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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014

or

 

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

For the transition period from                      to                     

Commission File Number: 001-33151

 

 

HANSEN MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   14-1850535

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

800 East Middlefield Road, Mountain View, CA 94043

(Address of Principal Executive Offices) (Zip Code)

(650) 404-5800

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition 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

The number of shares outstanding of the registrant’s common stock as of July 31, 2014 was 112,196,896.

 

 

 


Table of Contents

INDEX

 

PART I - FINANCIAL INFORMATION      3   

Item 1.

 

Financial Statements (unaudited)

     3  
 

Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

     3  
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

     4  
 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013

     5  
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     6  
 

Notes to Condensed Consolidated Financial Statements

     7  

Item 2.

 

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

     17   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     27   

Item 4.

 

Controls and Procedures

     27   
PART II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     28   
Item 1A.  

Risk Factors

     29   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 3.

 

Defaults Upon Senior Securities

     56   

Item 4.

 

Mine Safety Disclosures

     56   

Item 5.

 

Other Information

     56   

Item 6.

 

Exhibits

     57   

Signatures

     59   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANSEN MEDICAL, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data)

 

     June 30,
2014
    December 31,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 24,899      $ 27,995   

Short-term investments

     1,903        1,945   

Accounts receivable, net of allowance of $21 and $554, as of June 30, 2014 and December 31, 2013, respectively

     4,055        5,114   

Inventories

     11,397        12,203   

Prepaids and other current assets

     1,362        1,914   
  

 

 

   

 

 

 

Total current assets

     43,616        49,171   

Property and equipment, net

     3,407        3,641   

Restricted cash

     5,405        5,394   

Other assets

     1,456        2,953   
  

 

 

   

 

 

 

Total assets

   $ 53,884      $ 61,159   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,986      $ 3,337   

Accrued liabilities

     5,254        3,934   

Current portion of deferred revenue

     3,185        2,912   
  

 

 

   

 

 

 

Total current liabilities

     11,425        10,183   

Deferred revenue, net of current portion

     246        203   

Long-term debt

     33,863        33,358   

Other long-term liabilities

     557        539   
  

 

 

   

 

 

 

Total liabilities

     46,091        44,283   

Commitments and contingencies (Note 7)

    

Stockholders’ equity:

    

Preferred stock, par value $0.0001:

    

Authorized: 10,000 shares; issued and outstanding: none

     —          —     

Common stock, par value $0.0001:

    

Authorized: 200,000 shares; issued and outstanding: 112,229 and 99,014 shares at June 30, 2014 and December 31, 2013, respectively

     11        10   

Additional paid-in capital

     386,843        369,170   

Accumulated other comprehensive income

     337        360   

Accumulated deficit

     (379,398     (352,664 )
  

 

 

   

 

 

 

Total stockholders’ equity

     7,793        16,876   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 53,884      $ 61,159   
  

 

 

   

 

 

 

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

 

3


Table of Contents

HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Revenues:

        

Product

   $ 5,518      $ 2,034      $ 7,870      $ 3,660   

Service

     1,369        1,309        2,716        2,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     6,887        3,343        10,586        6,294   

Cost of revenues:

        

Product

     4,283        2,108        7,027        3,967   

Service

     702        659        1,259        1,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     4,985        2,767        8,286        5,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,902        576        2,300        1,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     4,809        4,478        9,224        8,590   

Selling, general and administrative

     8,146        8,597        17,307        16,015   

Loss on settlement of litigation

     —          —          —          4,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,955        13,075        26,531        29,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (11,053     (12,499     (24,231     (28,060

Interest and other expense, net

     (1,222     (932     (2,471     (2,520
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (12,275     (13,431     (26,702     (30,580

Income tax expense

     (15     (15     (33     (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (12,290   $ (13,446   $ (26,735   $ (30,633
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share

   $ (0.11   $ (0.20   $ (0.25   $ (0.45
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute basic and diluted net loss per share

