment loss of $1.1 million of property and equipment related to the termination of our relationship with a subcontractor in Europe for the manufacture of catheters. As of December 31, 2009, we had $13.5 million of property and equipment, net. If estimates or the related assumptions change in the future, we may record impairment charges to reduce the carrying value of certain groups of these assets. Changes in the valuation of long-lived assets could materially impact our operating results and financial position.

Stock-Based Compensation

Under the fair value recognition provisions of authoritative guidance related to stock-based compensation, stock-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. The recording of compensation expense related to stock-based awards is significant to our financial statements but does not result in the payment of cash by us. Determining the appropriate fair value model used to calculate the fair value of stock-based awards requires significant management judgment. Additionally, the calculation of the fair value of stock-based awards requires us to make significant estimates and judgments, including the expected volatility, the expected term of the award and the forfeiture rate. If we had chosen a different fair value model or made different estimates in the calculation of fair value, the amount or timing of stock-based compensation recorded could have differed materially from the amounts reported.

We have selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for our stock-based awards. The Black-Scholes model requires the use of highly subjective and complex assumptions in determining the fair value of stock-based awards, including the expected volatility of the underlying stock, the award’s expected term and the forfeiture rate.

 

   

Expected Volatility. Our current estimate of volatility is based on a blend of average historical volatilities of our stock price and the volatility of similar entities.

 

   

Expected Term. We estimate the expected term based on our historical settlement experience related to vesting and contractual terms while giving consideration to awards that have life cycles less than the contractual terms and vesting schedules in accordance with authoritative guidance.

 

   

Forfeiture Rate. We estimate our forfeiture rate based on our historical experience and revise these estimates in future periods if actual forfeitures differ from those estimates.

To the extent that future evidence regarding these variables is available and provides estimates that we determine are more indicative of actual trends, we may refine or change our approach to deriving these input estimates. These changes could significantly impact the stock-based compensation expense recorded in the future.

We account for compensation expense related to stock-based awards to non-employees in accordance with authoritative guidance. We record the expense of such services based on the estimated fair value of the award using the Black-Scholes pricing model. The value of the award is recognized as expense ratably over the requisite service period of the award.

Loss Contingencies

We evaluate potential loss contingencies as circumstances dictate. Should a specific loss contingency meet the definition of a liability under authoritative accounting guidance, we would record a loss and a liability. As of December 31, 2009, we had not recorded any loss contingencies as liabilities. However, if estimates and assumptions change in the future, we may record charges to our financial statements. This could materially impact our operating results and financial position.

 

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Net Operating Loss Carryforwards

We make certain judgments and estimates in determining and valuing deferred tax assets. These judgments arise from differences in timing of recognizing certain expenses for tax purposes and in the calculation of credit and net operating loss carryforwards.

At December 31, 2009, we had federal and California net operating loss carryforwards of approximately $149.2 million and $122.5 million, respectively. At December 31, 2008, we had federal and California net operating loss carryforwards of approximately $125.0 million and $109.4 million, respectively. These net operating loss carryforwards will expire in varying amounts from 2015 through 2029 if not utilized. We maintained a full valuation allowance against the deferred tax asset for those net operating losses totaling $84.2 million and $64.6 million at December 31, 2009 and 2008, respectively. The determination to maintain an allowance is highly subjective. The factors we considered in making this determination include, but are not limited to (i) our historical cumulative net losses, after adjustment for permanent tax differences, over the previous five years through 2009; (ii) our dependence on continued high growth rates in achieving forecasted profitability; (iii) operation in an industry subject to rapid technological changes; and (iv) the unknown impact of current negative macroeconomic factors on our forecasted results of operations. Based on our consideration of these factors, we believe there is sufficient uncertainty regarding our ability to generate future taxable income. We will retain a full valuation allowance until such time that we determine it is more likely than not that we will recognize the benefit of the deferred tax assets. Throughout 2010, we will continually evaluate these, and other, factors, and the impact any changes in these factors has on our judgment regarding the realization of the deferred tax assets.

Section 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for limitations on the utilization of net operating loss and research and experimentation credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382. As the result of the sale by the Company of 11,700,000 shares of Common Stock in April 2009, such an ownership change may have occurred. Accordingly, the Company’s utilization of net operating loss and credit carryforwards which existed at that time could be limited.

Financial Overview

Revenues

We made our first commercial shipments to Europe in the first quarter of 2007 and recognized our first revenues in the second quarter of 2007 for both European and U.S. customers. 2008 represented our first full year of revenues. Our revenues consist of sales of Sensei systems, Artisan catheters, other disposables and, beginning in 2008, post-contract customer service. We have experienced significant fluctuations in quarterly revenues, primarily attributable to still being in the early stages of our commercial launch and, especially beginning in the fourth quarter of 2008 and continuing throughout 2009, deteriorating general economic and capital market conditions. We expect these fluctuations to continue in 2010, even as we plan to experience overall revenue growth as compared to 2009 levels due to what we perceive as an improvement in general capital market conditions for our customers. We do not anticipate that revenues in 2010 will be sufficient to eliminate losses.

Cost of Goods Sold

Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, training and installation costs, royalties, provisions for inventory valuation and warranty expenses. We expect that cost of goods sold both as a percentage of revenues and on a dollar basis will continue to vary from quarter to quarter in 2010 due, among other things, to fluctuations in revenue levels, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, software development, product development, quality assurance and clinical and regulatory expenses, including costs to develop our Sensei

 

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system and disposable Artisan catheters. Research and development expenses include employee compensation, including stock-based compensation expense, consulting services, outside services, materials, supplies, depreciation and travel. We expense research and development costs as they are incurred. Prior to our first commercial shipments in the second quarter of 2007, research and development expenses also included manufacturing costs for commercial products, including start-up manufacturing costs. We expect research and development expenses in 2010 to increase moderately as compared to 2009 levels due to our on-going development activities for the electrophysiology market, the development of a vascular platform and exploring certain other potential future applications of our technology.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, sales, legal and administrative personnel, including sales commissions and stock-based compensation. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services (including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products) and accounting services, consulting fees and travel expenses. We expect our selling, general and administrative expenses in 2010 to decrease moderately as compared to 2009 levels as we reduce general and administrative employee costs while we continue to maintain our sales and clinical support groups.

Acquired In-process Research and Development

Acquired in-process research and development consists of in-process research and development acquired in our acquisition of AorTx in November 2007. As the research and development acquired in the AorTx acquisition had not reached the stage of technological feasibility and had no alternative future use, the amounts were immediately written off.

Results of Operations

Comparison of the year ended December 31, 2009 to the year ended December 31, 2008

Revenues

 

     Year Ended
December 31,
   Change  
     2009    2008    $     %  
     (Dollars in thousands)  

Revenues

   $ 22,203    $ 23,446    $ (1,243   (5 )% 

Revenues primarily related to the following:

 

     Year Ended
December 31,
     2009    2008

United States Sensei system units

     16      23

International Sensei system units

     10      6
             

Total Sensei system units

     26      29
             

Sensei system average selling price (in thousands)

   $ 615    $ 677
             

Artisan catheter units

     2,243      1,591
             

Artisan catheter average selling price (in thousands)

   $ 1.6    $ 1.7
             

Post-contract customer service revenue (in thousands)

   $ 1,879    $ 268
             

 

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Our average selling prices of Sensei systems in 2009 as compared to 2008 were negatively impacted by pressures related to the general economic and capital market conditions which have resulted in discounting as well as by unfavorable movements in foreign currency exchange rates. We have experienced significant fluctuations in quarterly revenues, primarily due to the fact that we are still in the early stages of our commercial launch and, especially beginning in the fourth quarter of 2008 and continuing throughout 2009, deteriorating general economic and capital market conditions. As discussed in our risk factors, these conditions can cause customers to delay purchases and can lengthen sales cycles and these factors contributed to our results in 2009 being lower than we anticipated. Sales of Artisan catheters have increased in 2009 as compared to 2008 due to the larger installed base of Sensei systems. Service revenue has increased in 2009 from 2008 as more customers transition from the first year of warranty to our post-contract customer service contracts. We expect revenue fluctuations to continue throughout 2010 even as we plan to experience overall revenue growth as compared to 2009 levels due to what we perceive as an improvement in general capital market conditions for our customers.

Cost of Goods Sold

 

     Year Ended
December 31,
    Change  
     2009     2008     $     %  
     (Dollars in thousands)  

Cost of goods sold

   $ 16,147      $ 19,165      $ (3,018   (16 )% 

As a percentage of revenues

     72.7     81.7    

Cost of goods sold for 2009 included stock-based compensation expense of $787,000 as compared to $710,000 in 2008. Cost of goods sold as a percentage of revenues for 2009 benefited from manufacturing efficiencies as we have reduced the cost of producing our products. This benefit was partially offset by the decreased level of sales and the effects of increases in the overhead applied to our inventory, primarily due to our move into a new facility during the third quarter of 2008. We expect that cost of goods sold both as a percentage of revenues and on a dollar basis will continue to vary from quarter to quarter in 2010 due, among other things, to fluctuations in revenue levels, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development

 

     Year Ended
December 31,
   Change  
     2009    2008    $     %  
     (Dollars in thousands)  

Research and development

   $ 19,828    $ 25,582    $ (5,754   (22 )% 

The change in research and development expenses in 2009 compared to 2008 was primarily due to the following:

 

   

A decrease of $2.9 million in employee-related expenses, including travel expenses, primarily due to a decrease of 16 in average research and development headcount and the effects of the Company’s quarterly one-week furloughs during 2009;

 

   

A decrease of $2.6 million in outside services, materials and overhead expenses; and

 

   

A decrease of $0.3 million in stock-based compensation expense, due primarily to the effects of our lower headcount and lower average stock price.

Total research and development expenses in 2009 included $2.4 million of stock-based compensation expense compared to $2.7 million in 2008. We expect research and development expenses in 2010 to increase

 

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moderately as compared to 2009 levels due to our development activities for the electrophysiology market and exploring certain other potential future applications of our technology including vascular applications.

Selling, General and Administrative

 

     Year Ended
December 31,
   Change  
     2009    2008    $    %  
     (Dollars in thousands)  

Selling, general and administrative

   $ 37,524    $ 37,112    $ 412    1

The change in selling, general and administrative expenses in 2009 compared to 2008 was primarily due to the following:

 

   

An increase of $3.6 million in litigation and other legal costs associated with our dispute with Luna Innovations Incorporated;

 

   

An increase of $1.7 million in legal and auditing costs due to the investigation of our revenue recognition practices and the restatement of our financial statements;

 

   

A $1.1 million charge in 2009 for the write-off of non-recoverable fixed assets related to the company’s decision to terminate its relationship with its European subcontractor for the manufacture of catheters;

 

   

A $1.0 million charge for executive severance in 2009, consisting of $0.4 million of severance and $0.6 million of stock-based compensation;

 

   

An increase of $0.7 million in supplies, equipment and overhead expenses;

 

   

A decrease of $0.1 million in non-compensation marketing expenses;

 

   

A decrease of $0.1 million in professional service fees exclusive of Luna legal costs and costs associated with the investigation of our revenue recognition practices;

 

   

A decrease of $1.2 million in lease costs allocated to selling, general and administrative expenses as a result of all lease costs for our new facility prior to our occupancy in the third quarter of 2008 having been charged to selling, general and administrative expenses;

 

   

A decrease of $1.9 million in employee-related expenses, exclusive of executive severance, including sales commissions and travel expenses, due primarily to a decrease in average general and administrative headcount of 10 and a decrease in average sales and marketing headcount of 2, and the effects of the Company’s quarterly one-week furloughs during 2009; and

 

   

A decrease of $4.3 million in stock-based compensation expense, exclusive of stock compensation related to executive severance, due primarily to the effects of our lower headcount and lower average stock price.

Selling, general and administrative expenses in 2009 included $4.2 million of stock-based compensation expense compared to $7.8 million in 2008. We expect our selling, general and administrative expenses in 2010 to decrease as compared to 2009 levels as we reduce general and administrative employee costs while we continue to maintain our sales and clinical support groups.

Interest Income

 

     Year Ended
December 31,
   Change  
     2009    2008    $     %  
     (Dollars in thousands)  

Interest income

   $ 307    $ 1,393    $ (1,086   (78 )% 

 

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Interest income decreased in 2009 compared to 2008 primarily due to significantly lower interest rate returns available in the market for highly rated investments as compared to the rates available in the previous year and lower average investment balances in 2009 as compared to 2008. We expect interest income to continue to decrease as our short-term investment balances continue to decrease.

Interest Expense

 

     Year Ended
December 31,
    Change  
     2009     2008     $     %  
     (Dollars in thousands)  

Interest expense

   $ (1,081   $ (630   $ (451   72

Interest expense increased in 2009 as compared to 2008 primarily due to the full year of interest on our term equipment line in 2009 as compared to only one quarter of interest in 2008. We expect interest expense to decrease in 2010 over 2009 levels as we pay down the balance of our term equipment line.

Other Expense

 

     Year Ended
December 31,
    Change  
     2009     2008     $     %  
     (Dollars in thousands)  

Other expense

   $ (379   $ (218   $ (161   74

Other expense consisted mainly of realized foreign exchange losses in both 2009 and 2008. Net foreign exchange losses increased in 2009 as compared to 2008 due primarily to the impact of unfavorable movements in the Euro exchange rate on our Euro-denominated accounts receivable.

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

Revenues

 

     Year Ended
December 31,
   Change  
     2008    2007    $    %  
     (Dollars in thousands)  

Revenues

   $ 23,446    $ 9,464    $ 13,982    148

Revenues for 2008 primarily related to the sale of 23 Sensei systems in the United States and 6 Sensei systems in Europe at an average selling price of approximately $677,000 per unit and the sale of approximately 1,600 Artisan catheters at an average selling price of approximately $1,700 per unit. Revenues for 2007 primarily related to the sale of nine Sensei systems in the United States and five Sensei systems in Europe at an average selling price of $624,000 per unit and the sale of approximately 380 Artisan catheters at an average selling price of approximately $1,900. Average selling prices of Sensei systems in 2008 were positively impacted by sales of Sensei systems with CoHesion Modules and the sale of one system with an additional robotic arm. We have experienced significant fluctuations in quarterly revenues, primarily due to our still being in the early stages of our commercial launch and, especially in the fourth quarter of 2008, general economic and capital market conditions. During the fourth quarter of 2008, in a period of economic uncertainty, we saw many potential customers lengthen their sales cycles and postpone purchase decisions.

 

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Cost of Goods Sold

 

     Year Ended
December 31,
    Change  
     2008     2007     $    %  
     (Dollars in thousands)  

Cost of goods sold

   $ 19,165      $ 8,955      $ 10,210    114

As a percentage of revenues

     81.7     94.6     

Cost of goods sold for 2008 included stock-based compensation expense of $0.7 million as compared to $0.4 million for 2007. During the second half of 2008, we experienced an increase in the overhead applied to our inventory, primarily due to our move into a new facility. During 2007 we sold certain inventory which had previously been written down to zero as a result of the uncertainty of receiving FDA clearance and CE Mark approval. As a result, cost of goods sold for 2007 did not include all of the cost for those sales, which resulted in a benefit of approximately $0.7 million. Cost of goods sold for 2007 also included a $0.4 million non-recurring milestone royalty charge. Overall, cost of goods sold for 2008 benefited as compared to 2007 from an increase in the level of production necessary for the increase in the sales and from manufacturing efficiencies as we have reduced the cost of producing our products.

Operating Expenses

Research and Development

 

     Year Ended
December 31,
   Change  
     2008    2007    $    %  
     (Dollars in thousands)  

Research and development

   $ 25,582    $ 19,020    $ 6,562    35

In the first quarter of 2007, as a development-stage company, all manufacturing expenses were included in research and development expenses. Beginning in the second quarter of 2007, as we received the necessary regulatory approvals, commenced our commercial operations and exited the development stage, manufacturing expenses were included in cost of goods sold. Research and development expenses for 2007 included development-stage manufacturing expenses of $1.0 million, all of which were incurred during the first quarter of 2007. The remaining change in research and development expenses in 2008 compared to 2007 of approximately $7.6 million was primarily due to the following:

 

   

An increase of $3.9 million in research and development materials, outside services and overhead expenses;

 

   

An increase of $3.4 million in employee-related expenses related to an increase of 18 in average research and development headcount; and

 

   

An increase of $0.3 million in stock-based compensation expenses due to our larger employee base, partially offset by the effects of our lower average stock price.

Research and development expenses in 2008 included $2.7 million of non-cash stock-based compensation expenses compared to $2.4 million in 2007.

Selling, General and Administrative

 

     Year Ended
December 31,
   Change  
     2008    2007    $    %  
     (Dollars in thousands)  

Selling, general and administrative

   $ 37,112    $ 24,179    $ 12,933    53

 

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Selling, general and administrative expenses increased in 2008 compared to 2007 primarily due to the following:

 

   

An increase of $6.0 million in employee-related expenses, including sales commissions and traveling expenses, associated with an increase in average sales and marketing headcount of 18 and an increase in average general and administrative headcount of 5;

 

   

An increase of $2.5 million in stock-based compensation expenses due to our larger employee base and the effects of stock option modifications for exiting employees;

 

   

An increase of $2.2 million in professional service fees, primarily consisting of legal fees necessary for the development of our intellectual property portfolio, Luna litigation costs and other intellectual property related legal expenses;

 

   

An increase of $1.3 million in supplies, equipment and overhead expenses;

 

   

An increase of $1.1 million in lease costs for our new facility, all of which were being charged to selling, general and administrative expenses prior to its occupancy in July 2008; and

 

   

A decrease of $0.2 million in non-compensation marketing expenses.

Selling, general and administrative expenses in 2008 included $7.8 million of non-cash stock-based compensation expenses compared to $5.3 million in 2007.

Acquired In-process Research and Development

 

     Year Ended
December 31,
   Change  
     2008    2007    $     %  
     (Dollars in thousands)  

Acquired in-process research and development

   $ —      $ 11,350    $ (11,350   (100 )% 

Acquired in-process research and development for 2007 consists of in-process research and development acquired in our acquisition of AorTx. Under the terms of our agreement with AorTx, we acquired all of the outstanding equity interests of AorTx in exchange for 140,048 shares of our common stock plus cash consideration of approximately $4.5 million and forgiveness of approximately $143,000 of notes payable plus possible future milestone payments of up to $30.0 million upon achievement of regulatory clearances and revenue and partnering milestones.

Interest Income

 

     Year Ended
December 31,
   Change  
     2008    2007    $     %  
     (Dollars in thousands)  

Interest income

   $ 1,393    $ 3,672    $ (2,279   (62 )% 

Interest income decreased in 2008 compared to 2007 primarily due to decreased average cash, cash equivalents and short-term investments balances in 2008 as compared to 2007, due primarily to the use of cash in operations and for the acquisition of AorTx, partially offset by the cash received from our equity offering in April 2008.

Interest Expense

 

     Year Ended
December 31,
    Change  
     2008     2007     $     %  
     (Dollars in thousands)  

Interest expense

   $ (630   $ (482   $ (148   31

 

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Interest expense increased in 2008 as compared to 2007 primarily due to the interest on our new term equipment line with Silicon Valley Bank.

Other Expense

 

     Year Ended
December 31,
    Change  
     2008     2007     $     %  
     (Dollars in thousands)  

Other expense

   $ (218   $ (9   $ (209   2322

Other expense consisted mainly of realized foreign exchange losses in both 2008 and 2007.

Liquidity and Capital Resources

 

     2009     2008     2007  

Cash and cash equivalents

   $ 9,553      $ 17,377      $ 30,404   

Short-term investments

     18,726        17,846        18,148   
                        

Total cash, cash equivalents and short-term investments

   $ 28,279      $ 35,223      $ 48,552   
                        

Cash used in operating activities

   $ (39,175   $ (45,251   $ (33,108

Cash used in investing activities

     (2,058     (17,735     (24,380

Cash provided by (used in) financing activities

     33,409        49,959        (1,019
                        

Net decrease in cash and cash equivalents

   $ (7,824   $ (13,027   $ (58,507
                        

Cash, Cash Equivalents and Short-Term Investments

Our cash and investment balances are held in a variety of interest-bearing instruments, including United States government agency securities, corporate debt securities and money market funds. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view towards liquidity and capital preservation.

Net Cash Used in Operating Activities

Net cash used in operating activities for the years presented primarily reflects the net loss for those periods, partially offset by non-cash charges such as depreciation and amortization, stock-based compensation and the acquired in-process research and development expenses in 2007. Additionally, net cash used in operating activities in 2009 was positively impacted by a decrease in average accounts receivable balances due to improved collections in 2009, and was negatively impacted by decreases in accounts payable and accrued liabilities resulting from our lower level of expenses in 2009. Net cash used in operating activities in 2008 and 2007 was negatively impacted by the increase in accounts receivable and inventory balances necessitated by the continuing growth of commercial sales of our Sensei system and Artisan catheter, and was positively impacted by the increase in our accounts payable and accrued liability accounts as our increased operations require higher levels of purchasing.

Net Cash Used in Investing Activities

Net cash used in investing activities for the years presented primarily relates to the proceeds from and purchases of investments as we manage our investment portfolio to provide interest income and liquidity. Investing activities were also negatively impacted by the purchase of property and equipment as we invested in the infrastructure of our growing company, especially in 2008 as we invested in the build-out of our new facility. Investing activities in 2007 included the acquisition of AorTx.

 

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Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities in 2009 was mainly due to the cash received from our equity offering in April 2009, partially offset by debt repayments. Net cash provided by financing activities in 2008 was mainly due to the cash received from our equity offering in April 2008 and the proceeds from our new term equipment line, in addition to receipts from our employee stock purchase plan and from the net exercises of stock options, partially offset by repayments of our long-term debt. Net cash used in financing activities in 2007 was mainly attributable to repayments of long-term debt and the payments for remaining costs associated with our initial public offering in November 2006, partially offset by receipts from stock option exercises and our employee stock purchase plan.

Historical Financing Activities

We have incurred significant losses since our inception in September 2002 and, as of December 31, 2009 we had an accumulated deficit of $220.2 million. We have financed our operations to date principally through the sale of capital stock, debt financing, interest earned on investments and the sale of our products. Prior to our initial public offering of stock in November 2006, we had received net proceeds of $61.3 million from the issuance of common and preferred stock and $7.0 million in debt financing. Through our initial public offering in 2006 we received net proceeds of $78.3 million. On April 7, 2008, we sold 3,000,000 shares of our common stock, resulting in approximately $39.5 million of net proceeds. On April 22, 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.3 million of net proceeds.

On August 25, 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. As of December 31, 2009, we had drawn down approximately $12.5 million against the equipment line under this agreement, and, per the original agreement terms, the remainder of this line is no longer available to us. The $10 million available under the revolving credit line expired in August 2009. Our current debt with Silicon Valley bank is collateralized by substantially all of our assets, excluding intellectual property, and is subject to certain covenants, including maintaining the required liquidity, achieving specified EBITDA amounts and fulfilling certain reporting requirements. The liquidity covenants require us to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. Silicon Valley Bank has yet to determine the quarterly EBITDA amounts with us. Additionally, the agreement limits our ability to take the following corporate actions without prior consent from Silicon Valley Bank:

 

   

transfer all or any part of our business or properties, other than transfers made in the ordinary course of business;

 

   

engage in any business other than the business in which we are currently engaged;

 

   

merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain exceptions;

 

   

create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;

 

   

pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;

 

   

create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to receive income;

 

   

directly or indirectly enter into or permit to exist any material transaction with any of our affiliates, subject to certain exceptions; and

 

   

make or permit any payment on any subordinated debt.

In the event we were to violate any covenants or if Silicon Valley Bank deems there to have been a material adverse change, including (1) a material impairment in the perfection or priority of Silicon Valley Bank’s lien in

 

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the collateral or in the value of such collateral, (2) a material adverse change in our business, operations or condition (financial or otherwise), or (3) a material impairment of the prospect of repayment of any portion of our obligations, we would seek to obtain a waiver from Silicon Valley Bank. If we were unable to obtain a waiver, we would be in default under the loan and security agreement, which would entitle Silicon Valley Bank to exercise their remedies, including the right to accelerate the debt, upon which we may be required to repay all amounts then outstanding under the loan and security agreement.

As of December 31, 2009, we were in compliance with all financial covenants. However, we currently are not in compliance with the covenant to deliver a board-approved 2010 plan within 45 days of year end. Silicon Valley Bank has issued us a waiver for this non-compliance. In addition, if we are unable to raise sufficient additional capital in the second quarter of 2010, we anticipate that we will violate the liquidity covenants of the loan and security agreement. At such time, Silicon Valley Bank could exercise their remedies, including their right to accelerate the debt. If we were required to repay all the amounts then outstanding under the loan and security agreement, our ability to continue as a going concern would be significantly impacted. Additionally, the continuing liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, we have classified all of our outstanding debt balance and related accrued interest as a current liability as of December 31, 2009.

Future Capital Requirements

We are still in the early stages of commercializing our Sensei system and Artisan catheter and we have not achieved profitability. We recognized our first revenues in 2007 and have not generated net income to date. We have experienced significant fluctuations in quarterly revenues and, beginning in the fourth quarter of 2008 and continuing throughout 2009, we saw many potential customers lengthen their sales cycles and postpone purchase decisions due in large part to deteriorating general economic and capital market conditions. In an attempt to reduce our future spending, we reduced our work force in the third quarter of 2008 and again in the first and third quarters of 2009. We anticipate that we will continue to incur substantial net losses for at least the next year as we continue to commercialize our products, maintain and develop the corporate infrastructure required to manufacture and sell our products at sufficient levels and profit margins and operate as a publicly traded company as well as continue to develop new products and pursue additional applications for our technology platform.

We believe our existing cash, cash equivalents and short-term investment balances and the interest income we earn on these balances in addition to the amounts received through the sale of our products will not be sufficient to meet our anticipated cash requirements through 2010. As discussed herein, the loan and security agreement with Silicon Valley Bank requires us to be in compliance with certain covenants including a liquidity covenant. If we are unable to raise sufficient additional capital during the second quarter of 2010, we anticipate that we will violate the liquidity covenants of the loan and security agreement. At such time, Silicon Valley Bank could exercise their remedies, including their right to accelerate the debt. If we were required to repay all the amounts then outstanding under the loan and security agreement and are unable to raise sufficient additional capital, our ability to continue as a going concern would be significantly impacted.

In order to delay this possibility, we may be required to adopt additional cost-cutting measures, including additional reductions in our work force, reducing the scope of, delaying or eliminating some or all of our planned research, development and commercialization activities or to license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize and we may require additional capital. The Company might also have to reduce marketing, customer support or other resources devoted to its products. Any of these factors could harm its financial condition. Failure to manage discretionary spending or raise additional capital as required may adversely impact the Company’s ability to achieve its intended business objectives. The Company continues to evaluate the extent of its implemented cost-saving measures based upon changing future economic conditions and the achievement of estimated revenue throughout 2010 and will consider the implementation of additional cost reductions during the remainder of the year if and as circumstances warrant. In any event, we believe that, by the first half of 2010, we will require additional

 

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capital and at any time prior to that we may seek to sell additional equity or debt securities or enter into an additional credit facility. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of, our planned research, development and commercialization activities or to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize, any of which could materially harm our business.

The timing and exact amounts of our current and future capital requirements will depend on many factors, including but not limited to the following:

 

   

our ability to maintain compliance with debt covenants;

 

   

the revenue and margins generated by sales of our current and future products;

 

   

our ability to generate revenue in a time of overall economic and capital market uncertainty;

 

   

the expenses we incur in manufacturing, marketing and selling our products, developing new products and operating our company;

 

   

our ability to achieve manufacturing cost reductions as we scale the production of our products;

 

   

our ability to achieve and maintain operating cost reductions;

 

   

the success of our research and development efforts;

 

   

the rate of progress and cost of our clinical trials and other development activities;

 

   

the cost and timing of future regulatory actions;

 

   

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property or other legal rights, or participating in litigation-related activities;

 

   

the costs of defending against lawsuits brought against the company;

 

   

the emergence of competing or complementary technological developments;

 

   

the terms and timing of any collaborative, licensing or other arrangements that we may establish; and

 

   

the acquisition of businesses, products and technologies.

We cannot guarantee that future equity or debt financing or credit facilities will be available in amounts or on terms acceptable to us, if at all. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of December 31, 2009 and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

     Payments Due by Period

Contractual Obligations

   Total    Less than
1 Year
   1-3 Years    3-5 years    More than
5 Years

Operating lease—real estate

   $ 9,041    $ 1,743    $ 3,622    $ 3,676    $ —  

Debt, including interest

     10,662      4,070      6,592      —        —  
                                  

Total

   $ 19,703    $ 5,813    $ 10,214    $ 3,676    $ —  
                                  

The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate principally to the lease for our corporate headquarters in Mountain View, California.

 

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Current future debt payments relate to principal and interest payments related to the $12.5 million we have borrowed under our term equipment line with Silicon Valley Bank. The above schedule shows the repayment of that debt per the original repayment terms. However, the continuing liquidity issues we face could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, we have classified all of our outstanding debt balance and related accrued interest as a current liability as of December 31, 2009. If we are unable to raise sufficient additional capital and violate the liquidity covenants of the loan and security agreement and Silicon Valley Bank decides to accelerate the outstanding debt, all of the above debt balance would be due in 2010.

Additionally, we have minimum royalty obligations of $100,000 per year under a license agreement with Mitsubishi Electric Research Laboratories, Inc. which reduces to $55,000 per year if the license becomes non-exclusive. The royalty obligation expires in 2018. We also have minimum royalty obligations of $200,000 per year under the terms of our cross license agreement with Intuitive Surgical, Inc. We have an agreement with Philips which provides for the payment of royalties to Philips for up to five years after the initial commercial shipment of a vascular system, subject to caps based on the amounts Philips contributes to the development. As of December 31, 2009, Philips had not contributed any amounts to the Company.

Recent Accounting Pronouncements

There are a number of new accounting pronouncements and interpretations that will impact our financial statements and disclosures (see Note 2 to our consolidated financial statements under the caption “Recent Accounting Pronouncements”.) We do not expect that any of those pronouncements or interpretations upon adoption will have a material impact on our results of operations, financial position or cash flows.

Off-balance Sheet Arrangements

As of December 31, 2009, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements and foreign currency exchange risk. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of December 31, 2009, the fair value of our cash, cash equivalents and short-term investments was approximately $28.3 million, the majority of which will mature in one year or less. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

A portion of our operations consist of sales activities outside of the United States and, as such, we have foreign currency exposure to non-United States dollar revenues and accounts receivable. Currently, we sell our products mainly in United States dollars, Euros and Great Britain Pounds although we may in the future transact business in other currencies. Future fluctuations in the exchange rates of these currencies may impact our revenues. In the past, we have not hedged our exposures to foreign currencies or entered into any other derivative instruments and we have no current plans to do so. For the year ended December 31, 2009, sales denominated in foreign currencies were approximately 31% of total revenue. A hypothetical 10% increase in the United States dollar exchange rate used would have resulted in a decrease of approximately $689,000 in revenues for 2009.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements

 

     Page

Report of Independent Registered Public Accounting Firm

   94

Consolidated Balance Sheets

   95

Consolidated Statements of Operations

   96

Consolidated Statements of Stockholders’ Equity

   97

Consolidated Statements of Cash Flows

   98

Notes to Consolidated Financial Statements

   99

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Hansen Medical, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, consolidated statements of stockholders’ equity and consolidated statements of cash flows present fairly, in all material respects, the financial position of Hansen Medical, Inc. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to the control environment, information and communication, revenue recognition process, and complex arrangements existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations since inception that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 16, 2010

 

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HANSEN MEDICAL, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

     December 31,  
     2009     2008  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 9,553      $ 17,377   

Short-term investments

     18,726        17,846   

Accounts receivable, net of allowance of $91 at December 31, 2009

     6,888        9,506   

Inventories

     7,406        6,426   

Deferred cost of goods sold

     2,535        2,364   

Prepaids and other current assets

     1,929        2,136   
                

Total current assets

     47,037        55,655   

Property and equipment, net

     13,460        18,195   

Restricted cash

     65        110   

Other assets

     179        174   
                

Total assets

   $ 60,741      $ 74,134   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY   

Current liabilities:

    

Accounts payable

   $ 2,068      $ 3,089   

Accrued liabilities

     4,825        5,634   

Current portion of deferred revenue

     9,337        8,794   

Current portion of long-term debt

     9,803        2,451   
                

Total current liabilities

     26,033        19,968   

Deferred rent, net of current portion

     789        860   

Deferred revenue, net of current portion

     126        189   

Long-term debt, net of current portion

     —          10,025   

Other long-term liabilities

     40        249   
                

Total liabilities

     26,988        31,291   
                

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Preferred stock, par value $0.0001:

    

Authorized: 10,000,000 shares

    

Issued and outstanding: none

     —          —     

Common stock, par value $0.0001:

    

Authorized: 100,000,000 shares

    

Issued and outstanding: 37,512,458 and 25,273,623 shares at December 31, 2009 and 2008, respectively

     4        3   

Additional paid-in capital

     253,968        210,548   

Deferred stock-based compensation

     —          (44

Accumulated other comprehensive income (loss)

     (29     77   

Accumulated deficit

     (220,190     (167,741
                

Total stockholders’ equity

     33,753        42,843   
                

Total liabilities and stockholders’ equity

   $ 60,741      $ 74,134   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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HANSEN MEDICAL, INC.

Consolidated Statements of Operations

(In thousands, except per share data)

 

     Years ended December 31,  
     2009     2008     2007  

Revenues

   $ 22,203      $ 23,446      $ 9,464   

Cost of goods sold

     16,147        19,165        8,955   
                        

Gross profit

     6,056        4,281        509   
                        

Operating expenses:

      

Research and development

     19,828        25,582        19,020   

Selling, general and administrative

     37,524        37,112        24,179   

Acquired in-process research and development

     —          —          11,350   
                        

Total operating expenses

     57,352        62,694        54,549   
                        

Loss from operations

     (51,296     (58,413     (54,040

Interest income

     307        1,393        3,672   

Interest expense

     (1,081     (630     (482

Other expense, net

     (379     (218     (9
                        

Net loss

   $ (52,449   $ (57,868   $ (50,859
                        

Basic and diluted net loss per share

   $ (1.55   $ (2.39   $ (2.35
                        

Shares used to compute basic and diluted net loss per share

     33,892        24,232        21,603   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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HANSEN MEDICAL, INC.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

 

    Common Stock   Additional Paid-
In Capital
    Deferred Stock-
based Employee
Compensation
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
  Shares   Amount          

Balances, January 1, 2007

  21,505,563   $ 2   $ 144,130      $ (346   $ —        $ (59,014   $ 84,772   

Exercise of stock options

  199,564     —       367        —          —          —          367   

Issuance of common stock pursuant to the employee stock purchase plan

  74,345     —       929        —          —          —          929   

Net exercise of warrants to purchase common stock

  42,291     —       —          —          —          —          —     

Issuance of common stock pursuant to acquisition of AorTx, Inc.

  140,048     —       5,224        —          —          —          5,224   

Change in estimated IPO costs

  —       —       127        —          —          —          127   

Amortization of deferred stock-based employee compensation

  —       —       —          118        —          —          118   

Reversal of deferred stock-based compensation due to cancellations

  —       —       (61     61        —          —          —     

Nonemployee stock-based compensation

  —       —       1,637        —          —          —          1,637   

Employee share-based compensation expense, net of cancellations

  —       —       6,254        —          —          —          6,254   

Comprehensive loss:

             

Net loss

  —       —       —          —          —          (50,859     (50,859

Change in unrealized loss on investments

  —       —       —          —          41        —          41   

Translation adjustment

  —       —       —          —          16        —          16   
                   

Total comprehensive loss

                (50,802
                                                 

Balances, December 31, 2007

  21,961,811     2     158,607        (167     57        (109,873     48,626   

Exercise of stock options

  219,872     —       281        —          —          —          281   

Issuance of common stock pursuant to the employee stock purchase plan

  91,940     —       1,077        —          —          —          1,077   

Issuance of common stock pursuant to secondary public offering

  3,000,000     1     39,491        —          —          —          39,492   

Amortization of deferred stock-based employee compensation

  —       —       —          104        —          —          104   

Reversal of deferred stock-based compensation due to cancellations

  —       —       (19     19        —          —          —     

Non-employee stock-based compensation

  —       —       63        —          —          —          63   

Employee share-based compensation expense, net of cancellations

  —       —       11,048        —          —          —          11,048   

Comprehensive loss:

             

Net loss

  —       —       —          —          —          (57,868     (57,868

Change in unrealized loss on investments

  —       —       —          —          92        —          92   

Translation adjustment

  —       —       —          —          (72     —          (72
                   

Total comprehensive loss

                (57,848
                                                 

Balances, December 31, 2008

  25,273,623     3     210,548        (44     77        (167,741     42,843   

Exercise of stock options

  392,044     —       363        —          —          —          363   

Issuance of common stock pursuant to the employee stock purchase plan

  154,791     —       446        —          —          —          446   

Issuance of common stock pursuant to public offering

  11,692,000     1     35,277        —          —          —          35,278   

Amortization of deferred stock-based employee compensation

  —       —       —          44        —          —          44   

Non-employee stock-based compensation

  —       —       (18     —          —          —          (18

Employee share-based compensation expense, net of cancellations

  —       —       7,352        —          —          —          7,352   

Comprehensive loss:

             

Net loss

  —       —       —          —          —          (52,449     (52,449

Change in unrealized loss on investments

  —       —       —          —          (118     —          (118

Translation adjustment

  —       —       —          —          12        —          12   
                   

Total comprehensive loss

                (52,555
                                                 

Balances, December 31, 2009

  37,512,458   $ 4   $ 253,968      $ —        $ (29   $ (220,190   $ 33,753   
                                                 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Consolidated Statements of Cash Flows

(In thousands)

 

     Years Ended December 31,  
     2009     2008     2007  

Cash flows from operating activities

      

Net loss

   $ (52,449   $ (57,868   $ (50,859

Adjustments to reconcile net loss to net cash used in operating activities:

      

Acquired in-process research and development

     —          —          11,350   

Depreciation and amortization

     4,289        2,822        1,337   

Stock-based compensation

     7,378        11,215        8,010   

Loss on disposal of fixed assets

     1,143        99        —     

Amortization of preferred stock warrants

     —          74        58   

Provision for doubtful accounts

     91        (26     26   

Changes in operating assets and liabilities:

      

Accounts receivable

     2,527        (5,477     (4,009

Inventories

     (980     (3,444     (2,692

Deferred cost of goods sold

     (171     (2,234     (130

Prepaids and other current assets

     484        (837     (725

Other long-term assets

     —          —          (161

Accounts payable

     (1,021     125        1,153   

Accrued liabilities

     (853     1,550        2,573   

Deferred revenue

     480        7,994        989   

Deferred rent

     (34     795        (74

Other long-term liabilities

     (59     (39     46   
                        

Net cash used in operating activities

     (39,175     (45,251     (33,108
                        

Cash flows from investing activities

      

Purchase of property and equipment, net

     (835     (18,117     (2,264

Payment for purchase of AorTx, Inc., net of cash acquired

     —          —          (5,089

Proceeds from sales and maturities of short-term investments

     41,372        15,467        12,100   

Purchase of short-term investments

     (42,640     (15,080     (29,112

Restricted cash

     45        (5     (15
                        

Net cash used in investing activities

     (2,058     (17,735     (24,380
                        

Cash flows from financing activities

      

Proceeds from loans payable

     —          12,476        —     

Repayments of loans payable

     (2,673     (3,334     (1,939

Proceeds from issuance of common stock, net of issuance costs

     35,278        39,492        (317

Proceeds from exercise of common stock options

     358        250        321   

Proceeds from employee stock purchase plan

     446        1,077        929   

Repurchase of unvested shares

     —          (2     (13
                        

Net cash provided by (used in) financing activities

     33,409        49,959        (1,019
                        

Net decrease in cash and cash equivalents

     (7,824     (13,027     (58,507

Cash and cash equivalents at beginning of year

     17,377        30,404        88,911   
                        

Cash and cash equivalents at end of year

   $ 9,553      $ 17,377      $ 30,404   
                        

Supplemental disclosures of cash flow information

      

Cash paid during the period for interest

   $ 739      $ 555      $ 438   

Supplemental schedule of non-cash investing and financing activities

      

Issuance of common shares for purchase of AorTx, Inc.

     —          —          5,224   

Net exercise of warrants to purchase common stock

     —          —          549   

Deferred stock-based compensation, net of cancellations

     —          (19     (61

The accompanying notes are an integral part of these consolidated financial statements.

 

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Notes to Consolidated Financial Statements

1. Description of Business

Hansen Medical, Inc. (the “Company”) develops, manufactures and markets a new generation of medical robotics designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. The Company was incorporated in the state of Delaware on September 23, 2002. The Company is headquartered in Mountain View, California. In March 2007, the Company established Hansen Medical UK Ltd., a wholly-owned subsidiary located in the United Kingdom and, in May 2007, the Company established Hansen Medical, GmbH, a wholly-owned subsidiary located in Germany. Both subsidiaries were established for the purpose of marketing the Company’s products in Europe.

Prior to the second quarter of 2007, the Company was a development stage company that devoted substantially all of its resources to recruiting personnel, developing its product technology, obtaining patents to protect its intellectual property and raising capital. The Company received CE Mark approval for its Sensei system in the fourth quarter of 2006 and, in the second quarter of 2007, received CE Mark approval for its Artisan catheters and also received U.S. Food & Drug Administration (“FDA”) clearance for the marketing of its Sensei system and Artisan catheters for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result of obtaining the necessary regulatory approvals, the Company recorded its initial product revenues in the second quarter of 2007, thus commencing its planned principal operations and exiting the development stage.

The Company completed its initial public offering of stock (“IPO”) on November 15, 2006. The IPO consisted of 7,187,500 shares of the Company’s common stock and produced net proceeds of $78.3 million, after expenses and underwriters’ discounts and commissions. On April 7, 2008, the Company sold an additional 3,000,000 shares of its common stock, resulting in net proceeds of approximately $39.5 million. On April 22, 2009, the Company sold 11,692,000 shares of its common stock, resulting in approximately $35.3 million of net proceeds, after underwriting discounts and commissions and offering expenses. On August 25, 2008, the Company entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. The revolving credit line expired in August 2009; however the Company and Silicon Valley Bank have initiated discussions to replace the credit line. As of December 31, 2009, the Company had drawn down approximately $12.5 million against the term equipment line under this agreement. See Note 7.

From inception to December 31, 2009, the Company has incurred losses totaling approximately $220.2 million and has not generated positive cash flows from operations. The Company expects such losses to continue through at least the year ended December 31, 2010 as it continues to commercialize its technologies and develop new applications and technologies. The Company also faces significant short-term uncertainty related to current economic and capital market conditions and the related impact of those conditions on the capital equipment market. The Company anticipates that, in 2010, it will require capital in addition to the existing cash, cash equivalents and short-term investment balances and the interest earned on those balances, in addition to amounts received through the sale of products and may seek to sell additional equity or debt securities or enter into additional credit facilities. Any such required additional capital may not be available in amounts or on terms acceptable to the Company, if at all. This could leave the Company without adequate financial resources to fund its operations as presently conducted or as it plans to conduct them in the future. If adequate funds are not available due to the Company’s inability to obtain additional financing or if operating cash flows are insufficient to meet the Company’s existing debt covenants, the Company may be required to reduce the scope of, delay or eliminate some or all of its planned research, development and commercialization activities or to license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize. The Company might also have to reduce marketing, customer support or other resources devoted to its products. Any of these factors could harm its financial condition. Failure to manage discretionary spending

 

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Notes to Consolidated Financial Statements—(Continued)

 

or raise additional capital as required may adversely impact the Company’s ability to achieve its intended business objectives. The Company continues to evaluate the extent of its implemented cost-saving measures based upon changing future economic conditions and the achievement of estimated revenue throughout 2010 and will consider the implementation of additional cost reductions during the remainder of the year if and as circumstances warrant.

As discussed in Note 7, under the terms of the loan and security agreement with Silicon Valley Bank, the Company is subject to various financial covenants, including maintaining the required liquidity, achieving specified EBITDA amounts and fulfilling certain reporting requirements. The liquidity covenants require the Company to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. Silicon Valley Bank has yet to determine the quarterly EBITDA amounts with the Company. Additionally, the agreement limits the Company’s ability to take the following corporate actions without prior consent from Silicon Valley Bank:

 

   

transfer all or any part of its business or properties, other than transfers made in the ordinary course of business;

 

   

engage in any business other than the business in which the Company is currently engaged;

 

   

merge or consolidate with any other person, or acquire, all or substantially all of the capital stock or property of another person, subject to certain exceptions;

 

   

create, incur, assume, or be liable for any indebtedness, other than certain permitted indebtedness;

 

   

pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, subject to certain exceptions;

 

   

create, incur, allow or suffer any lien on any of our property, including without limitation intellectual property, assign or convey any right to receive income;

 

   

directly or indirectly enter into or permit to exist any material transaction with any of its affiliates, subject to certain exceptions; and

 

   

make or permit any payment on any subordinated debt.

In the event the Company were to violate any covenants or if Silicon Valley Bank deems there to have been a material adverse change, including (1) a material impairment in the perfection or priority of Silicon Valley Bank’s lien in the collateral or in the value of such collateral, (2) a material adverse change in the Company’s business, operations or condition (financial or otherwise), or (3) a material impairment of the prospect of repayment of any portion of the Company’s obligations, the Company would seek to obtain a waiver from Silicon Valley Bank. If the Company were unable to obtain a waiver, it would be in default under the loan and security agreement, which would entitle Silicon Valley Bank to exercise their remedies, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the loan and security agreement.

If the Company is unable to raise sufficient additional capital in the second quarter of 2010, the Company anticipates that it will violate the liquidity covenants of the loan and security agreement. If the Company is unable to obtain a waiver from the lender, the lender would be entitled to exercise its remedies, which includes the right to accelerate the debt, upon which the Company would be required to repay all amounts then outstanding under the loan and security agreement. Under such circumstances, if the Company is unable to obtain sufficient additional financing, the Company’s ability to continue as a going concern would be significantly impacted. Additionally, the continuing liquidity issues the Company faces could be construed by Silicon Valley

 

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Notes to Consolidated Financial Statements—(Continued)

 

Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, the Company has classified all of its outstanding debt balance and related accrued interest as a current liability as of December 31, 2009.

Going Concern

These consolidated financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. The Company has incurred net operating losses and negative cash flows from operations during every year since inception. At December 31, 2009, the Company has an accumulated deficit of $220.2 million and currently does not have financing sufficient for continued operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue its operations, the Company must achieve profitable operations and/or obtain sufficient additional financing. There can be no assurance, however, that the Company can achieve profitability or that such a financing will be successfully completed on terms acceptable to the Company. Management is currently considering financing alternatives. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America “GAAP”. On July 1, 2009, the Financial Accounting Standards Board released the authoritative version of its new Accounting Standards Codification (“ASC”) as the single source for GAAP, replacing all previous GAAP accounting standards. As the Codification did not substantively change GAAP, but rather changed its organization and presentation, it will not have any effect on the Company’s consolidated financial statements other than how the Company discloses some of its accounting policies.

The Company’s fiscal year ends on December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company’s revenues are primarily derived from the sale of the Sensei Robotic Catheter System (“Sensei system”) and the associated Artisan catheter as well as the sale of post-contract customer service. As computer software is more than incidental to the functioning of those products, the Company’s revenue recognition policy is based on authoritative guidance regarding software revenue recognition. Under the policy, revenues are recognized when persuasive evidence of an arrangement exists, delivery to the customer has occurred or the services have been fully rendered, the sales price is fixed or determinable and collectability is probable.

 

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Notes to Consolidated Financial Statements—(Continued)

 

   

Persuasive Evidence of an Arrangement. Persuasive evidence of an arrangement for sales of Sensei systems is generally determined by a sales contract signed and dated by both the customer and the Company, including approved terms and conditions and the receipt of an approved purchase order. Evidence of an arrangement for the sale of disposable products is determined through an approved purchase order from the customer. Evidence of an arrangement for the sale of post-contract customer service is determined through either a signed sales contract or an approved purchase order from the customer.

 

   

Delivery.

 

   

Multiple-element Arrangements. Typically, all products and services sold to customers are itemized and priced separately. In arrangements that include multiple elements, the Company allocates revenue based on vendor-specific objective evidence of fair value (“VSOE”) and defers revenue for undelivered items. VSOE for each element is based on the price for which the item is sold separately, determined based on historical evidence of stand-alone sales of these elements or stated renewal rates for the element. When contracts contain multiple elements wherein VSOE exists for all undelivered elements, the residual method prescribed by authoritative guidance regarding software revenue recognition is used to account for the delivered elements. Under the residual method, the full VSOE of the undelivered element is deferred until that element is delivered and any residual revenue is recognized. When the Company cannot reasonably determine the VSOE of an undelivered element, the entire arrangement fee is deferred until all elements are delivered. If the Company cannot establish VSOE for an element of the arrangement and the only undelivered element is post-contract customer support (“PCS”), the arrangement fee is recognized ratably over the term of the PCS.

 

   

Systems. Typically, ownership of the Sensei system passes to customers upon shipment. When no further obligations exist subsequent to the shipment of the system, system revenues are recognized upon shipment. However, substantially all of the sales contracts for systems require installation and training. As these services are not deemed to be perfunctory, all such system revenue is deferred until training and installation are completed.

 

   

Disposable Products. Ownership of the Artisan catheter and other disposable products typically passes to customers upon shipment, at which time delivery is deemed to be complete.

 

   

Post-contract Customer Service Revenue. The Company recognizes post-contract customer service revenue from the sale of product maintenance plans. Revenue from post-contract customer services, whether sold individually or as a separate unit of accounting in a multi-element arrangement, is deferred and amortized over the service period, which is typically one year.

 

   

Sales Price Fixed or Determinable. The Company assesses whether the sales price is fixed or determinable at the time of the transaction. Sales prices are documented in the executed sales contract or purchase order received prior to shipment. If a significant portion of the sales price in considered to have extended payment terms, the sales price is accounted for as not being fixed or determinable and revenue is recognized as payments become due. The Company’s standard terms do not allow for contingencies, such as trial or evaluation periods, refundable orders, payments contingent upon the customer obtaining financing or other contingencies which would impact the customer’s obligation. In situations where contingencies such as those identified are included, all related revenue is deferred until the contingency is resolved.

 

   

Collectability. The Company assesses whether collection is probably based on a number of factors, including the customer’s past transaction history and credit worthiness. If collection of the sales price is not deemed probable, the revenue is deferred and recognized at the time collection becomes probably, which is usually upon receipt of cash. The Company’s sales contracts generally do not allow the

 

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Notes to Consolidated Financial Statements—(Continued)

 

 

customer the right of cancellation, refund or return, except as provided under the Company’s standard warranty. If such rights were allowed, all related revenues would be deferred until such rights expired.

Significant management judgments and estimates are made in connection with the determination of revenue to be recognized and the period in which it is recognized. If different judgments and estimates were utilized, the amount of revenue to be recognized and the period in which it is recognized could differ materially from the amounts reported.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts at two financial institutions. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company had six customers who constituted 16%,13%, 11%, 11%, 11% and 11%, respectively, of the Company’s net accounts receivable at December 31, 2009. The Company had two customers who constituted 14% and 13%, respectively, of the Company’s net accounts receivable at December 31, 2008. No customer accounted for more than 10% of revenues in 2009. One customer accounted for 10% of revenues in 2008. The Company carefully monitors the creditworthiness of potential customers. As of December 31, 2009, the Company has not experienced any significant losses on its accounts receivable.

Most of the products developed by the Company require clearance from the FDA or corresponding foreign regulatory agencies prior to commercial sales. The Company received CE Mark approval to market its Sensei system in Europe in the fourth quarter of 2006 and received CE Mark approval to market its Artisan catheter in Europe in May 2007. The Company received FDA clearance for the marketing of its Sensei system and Artisan catheters for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures in the United States in May 2007. However, there can be no assurance that any new products the Company develops in the future will receive the necessary clearances. If the Company is denied clearance or clearance is delayed, it might have a material adverse impact on the Company.

The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert, and have asserted in the past, that its products or the use of the Company’s products are covered by United States or foreign patents held by them. This risk is heightened due to the numerous issued and pending patents relating to the use of catheter-based procedures in the medical technology field.

Fair Value of Financial Instruments

Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their short maturities.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents, include money market funds and various deposit accounts, which are readily convertible to cash and are stated at cost, which approximates market.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Short-Term Investments

The Company determines the appropriate classification of investments at the time of purchase and evaluates such classification as of each balance sheet date. The Company classifies all investments with maturities greater than three months at the time of purchase as short-term investments as they are subject to use within one year in current operations. The Company makes investments based upon specific guidelines approved by its board of directors with a view to liquidity and capital preservation and regularly reviews its investments for performance. As of December 31, 2009, all of the Company’s investments have been classified as available-for-sale and are carried on the balance sheet at fair value with the unrealized gains and losses, if any, included in other comprehensive income within stockholders’ equity. Any unrealized losses which are determined to be other than temporary will be included in earnings. Realized gains and losses are recognized on the specific identification method.

The Company periodically evaluates its investments for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine whether a decline in value is other than temporary, the Company evaluates many factors, including the following: the duration and extent to which the fair value has been less than the carrying value; the Company’s financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in the industry; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2009, the Company had not experienced other–than-temporary declines in fair value in any of its investments. Significant management judgment is required in determining whether an other-than-temporary decline in the fair value of an investment exists. Changes in the Company’s assessment of the valuation of investments could materially impact future operating results and financial position.

Allowance for Doubtful Accounts

The Company establishes allowances for doubtful accounts based on a review of the credit profiles of customers, contractual terms and conditions, current economic trends and historical collection experience. The allowance for doubtful accounts is reassessed each period. If different judgments and estimates were utilized is establishing the allowance, the amount or timing of bad debt expense or revenue recognized could differ materially from the amounts reported. In the Company’s limited historical experience, actual losses and credits related to accounts receivable have been consistent with the recorded provisions. If, however, actual future receipts differ materially from the current assessments due, among other things, to unexpected events or significant changes in trends, additional provisions may be necessary and future cash flows and statements of operations could be materially negatively impacted. Allowances for doubtful accounts as a percentage of revenues have been immaterial.

Inventories

Inventory, which includes material, labor and overhead costs, is stated at standard cost, which approximates actual cost, determined on a first-in, first-out basis, not in excess of market value. The Company records reserves, when necessary, to reduce the carrying value of excess or obsolete inventories to their net realizable value.

Property and Equipment, Net

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of two to

 

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Notes to Consolidated Financial Statements—(Continued)

 

five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is recognized. Maintenance and repairs are charged to operations as incurred.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with authoritative accounting guidance. When events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable, the Company recognizes such impairment if the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or discounted estimates of future cash flows attributable to the assets. In the second quarter of 2009, the Company recorded an impairment loss of $1.1 million of property and equipment related to the termination of its relationship with a subcontractor in Europe for the manufacture of catheters. As of December 31, 2009, the Company had $13.5 million of property and equipment, net. If estimates or the related assumptions change in the future, the Company may record impairment charges to reduce the carrying value of certain groups of these assets. Changes in the valuation of long-lived assets could materially impact the Company’s operating results and financial position.

Stock-Based Compensation

Under the fair value recognition provisions of authoritative guidance related to stock-based compensation, stock-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. The recording of compensation expense related to stock-based awards is significant to the Company’s financial statements but does not result in the payment of cash by the Company. Determining the appropriate fair value model used to calculate the fair value of stock-based awards requires significant management judgment. Additionally, the calculation of the fair value of stock-based awards requires the Company to make significant estimates and judgments, including the expected volatility, the expected term of the award and the forfeiture rate. If the Company had chosen a different fair value model or made different estimates in the calculation of fair value, the amount or timing of stock-based compensation recorded could have differed materially from the amounts reported.

The Company selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of highly subjective and complex assumptions in determining the fair value of stock-based awards, including the expected volatility of the underlying stock, the award’s expected term and the forfeiture rate.

 

   

Expected Volatility. The Company’s current estimate of volatility is based on a blend of average historical volatilities of its stock price and the volatility of similar entities.

 

   

Expected Term. The Company estimates the expected term based on its historical settlement experience related to vesting and contractual terms while giving consideration to awards that have life cycles less than the contractual terms and vesting schedules in accordance with authoritative guidance.

 

   

Forfeiture Rate. The Company estimates its forfeiture rate based on historical experience and revises these estimates in future periods if actual forfeitures differ from those estimates.

To the extent that future evidence regarding these variables is available and provides estimates that the Company determines are more indicative of actual trends, the Company may refine or change its approach to deriving these input estimates. These changes could significantly impact the stock-based compensation expense recorded in the future.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The Company accounts for compensation expense related to stock-based awards to non-employees in accordance with authoritative guidance and, as such, records the expense of such services based on the estimated fair value of the award using the Black-Scholes pricing model. The value of the award is recognized as expense ratably over the requisite service period of the award.

Research and Development

Research and development costs are charged to expense as incurred. Research and development costs include, but are not limited to, payroll and other personnel expenses, prototype materials, laboratory supplies, and consulting costs.

Income Taxes

The Company accounts for income taxes using the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established to reduce deferred tax assets when management estimates, based on available objective evidence, that it is more likely than not that the benefit will not be realized for the deferred tax assets. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment owners and distributions to owners. The difference of comprehensive loss from reported net loss relates to net unrealized gains and losses on short-term investments and cumulative translation adjustments related to the Company’s foreign subsidiaries. The Company presents its comprehensive loss in its consolidated statement of stockholders’ equity.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. The Company’s potential dilutive shares, which include outstanding common stock options, proceeds from the Company’s employee stock purchase plan, unvested common shares subject to repurchase, unvested restricted stock and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

Recent Accounting Pronouncements

In April 2009, the FASB issued authoritative guidance regarding interim disclosures about the fair value of financial instruments. This new guidance requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance also requires those disclosures in summarized financial information at interim reporting periods. This guidance became effective for the Company beginning in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued authoritative guidance regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not are not

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

orderly. This guidance provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance became effective for the Company beginning in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued authoritative guidance regarding recognition and presentation of other-than-temporary impairments. This guidance amends the other-than-temporary impairment guidance in debt securities to be based on intent to sell instead of ability to hold the security and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance became effective for the Company beginning in the second quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In August 2009, the FASB issued authoritative guidance regarding fair value measurements and disclosures. This guidance clarifies the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the fair value of a liability must be measured using one or more of the listed valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the new guidance clarifies that when estimating the fair value of a liability, an entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance also clarifies how the price of a traded debt security should be considered in estimating the fair value of the issuer’s liability. This guidance became effective for the Company beginning in the fourth quarter of 2009 and did not have a significant impact on its consolidated financial statements.

In October 2009, the FASB issued authoritative guidance regarding revenue arrangements with multiple deliverables. Under this new guidance, multiple-deliverable arrangements will be separated in more circumstances than under existing GAAP. This guidance also established a hierarchy for determining the selling price of a deliverable, using vendor specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available or estimated selling price if neither VSOE nor third party evidence is available. The guidance is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its consolidated financial statements nor whether it will adopt this guidance early.

In October 2009, the FASB issued authoritative guidance regarding the applicability of software revenue guidance to certain arrangements that include software elements, changing the accounting model for such arrangements so that they are no longer under the scope of the software revenue guidance. The guidance is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company has not yet determined the effect which this new guidance will have on its consolidated financial statements nor whether it will adopt this guidance early.

 

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3. Investments and Fair Value Measurements

Investments

The amortized cost and fair value of short-term investments, with gross unrealized gains and losses, were as follows (in thousands):

 

     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value
   Balance Sheet
Classification
              Cash
Equivalents
   Short-term
Investments

December 31, 2009:

                

Money market funds

   $ 5,922    $ —      $ —        $ 5,922    $ 5,922    $ —  

U.S. government agency securities

     10,987      16      (2     11,001      —        11,001

Corporate debt securities

     8,824      1      —          8,825      1,100      7,725
                                          
   $ 25,733    $ 17    $ (2   $ 25,748    $ 7,022    $ 18,726
                                          

December 31, 2008:

                

Money market funds

   $ 7,486    $ —      $ —        $ 7,486    $ 7,486    $ —  

U.S. government agency securities

     10,992      108      —          11,100      —        11,100

Corporate debt securities

     11,820      22      —          11,842      5,096      6,746
                                          
   $ 30,298    $ 130    $ —        $ 30,428    $ 12,582    $ 17,846
                                          

Fixed income securities included in short-term investments above are summarized by their contractual maturities as follows (in thousands):

 

     December 31,
     2009    2008

Contractual maturities:

     

Less than one year

   $ 18,726    $ 16,308

One to two years

     —        1,538
             
   $ 18,726    $ 17,846
             

The Company periodically assesses whether significant facts and circumstance have arisen to indicate that an impairment, that is other than temporary, of the fair value of any investment has occurred. The investments held by the Company are high investment grade and, as of December 31, 2009, investments which are in an unrealized loss position are summarized as follows (in thousands):

 

     Fair Value    Gross
Unrealized
Losses
 

U.S. government agency securities

   $ 5,986    $ (2

Fair Value Measurements

Authoritative accounting guidance defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As

 

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such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

•   Level 1 Inputs

  Quoted prices (unadjusted) in active markets for identical assets or liabilities.

•   Level 2 Inputs

  Inputs other than quoted prices in active markets that are observable either directly or indirectly.

•   Level 3 Inputs

  Unobservable inputs in which there is little or no market data, which require us to develop our own assumptions.

This hierarchy requires the use of observable market data when available and to minimize the use of unobservable inputs when determining fair value. The Company’s cash equivalent and short-term investment instruments are classified using Level 1 or Level 2 inputs within the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Investment instruments valued using Level 1 inputs include money market securities and U.S. government agency securities. Investment instruments valued using Level 2 inputs include investment-grade corporate debts, such as bonds and commercial paper.

The fair value hierarchy of our cash equivalents and short-term investments at December 31, 2009 is as follows (in thousands):

 

     Fair Value Measurements Using    Total
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1 Inputs)
   Significant other
Observable
Inputs

(Level 2 Inputs)
  

Money market funds

   $ 5,922    $ —      $ 5,922

U.S. government agency securities

     11,001      —        11,001

Corporate debt securities

     —        8,825      8,825
                    
   $ 16,923    $ 8,825    $ 25,748
                    

4. Balance Sheet Components

Inventories (in thousands)

 

     December 31,
     2009    2008

Raw materials

   $ 2,834    $ 1,984

Work in process

     2,996      2,980

Finished goods

     1,576      1,462
             

Inventories

   $ 7,406    $ 6,426
             

 

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Property and equipment, net (in thousands)

 

     December 31,  
     2009     2008  

Furniture and leasehold improvements

   $ 11,185      $ 11,149   

Laboratory equipment

     7,826        8,717   

Computer equipment and software

     3,503        3,384   
                
     22,514        23,250   

Less: Accumulated depreciation and amortization

     (9,054     (5,055
                

Property and equipment, net

     13,460      $ 18,195   
                

Accrued liabilities (in thousands)

 

     December 31,
     2009    2008

Accrued salaries, commission, bonus and benefits

   $ 1,429    $ 1,705

Accrued warranty costs

     134      881

Accrued legal and other professional fees

     870      779

Accrued royalties

     576      1,302

Accrued other expenses

     1,816      967
             

Total

   $ 4,825    $ 5,634
             

5. Asset Purchase

AorTx, Inc.

In November 2007, the Company acquired AorTx, Inc. (“AorTx”), a privately held early stage developer of “percutaneous” or catheter-based valve technology. The acquisition was accounted for as an acquisition of assets as the operations of AorTx did not meet the definition of a business as defined in authoritative accounting guidance. Assets acquired and liabilities assumed were recorded at their estimated fair values. Under the terms of the merger agreement, the Company acquired all of the outstanding equity interests of AorTx in exchange for 140,048 shares of Hansen common stock, cash consideration of approximately $4.5 million, forgiveness of approximately $143,000 of notes payable plus possible future milestone payments of up to $30.0 million, which would be payable to AorTx stockholders upon achievement of regulatory clearances and revenue and partnering milestones. The Company did not assume any stock options or other unvested equity securities in the agreement.

The purchase price of the acquisition was comprised of the following items (in thousands):

 

Cash consideration

   $ 4,481

Forgiveness of notes payable

     143

Issuance of Hansen Medical common stock

     5,224

Transaction costs

     685
      

Total

   $ 10,533
      

The purchase price above does not include any provisions for contingent milestone payments of up to $30.0 million, which would be payable to AorTx stockholders upon achievement of regulatory clearances and revenue and partnering milestones. Any milestone payments would be made half in cash and half in Hansen common stock.

 

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The fair value of the Hansen shares used in determining the purchase price was $37.30 per common share, based on the average closing price of Hansen’s common stock on the Nasdaq Global Market for the period from two trading days before through the two trading days after November 1, 2007, the date of the public announcement of the Merger Agreement.

The purchase price was allocated to the assets and liabilities acquired as follows (in thousands):

 

Current assets

   $ 76   

Property and equipment and other assets

     51   

Acquired in-process research and development

     11,350   

Current liabilities

     (916

Other long-term liabilities

     (28
        

Total

   $ 10,533   
        

As technological feasibility of the acquired in-process research and development had not been reached at the time of acquisition and the technology had only limited alternative future uses, the amount allocated to purchased research and development was charged to the statement of operations.

Since the acquisition, the research and development positions focused on developing the AorTx valve technology have been eliminated. The Company plans to pursue the application of robotics to structural heart procedures, but does not expect that the technologies acquired from AorTx will form a material, or any, part of that strategy. In 2009, the Company entered into an agreement to license the acquired AorTx technologies back to an entity formed by the former AorTx stockholders.

6. Commitments and Contingencies

Operating Lease

The Company rents its office and laboratory facilities under operating leases which expire at various dates through November 2014. The Company has an option to extend its lease until approximately November 30, 2019. Rent expense on a straight-line basis was as follows (in thousands):

 

     Years Ended December 31,
     2009    2008    2007

Rent expense

   $ 2,171    $ 2,732    $ 511

At December 31, 2009, future minimum payments under the leases are as follows (in thousands):

 

Years ended December 31,

   Future
Minimum
Lease
Payments

2010

   $ 1,743

2011

     1,784

2012

     1,838

2013

     1,893

2014

     1,783
      

Total

   $ 9,041
      

 

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Warranties

Prior to the third quarter of 2009, the Company generally provided a limited one-year warranty on its Sensei system and accrued the estimated cost of warranties at the time revenue was recognized. Beginning in the third quarter of 2009, the company began providing one year of post-contract customer service on the sale of its Sensei system. Post-contract customer service revenue is recognized ratable over the life of the service period and associated expenses are charged to cost of goods sold as incurred. The Company continues to provide a limited warranty on the sale of Artisan catheters. The Company’s warranty obligation may be impacted by product failure rates, material usage and service costs associated with its warranty obligations. The Company periodically evaluates and adjusts the warranty reserve to the extent actual warranty expense differs from the original estimates. Movement in the warranty liability was as follows (in thousands):

 

     Years Ended
December 31,
 
     2009     2008  

Balance at beginning of period

   $ 881      $ 488   

Accruals for warranties issued during the period

     614        1,734   

Warranty costs incurred during the period

     (1,361     (1,341
                

Balance at end of period

   $ 134      $ 881   
                

License and Royalty Payments

In March 2003, the Company entered into a license agreement with Mitsubishi Electric Research Laboratories, Inc. (“Mitsubishi”) for the use of certain technology. Under the agreement, the Company is obligated to make royalty payments of $100,000 on the effective date of the agreement and on each anniversary thereafter while the license remains exclusive. If the license becomes nonexclusive, the royalty payment will be reduced to $55,000 per year. The license payments terminate upon the expiration of the technology patent in 2018. The Company also issued 9,375 shares of common stock to Mitsubishi in connection with this license agreement.

All amounts paid to Mitsubishi prior to the second quarter of 2007, when the Company commenced commercial operations, and the value of the common stock issued to Mitsubishi were expensed to research and development expense as technology feasibility had not been established and the technology had no alternative future use. Amounts paid to Mitsubishi subsequent to the commencement of commercial operations are expensed to cost of goods sold.

In September 2005, the Company entered into a cross license agreement with Intuitive Surgical, Inc. (“Intuitive”). The agreement granted both the Company and Intuitive the right to use each other’s then-existing patents and related patent applications in certain fields of use. Under the terms of the agreement, Intuitive received 125,000 shares of Series B redeemable convertible preferred stock valued at $730,000. The Company also pays royalties to Intuitive on certain product sales, with an annual minimum royalty of $200,000.

The value of the Series B redeemable convertible preferred stock issued to Intuitive was expensed to research and development expense as technology feasibility had not been established for the Company’s underlying product that would potentially utilize the license and there was no alternative future use. Royalties paid to Intuitive subsequent to the commencement of commercial operations are expensed to cost of goods sold.

In December 2009, the Company entered into an extended joint development agreement with Philips Medical Systems Nederland B.V., a Philips Healthcare company (“Philips”). Under the terms of the extended

 

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joint development agreement, the Company will, with support and collaboration from Philips, develop a vascular robotics platform and associated catheters (“Vascular System”). The Vascular System will not include our Sensei Robotic Catheter System or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips will partially fund our development costs based upon our achievement of development milestones for the Vascular System. For up to five years after the initial commercial shipment of the Vascular System, we will pay Phillips royalties based on the number of Vascular Systems and associated catheters that are sold, subject to caps based on the amounts Philips contributes to the development. The extended joint development agreement will remain in effect until the earlier of April 1, 2012 or the completion of the Vascular System, provided that either party may terminate the Agreement in the event of the other party’s uncured failure to perform a material obligation. Philips may also terminate the Agreement for convenience upon 60 days prior written notice and the payment of a variable termination fee. As of December 31, 2009, no amounts had been received from Philips under this extended joint development agreement.

Indemnification

The Company has agreements with each member of its board of directors, its Chief Executive Officer and President and its Chief Financial Officer indemnifying them against liabilities arising from actions taken against the Company. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying financial statements.

The Company has agreements with certain customers indemnifying them against liabilities arising from legal actions relating to the customer’s use of intellectual property owned by the Company. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying financial statements.

Legal Proceedings

On June 22, 2007, the Company filed suit in Santa Clara Superior Court against Luna Innovations Incorporated (“Luna”) alleging that Luna had, among other things, breached a 2006-2007 development and intellectual property agreement with the Company. On July 17, 2009, following a jury award in Hansen’s favor, and while certain post-trial motions were pending, Luna filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Western District of Virginia, automatically staying the motions pending in Santa Clara Superior Court. On December 11, 2009, Hansen and Luna entered into a settlement agreement, and on January 12, 2010, following the bankruptcy court’s approval of Luna’s plan of reorganization, the parties executed a mutual release of claims, including Hansen’s claims against Luna in the Santa Clara Superior Court action, as well as claims brought in Luna’s bankruptcy action. In connection with the settlement and release, Luna issued Hansen a secured promissory note in the principal amount of $5,000,000, 1,247,330 shares of Luna common stock (representing 9.9% of the outstanding shares of Luna common stock) and a warrant to purchase additional shares of Luna common stock. Hansen and Luna also entered into a license agreement and a development and supply agreement. In connection with the settlement, Hansen also entered into a cross license agreement with Intuitive Surgical, Inc. Pursuant to the settlement agreement, the Santa Clara action was dismissed on January 14, 2010.

Following the Company’s October 19, 2009 announcement that it would restate certain of its financial statements, a securities class action lawsuit was filed on October 23, 2009 in the United States District Court for the Northern District of California, naming the Company and certain of its officers: Curry v. Hansen Medical, Inc. et al., Case No. 09-05094. The complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of a putative class of purchasers of Hansen stock between May 1, 2008 and October 18, 2009, inclusive, and alleges, inter alia, that defendants made false and/or misleading

 

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statements and/or failed to make disclosures regarding the Company’s financial results and compliance with Generally Accepted Accounting Principles (“GAAP”) while improperly recognizing revenue; that these misstatements and/or nondisclosures resulted in overstatement of Company revenue and financial results and/or artificially inflated the Company’s stock price; and that following the Company’s October 19, 2009 announcement, the price of the Company’s stock declined. On November 4, 2009 and November 13, 2009, substantively identical complaints were filed in the Northern District of California by other purported Hansen stockholders asserting the same claims on behalf of the same putative class of Hansen stockholders: Livingstone v. Hansen Medical, Inc. et al., Case No. 09-05212 and Prenter v. Hansen Medical, Inc., et al., Case No. 09-05367. All three complaints seek certification as a class action and unspecified compensatory damages plus interest and attorneys fees. On December 22, 2009, two purported Hansen stockholders, Mina and Nader Farr, filed a joint application for appointment as lead plaintiffs and for consolidation of the three actions. On February 25, 2010, the Court issued an order granting Mina and Nader Farr’s application for appointment as lead plaintiffs and consolidating the three securities class actions. Lead plaintiffs have until April 26, 2010 to file a consolidated amended complaint. The Company and the named officers intend to defend themselves vigorously against these actions.

On November 12, 2009, Dawn Cates, a purported stockholder of Hansen, filed a shareholder derivative complaint in the Superior Court of the State of California, County of Santa Clara, against the current members of Hansen’s board of directors and certain current and former officers of Hansen (the “Individual Defendants”), as well as Hansen’s independent auditor, PricewaterhouseCoopers LLP (“PwC”): Cates v. Moll, et al., Case No 09cv157170 (the “Cates Action”). The Cates Action purports to be brought on behalf of Hansen. The complaint asserts claims for breach of fiduciary duties and waste of corporate assets against the Individual Defendants, and professional negligence against PwC. The complaint alleges that the Individual Defendants disseminated false and misleading information in Hansen’s SEC filings, public statements and other disclosures, failed to maintain adequate internal controls and willfully ignored problems with accounting and internal control practices and procedures, mismanaged and failed appropriately to oversee the operations of Hansen, and wasted corporate assets. The complaint further alleges that the director defendants breached their fiduciary duties by allowing defendant Christopher Sells to resign from Hansen. The complaint seeks unspecified damages, internal control and corporate governance reforms, restitution and an award of costs and fees incurred in bringing the action. A substantively identical complaint (although without any claims against PwC) was filed in Santa Clara Superior Court on November 19, 2009. Daneshmand v. Moll, et al., Case No. 09cv157592 (the “Daneshmand Action”). On December 22, 2009, the Santa Clara Superior Court entered an order consolidating the Cates and Daneshmand Actions and renaming the actions as In re Hansen Medical, Inc. Shareholder Derivative Litigation, Case No. 09cv157170. To date, plaintiffs have not announced whether they will be filing a consolidated amended complaint and the deadline for defendants to respond to the complaint(s) has not been set.

On December 15, 2009, Michael Brown, a purported stockholder of Hansen, filed a shareholder derivative complaint in the United States District Court for the Northern District of California: Brown v. Moll, et al., Case No. 09-05881 (the “Brown Action”). The allegations of complaint in the Brown Action are substantively identical to the allegations of the Cates and Daneshmand complaints (the Brown Action does not name PwC as a defendant). The Company’s current deadline for responding to the complaint is April 7, 2010.

The Individual Defendants deny the allegations made in the Cates, Daneshmand and Brown Actions and intend to defend themselves vigorously against those claims.

On December 1 and December 14, 2009, the Company received letters from counsel for purported Hansen stockholders Naoum Baladi and Robert Rogowski demanding that the Company’s Board of Directors take action to “remedy breaches of fiduciary duty by the directors and certain officers of Hansen and professional negligence by the Company’s outside auditor PricewaterhouseCoopers LLP.” These letters recite essentially the same

 

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allegations as are contained in the Cates complaint and demand that the Board take action against the officers and directors, and PwC, to recover damages incurred by the Company and to correct deficiencies in the Company’s internal controls. The letters state that if, within a reasonable time, the Board has not commenced the requested action or if the Board refuses to commence the requested action, the named stockholders will commence derivative actions. The Company has responded in writing to counsel for Ms. Baladi and Mr. Rogowski, stating that the Board is considering the demands and will respond in a reasonable time.

The Company cannot estimate whether any of the above actions will result in any significant expenses nor the amount of any such expenses. No amounts have been accrued for any of the preceding actions based on the uncertainly of the outcomes. However, depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on the Company’s results of operations, financial position and liquidity.

7. Long-term Debt

In August 2008, the Company entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line due in installments from April 2009 through September 2012 bearing annual interest equal to the U.S. Treasury note yield to maturity plus 3.5%, and a one-year $10 million revolving credit line, bearing interest at a floating per annum rate equal to the Prime Rate plus 1%. The interest rate on borrowings under the equipment line becomes fixed for each borrowing at the time of the draw-down. The Company’s ability to draw down on the term equipment line ended on March 31, 2009. The interest rate on borrowings under the one-year revolving credit line adjusts with the bank’s Prime Rate. The loans are collateralized by substantially all of the Company’s assets, excluding intellectual property, and are subject to certain covenants which, if not met, could constitute an event of default. These covenants include maintaining the required liquidity, achieving the specified EBITDA amounts, the non-occurrence of a material adverse change (defined as a material impairment in the perfection or priority of the bank’s lien in the collateral or in the value of the collateral, a material adverse change in the business, operations or conditions (financial or otherwise) of the Company, or a material impairment of the prospect of repayment of any portion of the Company’s outstanding obligations) and fulfilling certain reporting requirements. The liquidity covenants require the Company to maintain at the end of each month either liquid assets in the amount of 1.5 times the outstanding loan balance or sufficient liquidity to fund at least six months of projected operations, whichever is greater. The Company and Silicon Valley Bank have yet to determine the quarterly EBITDA amounts. As of December 31, 2009, the Company was in compliance with all specified financial covenants. However, the Company is currently not in compliance with the covenant to deliver a board-approved 2010 plan within 45 days of year end. Silicon Valley Bank has issued the Company a waiver for this non-compliance. If the Company is unable to raise sufficient additional capital in the second quarter of 2010, the Company anticipates that it will violate the liquidity covenants of the loan and security agreement. Additionally, the continuing liquidity issues the Company faces could be construed by Silicon Valley Bank as a material adverse change which could trigger an acceleration of all of the outstanding debt. As such, the Company has classified all of its outstanding debt balance and related accrued interest as a current liability as of December 31, 2009. The Company has drawn down approximately $12.5 million against the term equipment line at an interest rate of 6.12% and, per the original agreement terms, the remainder of this line is no longer available.

 

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Future annual payments due on the amounts outstanding as of December 31, 2009 calculated according to the existing debt repayment schedule are as follows (in thousands):

 

2010

   $ 4,070   

2011

     3,849   

2012

     2,743   
        
     10,662   

Less: Amount representing interest

     (859
        
   $ 9,803   
        

If the Company is unable to raise sufficient additional capital and violates the liquidity covenants of the loan and security agreement and/or Silicon Valley Bank decides to accelerate the outstanding debt under the material adverse change clause, all of the above debt balance would be due in 2010.

The fair value of the Company’s long-term debt was estimated to be $9.1 million at December 31, 2009 based on the then-current rates available to the Company for debt of a similar term and remaining maturity. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimate presented herein is not necessarily indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value.

8. Employee Benefit Plan

The Company has a 401(k) income deferral plan (the “Plan”) for employees. According to the terms of the Plan, the Company may make discretionary matching contributions to the Plan. The Company made no discretionary contributions during the years ended December 31, 2009, 2008 and 2007.

9. Redeemable Convertible Preferred Stock

The Company’s Restated Certificate of Incorporation, as amended, currently authorizes 10,000,000 shares of $0.0001 par value redeemable convertible preferred stock (“preferred stock”). As of December 31, 2009 and 2008, there were no shares of preferred stock issued or outstanding as all shares of preferred stock converted to shares of common stock upon completion of the Company’s IPO.

10. Stockholders’ Equity

Common Stock

The Company’s Restated Certificate of Incorporation, as amended, authorizes the Company to issue 100,000,000 shares of $0.0001 par value common stock. The holder of each share of common stock is entitled to one vote. Common stockholders are entitled to dividends as and when declared by the board of directors, subject to the rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date.

The Company has issued certain shares of common stock under restricted stock purchase agreements. For founders and employees of the Company these agreements contained provisions for the repurchase of unvested

 

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shares by the Company at the original issuance price for individuals who terminate their employment. The repurchase rights generally lapse over approximately three to four years. At December 31, 2009, there were no unvested shares issued under restricted stock purchase agreements.

Stock Option and Equity Incentive Plans

2002 Stock Option Plan

The Company’s 2002 Stock Option Plan (the “2002 Plan”) was created for the purpose of issuing stock options to employees, directors and consultants of the Company. Options granted under the 2002 Plan were either incentive stock options (“ISO”) or nonqualified stock options (“NSO”). ISOs may be granted only to Company employees (including officers and directors), whereas NSOs may be granted to Company employees and consultants. Options expire on terms as determined by the board of directors but not more than ten years after the date of grant. The Company reserved a total of 4,579,009 shares of its common stock for issuance under its 2002 Plan. Upon effectiveness of the Company’s IPO in November 2006, the Company ceased issuing stock options under the 2002 Plan. At that time, all shares remaining available for grant under the 2002 Plan became available for grant instead under the 2006 Equity Incentive Plan. However, cancelled shares under the 2002 Plan do not become available for grant under the 2006 Equity Incentive Plan. All outstanding options granted under the 2002 Plan continue to be administered under the 2002 Plan.

Stock options granted under the 2002 Plan provided employee option holders the right to elect to exercise unvested options in exchange for restricted common stock. Unvested shares amounting to 7,000 and 71,000 at December 31, 2008 and 2007, respectively, were subject to a repurchase right held by the Company at the original issuance price in the event the optionees’ employment is terminated either voluntarily or involuntarily. For exercises of employee options, this right usually lapses 25% on the first anniversary of the vesting start date and in 36 equal monthly amounts thereafter. These repurchase terms are considered to be a forfeiture provision and do not result in variable accounting. In accordance with authoritative accounting guidance, the cash received from employees for exercise of unvested options is treated as a refundable deposit shown as a liability in the Company’s financial statements. As of December 31, 2009, cash received for early exercise of options totaled $184,000.

2006 Equity Incentive Plan

In August 2006, the Company’s board of directors approved the 2006 Equity Incentive Plan (the “2006 Plan”) to be effective on the date of the Company’s IPO. The 2006 Plan provides for the grant of ISOs, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards, and other forms of equity compensation, or collectively, stock awards, and performance-based cash awards, all of which may be granted to employees, including officers, non-employee directors and consultants. Options expire on terms as determined by the board of directors but not more than ten years after the date of grant.

The Company initially reserved a total of 2,000,000 shares for issuance under the 2006 Plan in addition to those shares which remained available for grant under the 2002 Plan. In addition, beginning on January 1, 2007, the number of shares of common stock reserved for issuance under the 2006 Plan automatically increases on January 1st each year by the lowest of (a) 4% of the total number of shares of our common stock outstanding on December 31st of the preceding calendar year, (b) 3,500,000 shares, or (c) a number determined by the board of directors that is less than (a) or (b). At December 31, 2009, 1,512,000 shares were available for grant under the 2006 Plan.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Option activity under both the 2002 Plan and the 2006 Plan for 2009 is as follows:

 

     Shares     Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
     (in thousands)          (in years)    (in thousands)

Balance at January 1, 2009

   4,203      $ 12.33      

Granted

   1,206      $ 3.42      

Exercised

   (232   $ 1.54      

Cancelled

   (1,471   $ 11.25      
              

Balance at December 31, 2009

   3,706      $ 10.54    5.46    $ 567
              

Options vested and expected to vest at December 31, 2009

   3,112      $ 10.73    4.51    $ 553

Options vested at December 31, 2009

   1,830      $ 11.60    5.03    $ 523

The weighted-average grant-date fair value of options granted in 2009, 2008 and 2007 was $1.72, $6.94 and $11.25 per share, respectively. The total fair value of options that vested in 2009, 2008 and 2007 was $6,796,000, $8,053,000 and $4,082,000, respectively. As of December 31, 2009, total unamortized stock-based compensation related to unvested stock options was $7,720,000, with a weighted-average remaining recognition period of 2.31 years.

The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the quoted market price of the Company’s common stock as of the close of the exercise date. The total intrinsic value of stock options exercised in 2009, 2008 and 2007 was $570,000, $1,581,000 and $3,882,000, respectively.

The options outstanding, vested and currently exercisable by exercise price under both the 2002 Plan and the 2006 Plan at December 31, 2009 are as follows:

 

     Options Outstanding    Options Exercisable and Vested

Exercise Price

   Number
of
Options
   Weighted-
Average
Remaining
Contractual
Life
   Number
of
Options
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual
Life
          (in years)              (in years)

$0.40-$3.74

   1,565    5.84    650    $ 2.27    4.94

$6.65-$12.69

   692    5.95    313    $ 8.89    6.06

$15.25-$20.25

   1,280    4.82    770    $ 18.62    4.73

$24.60-$31.20

   169    4.75    97    $ 27.06    4.75
                  
   3,706    5.46    1,830    $ 11.60    5.03
                  

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

Restricted stock unit activity under the 2006 Plan is as follows:

 

     Restricted Stock
Units
    Weighted-
Average Grant-
Date Fair Value
     (in thousands)      

Balance at January 1, 2009

   40      $ 12.50

Awarded

   125      $ 5.00

Vested

   (160   $ 6.44

Cancelled

   (5   $ 18.94
        

Balance at December 31, 2009

   —       
        

The fair value of restricted stock units is the quoted market price of the Company’s common stock as of the close of the grant date. The total fair value of shares vested pursuant to restricted stock units in 2009, 2008 and 2007 was $1,030,000, $1,660,000 and $156,000, respectively.

Stock-based Compensation Associated with Awards to Employees

Stock-based compensation expense charged to operations for options and restricted stock units granted to employees in 2009, 2008 and 2007 was $7,397,000, $11,152,000 and $6,373,000, respectively.

In 2008, the Company modified stock option agreements with two exiting employees. The modifications consisted of acceleration of vesting. The modifications resulted in the recording of additional employee stock compensation expense of $800,000 in 2008.

The Company uses the Black-Scholes pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables as follows:

Expected Volatility. As the Company has only been a public entity since November 2006, volatility is computed based on the Company’s volatility as well as on that of “guideline” companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.

Risk-Free Interest Rate. The risk-free rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.

Expected Term. Under the Company’s Plans, the expected term of options granted is determined using the average period the stock options are expected to remain outstanding and is based on the options vesting term, contractual terms and historical exercise and vesting information used to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.

Expected Dividend Rate. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeitures. Authoritative accounting guidance also requires the Company to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The estimated grant date fair values of the employee stock options and restricted stock units were calculated using the following assumptions:

 

     Years Ended December 31,
     2009    2008    2007

Expected volatility

   58%-61%    48%-53%    49%-55%

Risk-free interest rate

   1.9%-2.6%    1.3%-3.7%    3.3%-5.0%

Expected term (in years)

   4.50-4.75    5.00    5.00-5.47

Expected dividend rate

   0%    0%    0%

Stock-Based Compensation for Non-employees

Stock-based compensation expense related to stock options granted to non-employees is recognized on an accelerated basis as the stock options are earned. The final measurement occurs at the later of a performance commitment or when performance is complete. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model.

Stock-based compensation expense charged to operations for options granted to non-employees for the years ended December 31, 2009, 2008 and 2007 was $(18,000), $63,000 and $1,637,000, respectively. The estimated grant date fair values of the non-employee stock options were calculated using the following assumptions:

 

     Years Ended December 31,
     2009    2008    2007

Expected volatility

   59%-63%    50%-65%    52%-65%

Risk-free interest rate

   1.7%-3.4%    1.6%-4.1%    3.6%-5.0%

Expected term (in years)

   4.25-7.75    5.25-8.75    6.00-9.75

Expected dividend rate

   0%    0%    0%

2006 Employee Stock Purchase Plan

In August 2006, the Company’s board of directors approved the 2006 Employee Stock Purchase Plan (the “Stock Purchase Plan”) which became effective upon the Company’s IPO. Commencing on January 1, 2007, the Stock Purchase Plan allows participating employees to contribute up to 15% of their earnings, up to a maximum of $25,000, to purchase shares of the Company’s stock at a price per share equal to the lower of (a) 85% of the fair market value of a share of our common stock on the first date of the offering period, or (b) 85% of the fair market value of a share of our common stock on the date of purchase. The Company’s board of directors may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of the Company’s common stock will be purchased for employees participating in the offering.

The Company initially reserved a total of 625,000 shares of common stock for issuance under the Stock Purchase Plan. In addition, the plan provides for automatic increases on January 1st, from January 1, 2007 through January 1, 2016, by the lesser of (a) 2% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year or (b) a number determined by the board of directors that is less than (a).

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The estimated fair values of the shares issued under the Stock Purchase Plan were calculated using the following assumptions:

 

     Years Ended December 31,
     2009    2008    2007

Expected volatility

   67%-126%    50%-110%    32%-53%

Risk-free interest rate

   0.2%-0.4%    0.3%-3.5%    3.5%-5.2%

Expected term (in years)

   0.50-0.67    0.50    0.03-0.50

Expected dividend rate

   0%    0%    0%

Total Stock-based Compensation

Total stock-based compensation expense was allocated to cost of goods sold, research and development and selling, general and administrative expense as follows (in thousands):

 

     Years Ended December 31,
     2009    2008    2007

Cost of goods sold

   $ 787    $ 710    $ 379

Research and development

     2,403      2,742      2,370

Selling, general and administrative

     4,188      7,763      5,261
                    

Total

   $ 7,378    $ 11,215    $ 8,010
                    

Fair Value Estimates

The Company’s determination of fair value of stock-based awards on the date of grant using the Black-Scholes pricing model is impacted by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. To the extent that future evidence regarding these variables is available and provides estimates that the Company determines are more indicative of actual trends, the Company may refine or change its approach to deriving these input estimates. These changes could significantly impact the stock-based compensation expense recorded in the future and materially impact future operating results.

11. Income Taxes

At December 31, 2009, the Company has federal and California net operating loss carryforwards of approximately $149,165,000 and 122,492,000, respectively, available to offset future taxable income. These net operating loss carryforwards will expire in varying amounts from 2015 through 2029 if not utilized.

We recognize a tax benefit upon expensing certain stock-based awards associated with our stock-based compensation plans, including nonqualified stock options, restricted stock awards and restricted stock unit awards. We also establish a deferred tax benefit on these types of stock-based awards. Under current accounting standards we cannot recognize tax benefits currently for stock-based compensation expenses associated with incentive stock options and employee stock purchase plan shares (qualified stock options). We also cannot establish a deferred tax benefit on costs associated with incentive stock options and employee stock purchase plan shares (qualified stock options). For qualified stock options we recognize tax benefits only in the period when disqualifying dispositions of the underlying stock occur. Included in the Company’s net operating loss carryforwards are amounts which arose from the exercise of nonqualified stock options, and vesting of restricted

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

stock awards and restricted stock unit awards, as well as disqualifying dispositions of qualified stock options. The excess, if any, of the tax benefits from such amounts over that recognized as an expense will be reflected as an increase to paid-in capital, when realized.

The Company has federal and California tax credit carryforwards of $5,121,000 and $4,455,000, respectively, available to offset future taxes payable. The federal credits begin to expire in 2022, while the state credits have no expiration.

Section 168(k), amended by Sec. 103 of the Economic Stimulus Act of 2008, allows a 50% additional first year depreciation deduction for certain new property acquired by a taxpayer after 2007 and placed in service before 2010. Section 3081(a) of the Housing Assistance Tax Act of 2008 added Sec. 168(k)(4) to the Code. If a corporation elects to apply Sec, 168(k)(4), the corporation forgoes the Stimulus additional first year depreciation deduction allowable under Sec. 168(k) and is able to claim unused credits from taxable years beginning before January 1, 2006, which are allocable to research expenditures. The maximum (refundable) amount is the lesser of (1) $30,000,000, or (2) 6% of the sum of the business credit increase amount, which for the Company is a refundable R&D credit of $46,598. The tax credit carryforwards shown above have been reduced to reflect this refund.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for limitations on the utilization of net operating loss and research and experimentation credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382. As the result of the sale by the Company of 11,700,000 shares of Common Stock in April 2009, such an ownership change may have occurred. Accordingly, the Company’s utilization of net operating loss and credit carryforwards which existed at that time could be limited.

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):

 

     December 31,  
     2009     2008  

Net operating loss carryforwards

   $ 57,863      $ 48,898   

Research and development credits

     7,007        5,044   

Capitalized research and development

     8,163        —     

Fixed assets

     1,127        591   

Stock-based compensation

     4,520        3,722   

Accruals and reserves

     3,705        4,328   

Intangibles

     1,794        1,967   
                
     84,179        64,550   

Less: Valuation allowance

     (84,179     (64,550
                

Net deferred tax asset

   $ —        $ —     
                

Due to uncertainty surrounding realization of the deferred tax assets in future periods, the Company has placed a 100% valuation allowance against its net deferred tax assets. The valuation allowance increased by $19,629,000, $22,138,000 and $17,461,000 during the years ended December 31, 2009, 2008 and 2007, respectively. At such time as it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

The Company’s pre-tax loss consists of the following:

 

     Years Ended December 31,  
     2009     2008     2007  

Domestic

   $ (52,548   $ (58,004   $ (50,911

Foreign

     99        136        52   
                        

Pre-tax loss

   $ (52,449   $ (57,868   $ (50,859
                        

The Company’s effective tax rate differs from the U.S. federal statutory rate as follows:

 

     Years Ended December 31,  
     2009     2008     2007  

Federal tax provision (benefit) at statutory rate

   (34 )%    (34 )%    (34 )% 

Permanent difference due to non-deductible expenses

   3   2   10

State tax provision (benefit), net of federal impact

   (5 )%    (5 )%    (4 )% 

Change in deferred tax asset valuation allowance

   38   38   30

General business credits

   (2 )%    (1 )%    (2 )% 
                  

Effective tax rate

   —     —     —  
                  

The Company has not provided for U.S. federal income and foreign withholding taxes on any undistributed earnings from non-U.S. operations because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce or eliminate the resulting U.S. income tax liability.

A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):

 

     Years Ended December 31,  
     2009    2008    2007  

Balance at beginning of period

   $ 810    $ 600    $ 401   

Additions based on tax positions related to the current year

     243      210      246   

Reduction for tax positions of prior years

     —        —        (47
                      

Balance at end of period

   $ 1,053    $ 810    $ 600   
                      

If the Company is able to eventually recognize these uncertain tax positions, all of the unrecognized benefit would reduce the Company’s effective tax rate. The Company currently has a full valuation allowance against its net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.

The Company is subject to federal and state tax examinations for the years 2002 forward. There are no tax examinations currently in progress.

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

12. Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2009, 2008 and 2007 (in thousands, except per share data):

 

     Years Ended December 31,  
     2009     2008     2007  

Net loss

   $ (52,449   $ (57,868   $ (50,859
                        

Weighted-average common shares outstanding

     33,895        24,269        21,722   

Weighted-average unvested common shares subject to repurchase

     (3     (37     (119
                        

Shares used to calculated basic and diluted net loss per share

     33,892        24,232        21,603   
                        

Basic and diluted net loss per share

   $ (1.55   $ (2.39   $ (2.35
                        

The following securities that could potentially dilute basic net loss per share are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented (in thousands):

 

     December 31,
     2009    2008    2007

Stock options outstanding

   3,706    4,203    2,960

Unvested restricted stock units

   —      40    23

Unvested common shares subject to repurchase

   —      7    71

Proceeds from employee stock purchase plan

   23    58    15

13. Segment Information

The Company operates its business in one operating segment: the development and marketing of medical devices. The Company’s chief operating decision maker is its Chief Executive Officer who reviews the financial information presented on a consolidated basis for the purpose of making operating decisions and assessing financial performance.

The Company attributes revenues to different geographic areas on the basis of the location of the customer and attributes long-lived assets to different geographic areas based on the location of those assets. Information regarding geographic areas is as follows (in thousands):

 

     United
States
   Germany    Other    Total

2009:

           

Revenues

   $ 13,744    $ 2,193    $ 6,236    $ 22,203

Long-lived assets

     13,704      —        —        13,704

2008:

           

Revenues

   $ 17,544    $ 2,162    $ 3,740    $ 23,446

Long-lived assets

     18,479      —        —        18,479

 

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HANSEN MEDICAL, INC.

Notes to Consolidated Financial Statements—(Continued)

 

14. Quarterly Data (unaudited)

The following table represents certain unaudited quarterly information for the eight quarters ended December 31, 2009. This data has been derived from unaudited consolidated financial statements that, in the opinion of the Company’s management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with the Company’s annual audited consolidated financial statements and notes thereto appearing elsewhere in this report. These operating results are not necessarily indicative of results for any future period (in thousands, except per share data):

 

     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 

2009:

        

Revenues

   $ 7,455      $ 2,949      $ 4,565      $ 7,234   

Gross profit

     2,074        285        1,297        2,400   

Net loss

     (14,133     (14,685     (11,929     (11,702

Basic and diluted net loss per share

     (0.56     (0.42     (0.32     (0.31

2008:

        

Revenues

   $ 4,623      $ 3,888      $ 9,573      $ 5,362   

Gross profit

     86        (293     3,351        1,137   

Net loss

     (12,853     (16,277     (12,857     (15,881

Basic and diluted net loss per share

     (0.59     (0.66     (0.51     (0.63

15. Subsequent Events

On January 12, 2010, the Company entered into a series of agreements with Luna and Intuitive, under which the litigation between the Company and Luna was settled. The agreements included a license agreement to Luna’s fiber optic shape sensing/localization technology within the medical robotics field, a cross license agreement between Intuitive and the Company, and a development and supply agreement, under which Luna will develop for the Company a localization and shape sensing solution for the Company’s medical robotics system in accordance with the agreed upon development plan and development milestones. The Company also received 1,247,330 shares of Luna common stock, which represent 9.9 percent of the outstanding capital stock, a warrant granting the Company the right to purchase a number of shares of Luna common stock, at a purchase price of $0.01 per share, such that the total number of shares issuable under the warrant plus the 1,247,330 shares issued above equal 9.9% of Luna’s shares of common stock outstanding, and a secured promissory note in the principal amount of $5,000,000. Under the terms of the agreements, certain payments due to Luna for services provided will be settled by forgiveness of all or part of the note.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15e and 15d-15e under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures as defined under the Exchange Act as of December 31, 2009. Based on this evaluation and the identification of material weaknesses in our internal control over financial reporting as described below, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2009.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

  i. Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company

 

  ii. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and

 

  iii. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management used the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2009, the Company did not maintain effective controls over its control environment, information and communication, revenue recognition process and complex arrangements. Specifically:

 

1. Control Environment. We did not maintain an effective control environment, which is the foundation upon which all other components of internal controls are based. Specifically:

 

   

Our commercial operations leadership did not consistently support the importance of strict adherence to our revenue recognition policy and to GAAP and did not take sufficient steps to ensure good faith compliance with revenue recognition policies throughout our sales, clinical and field service departments. As a result, information related to certain revenue transactions was not communicated to accounting personnel to appropriately consider the financial reporting implications of such transactions.

 

   

We did not maintain sufficient safeguards to provide reasonable assurance that controls could not be circumvented or overridden by commercial operations management or to prevent or detect possible misconduct by members of our commercial operations organization with respect to certain revenue transactions.

 

   

We did not have the appropriate expertise or resources in order to effectively ensure the proper accounting related to complex areas in the application of GAAP.

 

2. Information and Communication. We did not maintain effective information and communication. Specifically:

 

   

We did not maintain effective procedures for communicating to all relevant personnel our accounting policies, the importance of consistent application of our accounting policies, and essential data required to properly apply GAAP to our transactions.

 

   

We did not effectively communicate the process of reporting unusual or uncertain circumstances. As a result, we did not detect deficiencies in compliance with our accounting policies on a timely basis.

These material weaknesses led to errors and irregularities that in turn resulted in errors in the preparation of our consolidated financial statements. These material weaknesses also contributed to the existence of the material weakness described in item 3 below.

 

3. Revenue recognition process. We did not maintain effective controls related to the process for ensuring completeness and accuracy of our accounting for revenue. Specifically, we did not maintain controls to provide reasonable assurance that all significant details of agreements with our distributors and customers were provided to those making revenue recognition decisions, that all appropriate personnel received sufficient training on revenue recognition and that we had the appropriate resources with the relevant expertise to make complex judgments related to the accounting for revenue transactions.

 

   

Certain employees were able to withhold information from accounting personnel or falsify documentation related to certain revenue transactions without discovery, which resulted in improper recognition of revenue in the period.

 

   

Accounting personnel were not provided the necessary information to determine the financial reporting consequences of certain revenue transactions. Specifically, this led to incomplete information regarding temporary installations, unfulfilled training obligations, the inability of distributors to independently install systems and train end users and undisclosed side arrangements.

 

   

Accounting personnel did not have the appropriate expertise or resources to effectively ensure the proper accounting related to certain of our multi-element revenue arrangements.

 

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Additionally, the control environment material weakness described above contributed to the existence of the material weakness described below:

 

4. Complex Arrangements. We did not maintain effective controls over complex arrangements. Specifically, we did not maintain effective controls over the evaluation of a joint development arrangement to ensure complete and accurate accounting in accordance with GAAP.

These material weaknesses resulted in material errors and the restatement of our financial statements for the year ended December 31, 2007, annual and interim financial statements for the year ended December 31, 2008 and interim financial statements for the first and second quarters during the year ended December 31, 2009, and resulted in audit adjustments to our financial statements for the year ended December 31, 2009, impacting revenue, cost of goods sold, other income, accounts receivable, deferred cost of goods sold and deferred revenue accounts. Additionally, these material weaknesses could result in further misstatements of these accounts that would result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis.

Because of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2009 based on the criteria in Internal Control—Integrated Framework Issued by the COSO.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There have been changes in internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Beginning in October 2009, our management began to design and implement certain remediation measures to address the above-described material weaknesses and enhance our system of internal control over financial reporting.

Control Environment and Organizational Structure. In order to create and communicate an effective culture and tone throughout the Company’s commercial operations organization:

 

   

Certain employees have been terminated and other employees have been disciplined for actions relating to the restatement.

 

   

Implemented new annual ethics training for all sales, clinical and field service employees to enhance their understanding of critical accounting and ethics policies.

 

   

Reorganized our sales, clinical and field service teams such that they no longer report to the same vice president to ensure that each team has the proper oversight and incentives.

Information and Communication. In order to enhance communication and ensure pertinent information is identified and shared at the appropriate levels within the Company on a timely basis:

 

   

Implemented new annual ethics training for all sales, clinical and field service employees to enhance their understanding of critical accounting and ethics policies.

 

   

Reorganized our sales, clinical and field service teams such that they no longer report to the same vice president to ensure that each team has the proper oversight and incentives.

 

   

Improved communications between accounting personnel responsible for revenue recognition and sales, clinical and field service personnel responsible for the execution of the work on those

 

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transactions and have instituted quarterly meetings involving accounting and sales, clinical and field service personnel involved in each system sale during the quarter, including communications of unusual or uncertain circumstances.

 

   

Expanded our revenue recognition training to include clinical and field service employees to promote their understanding of and appreciation for our revenue recognition policy and process and completed the training for a significant portion of these employees prior to year end.

 

   

Improved our existing revenue recognition training to include a more detailed description of our revenue recognition process.

Revenue Recognition Process. We enhanced our internal controls related to the revenue recognition process and training in the following ways:

 

   

Increased management oversight by expanding our processes to include more rigorous representations made by sales, clinical and field service personnel including more detailed documentation regarding the elements required for revenue recognition and timely accountability for details underlying elements of revenue recognition.

 

   

Improved communications between accounting personnel responsible for revenue recognition and sales, clinical and field service personnel responsible for the execution of the work on those transactions and have instituted quarterly meetings involving accounting and sales, clinical and field service personnel involved in each system sale during the quarter, including communications of unusual or uncertain circumstances.

 

   

Implemented new annual ethics training for all sales, clinical and field service employees to enhance their understanding of critical accounting and ethics policies.

 

   

Expanded our revenue recognition training to include clinical and field service employees to promote their understanding of and appreciation for our revenue recognition policy and process and completed the training for a significant portion of these employees prior to year end.

 

   

Improved our existing revenue recognition training to include a more detailed description of our revenue recognition process.

Management’s Plan for Future Remediation

We will continue to enhance the design and implementation of internal controls related to the control environment, information and communication, revenue recognition process and complex arrangements including the following:

 

   

We will expand training provided to our accounting personnel to enhance their ability to appropriately record transactions in both revenue and other complex arrangements in accordance with GAAP commensurate with our financial reporting requirements.

We believe the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. However, we have not yet implemented all of these measures and/or tested them. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures in order to ensure compliance with the requirements of the Sarbanes-Oxley Act and the related rules promulgated by the Securities and Exchange Commission. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that the control objectives will be met. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies and/or determine not to complete certain of the remediation efforts described above. While these efforts are underway, we are relying on extensive manual procedures to help ensure the proper collection, evaluation, and disclosure of the information included in our consolidated financial statements.

 

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this Item concerning our directors and executive officers is incorporated herein by reference to information contained in the sections of our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2009 (the “2010 Proxy Statement”) entitled “Proposal 1 Election of Directors,” “Corporate Governance,” “Executive Officers and Key Employees” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

Item 11. Executive Compensation.

The information required by this Item is incorporated herein by reference to the sections of our 2010 Proxy Statement entitled “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item is incorporated herein by reference to the sections of our 2010 Proxy Statement entitled “Securities Authorized for Issuance under Equity compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management.”

 

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information required by this Item is incorporated herein by reference to the section of our 2010 Proxy Statement entitled “Certain Relationships and Related Party Transactions.”

 

Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to the section of our 2010 Proxy Statement entitled “Principal Accountant Fees and Services.”

PART IV.

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS and FINANCIAL STATEMENT SCHEDULES

 

(a) Financial Statements and Schedules: Financial Statements for the three years ended December 31, 2009 are included in Part II, Item 8. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 

(b) Exhibits: The list of exhibits on the Exhibit Index on pages 132 through 135 of this report is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

  By:  

/s/    FREDERIC H. MOLL, M.D.        

Dated: March 16, 2010    

Chief Executive Officer and President

(Principal Executive Officer)

POWERS OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Frederic H. Moll and Peter Osborne, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    FREDERIC H. MOLL, M.D.        

Frederic H. Moll, M.D.

  

Chief Executive Officer, President and Director (Principal Executive Officer)

  March 16, 2010

/s/    PETER OSBORNE        

Peter Osborne

  

Interim Chief Financial Officer (Principal Accounting and Financial Officer)

  March 16, 2010

/s/    RUSSELL C. HIRSCH, M.D., PH.D.        

Russell C. Hirsch, M.D., Ph.D.

  

Director

  March 16, 2010

/s/    KEVIN HYKES        

Kevin Hykes

  

Director

  March 16, 2010

/s/    CHRISTOPHER P. LOWE        

Christopher P. Lowe

  

Director

  March 16, 2010

/s/    JOSEPH M. MANDATO        

Joseph M. Mandato

  

Director

  March 16, 2010

/s/    JAMES M. SHAPIRO        

James M. Shapiro

  

Director

  March 16, 2010

 

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EXHIBIT INDEX

 

Exhibit
Number
  

Description of Document

2.1(1)      Agreement and Plan of Merger and Reorganization, dated November 1, 2007, by and among the Registrant, AorTx, Inc., Redwood Merger Subsidiary, Inc., Redwood Second Merger Subsidiary, Inc., and David Forster and Louis Cannon, as Stockholders’ Representatives.
2.2(14)      Amendment to Agreement and Plan of Merger and Reorganization, among the Registrant, Redwood Merger Subsidiary, Inc., Redwood Second Merger Subsidiary, Inc., AorTx, Inc. and David Forster and Louis Cannon, as Stockholders’ Representatives, dated September 16, 2009.
3.1(2)      Amended and Restated Certificate of Incorporation of the Registrant.
3.2(3)      Amended and Restated Bylaws of the Registrant.
4.1(4)      Specimen Common Stock Certificate.
4.2(4)      Amended and Restated Investor Rights Agreement, dated November 10, 2005, between the Registrant and certain of its stockholders.
4.3(1)      Registration Rights Agreement, dated November 15, 2007, by and among the Registrant and the Investors listed therein.
10.1(4)+      Form of Indemnification Agreement for Directors and Executive Officers.
10.2(4)+      2002 Stock Plan.
10.3(4)+      2006 Equity Incentive Plan.
10.4.1(4)+    Form of Option Grant Notice and Form of Option Agreement under 2006 Equity Incentive Plan.
10.4.2(4)+    Form of Option Grant Notice and Form of Option Agreement for Non-Employee Directors under 2006 Equity Incentive Plan.
10.5(4)+      2006 Employee Stock Purchase Plan.
10.6(4)+      Form of Offering Document under 2006 Employee Stock Purchase Plan.
10.7(4)+      Offer Letter, by and between the Registrant and Frederic H. Moll, M.D., dated as of October 21, 2002.
10.8(4)+      Offer Letter, by and between the Registrant and Steven M. Van Dick, dated as of November 22, 2005.
10.9(4)+      Offer Letter, by and between the Registrant and Robert G. Younge, dated as of October 21, 2002.
10.10(4)+    Vesting Acceleration and Severance Agreement, by and between the Registrant and Robert G. Younge, dated as of October 11, 2005.
10.11(4)+    Form of Vesting Acceleration and Severance Agreement.
10.12(4)      Sublease, by and between the Registrant and Palmone, Inc., dated July 27, 2004.
10.13(4)*    Cross License Agreement, by and between the Registrant and Intuitive Surgical, Inc., dated September 1, 2005.
10.14(4)*    License Agreement, by and between the Registrant and Mitsubishi Electric Research Laboratories, Inc., dated as of March 7, 2003.
10.15(4)      Loan and Security Agreement, by and among the Registrant, Silicon Valley Bank and Gold Hill Venture Lending 03, LP, dated August 5, 2005.

 

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Exhibit
Number
  

Description of Document

10.16(4)+      Non-Employee Director Compensation Arrangements.
10.17(4)        Development and Supply Agreement, by and between the Registrant and Force Dimension, dated as of November 10, 2004.
10.18(4)+      Offer Letter, by and between the Registrant and Gary C. Restani, effective October 28, 2006.
10.19(4)+      Separation Agreement, by and between the Registrant and James R. Feenstra, dated November 1, 2006.
10.20(3)        2007 Executive Compensation Information.
10.21(5)*      Joint Development Agreement between the Registrant and St. Jude Medical, Atrial Fibrillation Division, dated April 27, 2007.
10.22(5)*      Co-Marketing Agreement between the Registrant and St. Jude Medical, dated April 30, 2007.
10.23(6)        Lease between the Registrant and MTV Research, LLC.
10.24(7)**    Purchase Agreement by and between the Registrant and Plexus Services Corp., dated October 10, 2007.
10.25(7)+      Offer Letter, by and between the Registrant and David M. Shaw, effective December 3, 2007.
10.26(7)+      Vesting Acceleration and Severance Agreement, by and between the Registrant and David M. Shaw, dated as of February 21, 2008.
10.27(7)+      Restricted Stock Unit Agreement by and between the Registrant and David M. Shaw, dated February 21, 2008.
10.28(8)+      Hansen Medical, Inc. Management Cash Incentive Plan, dated April 7, 2008.
10.29(9)        Agreement by and between the Registrant and W.L. Butler Construction, Inc. dated April 29, 2008.
10.30(10)      Loan and Security Agreement by and between the Registrant and Silicon Valley Bank, dated August 25, 2008.
10.31(11)+    Offer letter, by and between the Registrant and Christopher Sells, dated as of April 3, 2008.
10.32(12)+    Retention Agreement by and between the Registrant and Frederic H. Moll, M.D., dated October 28, 2008.
10.33(12)+    Retention Agreement by and between the Registrant and Gary C. Restani, dated October 28, 2008.
10.34(12)+    Retention Agreement by and between the Registrant and Steven M. Van Dick, dated October 28, 2008.
10.35(12)+    Retention Agreement by and between the Registrant and David M. Shaw, dated October 28, 2008.
10.36(12)+    Retention Agreement by and between the Registrant and Robert Younge, dated October 28, 2008.
10.37(12)+    Retention Agreement by and between the Registrant and Christopher Sells, dated October 28, 2008.
10.38(12)+    Separation Agreement by and between the Registrant and David M. Shaw, dated November 26, 2008 and related Side Letter by and between the Registrant and David M. Shaw, dated November 2, 2008 and Amendment to the Side Letter, dated November 26, 2008.
10.39(12)+    Separation Agreement by and between the Registrant and Gary C. Restani, dated February 19, 2009.

 

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Exhibit
Number
  

Description of Document

10.40(13)      Letter from Christopher P. Lowe, dated March 19, 2009 regarding reduction of cash fees for non-employee director services during 2009.
10.41(13)      Letter from Thomas C. McConnell, dated March 19, 2009 regarding waiver of cash fees for non-employee director services during 2009.
10.42(13)      Letter from James M. Shapiro, dated March 19, 2009 regarding waiver of cash fees for non-employee director services during 2009.
10.43(13)      Letter from Russell C. Hirsch, dated March 24, 2009 regarding waiver of cash fees for non-employee director services during 2009.
10.44+(14)    Letter Agreement, by and between the Registrant and Christopher Sells, dated as of July 16, 2009.
10.45(15)      Extension of Purchase Agreement by and between Plexus Corp. and the Registrant, dated August 28, 2009.
10.46+          Separation Agreement by and between the Registrant and Christopher Sells, dated October 21, 2009.
10.47**        Extended Joint Development Agreement by and between Registrant and Philips Medical Systems Nederland B.V., effective as of November 15, 2009.
10.48**        Development and Supply Agreement by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.
10.49**        License Agreement Between Hansen and Luna by and between the Registrant and Luna Innovations Incorporated, dated as of January 12, 2010.
10.50**        Cross License Agreement Between Intuitive and Hansen by and between the Registrant and Intuitive Surgical, Inc., dated as of January 12, 2010.
10.51+          Separation Agreement by and between the Registrant and Steven M. Van Dick, dated February 22, 2010.
21.1              List of subsidiaries of the Registrant.
23.1              Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
24.1              Powers of Attorney. Reference is made to the signature page to this report.
31.1              Certification of Chief Executive Officer required by Rule 13a-15(e) or Rule 15d-15(e).
31.2              Certification of Chief Financial Officer required by Rule 13a-15(e) or Rule 15d-15(e).
32.1***        Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the Unites States Code (18 U.S.C. §1350).
32.2***        Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the Unites States Code (18 U.S.C. §1350).

 

(1) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on November 19, 2007 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K, filed on March 28, 2007, and incorporated herein by reference.
(3) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on February 16, 2007 and incorporated herein by reference.
(4)

Previously filed as an exhibit to Registrant’s Registration Statement on Form S-1, as amended, originally filed on August 16, 2006 and incorporated herein by reference.

 

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(5) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on August 14, 2007, and incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2007, and incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K, filed on February 28, 2008 and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on April 9, 2008 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on August 5, 2008, and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on August 27, 2008 and incorporated herein by reference.
(11) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on November 5, 2008, and incorporated herein by reference.
(12) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K, filed on March 16, 2009, and incorporated herein by reference.
(13) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on May 8, 2009, and incorporated herein by reference.
(14) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on August 6, 2009, and incorporated herein by reference.
(15) Previously filed as an exhibit to Registrants’ Quarterly Report on Form 10-Q, filed on September 30, 2009, and incorporated herein by reference.
+ Indicates management contract or compensatory plan.
* Confidential treatment has been granted with respect to certain portions of this exhibit.
** Confidential treatment has been requested with respect to certain portions of this exhibit.
*** The certifications attached hereto as Exhibits 32.1 and 32.2 accompany this Annual Report on Form 10-K are not deemed filed with the U.S. Securities and Exchange Commission and are not to be incorporated by reference into any filing of Hansen Medical, 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 this Form 10-K, irrespective of any general incorporation language contained in such filing.

 

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