     112,003        67,615        107,692        67,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Net loss

   $ (12,290   $ (13,446   $ (26,735   $ (30,633

Other comprehensive income (loss), net:

        

Change in unrealized gains and losses on investments

     (125     (14     (42     653   

Foreign currency translation adjustment

     17        10        19        (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in other comprehensive income (loss)

     (108     (4     (23     634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (12,398   $ (13,450   $ (26,758   $ (29,999
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Six months ended
June 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net loss

   $ (26,735   $ (30,633

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

    

Loss on settlement of litigation

     —          4,500   

Depreciation and amortization

     1,345        1,598   

Stock-based compensation

     1,415        2,420   

Amortization of common stock warrants

     —          149   

Provision (benefit) for doubtful accounts

     (100     —     

Loss on sale of financing receivable

     19        —     

Unrealized losses on investments

     —          634   

Changes in operating assets and liabilities:

    

Accounts receivable

     1,159        852   

Inventories

     27        (1,966

Deferred cost of revenues

     78        (436

Prepaids and other current assets

     493        (215

Other long-term assets

     1,478        93   

Accounts payable

     (351     1,723   

Accrued liabilities

     1,321        487   

Deferred revenue

     316        391   

Other long-term liabilities

     522        79   
  

 

 

   

 

 

 

Net cash used in operating activities

     (19,013 )     (20,324 )
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (331     (179 )

Proceeds from sales and maturities of short-term investments

     —          6,704   

Increase in restricted cash

     (11 )     —    
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (342 )     6,525  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of common stock options

     2,586        114   

Proceeds from employee stock purchase plan

     293       287  

Proceeds from exercise of Series A warrants

     14,000        —     

Withholding taxes paid on vested restricted stock units

     (620     (13
  

 

 

   

 

 

 

Net cash provided by financing activities

     16,259        388   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,096 )     (13,411 )

Cash and cash equivalents at beginning of period

     27,995        32,749   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,899      $ 19,338   
  

 

 

   

 

 

 

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

 

6


Table of Contents

HANSEN MEDICAL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. The Company

Nature of Operations

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 are engaged in marketing the Company’s products in Europe.

Need to Raise Additional Capital

From inception to June 30, 2014, the Company has incurred losses totaling approximately $379.4 million and has not generated positive cash flows from operations. The Company expects such losses to continue through at least the year ending December 31, 2014 as it continues to commercialize its technologies and develop new applications and technologies. The Company faces significant uncertainty related to recently introduced legislation impacting our healthcare system and how such changes will affect the procurement policies of our hospital customer base. The Company also faces uncertainty related to the commercialization of its Magellan Robotic System and its projected revenue is heavily dependent on a successful commercialization of this system. The Company anticipates that its existing cash, cash equivalents, short-term investment and restricted cash balances as of June 30, 2014 and the estimated amounts received through the sale of its products and services will not be sufficient to meet its anticipated cash requirements for the next twelve months. In order to continue operations, the Company will need to raise additional funding and may attempt to do so at any time by selling equity or debt securities, licensing core or non-core intellectual property assets, entering into future research and development funding arrangements, refinancing or restructuring existing debt arrangements or entering into a credit facility in order to meet its continuing cash needs. See Note 12 – Subsequent Events for additional information regarding the Company’s funding efforts as of the date of filing of this Quarterly Report on Form 10-Q. The Company cannot guarantee that future equity or debt financing or credit facilities will be available in amounts or on terms acceptable to it, if at all, nor can the Company guarantee that it will be able to license core or non-core intellectual property assets or enter into future research and development funding arrangements. If such financing, licensing, funding or credit arrangements do not meet the Company’s longer term needs or if future sales do not meet the Company’s current forecast, the Company may be required to extend its existing liquidity by adopting cost-cutting measures, including reductions in its work force, reducing the scope of, delaying or eliminating some or all of its planned research, development and commercialization activities and/or reducing marketing, customer support or other resources devoted to the Company’s products. Any of these factors could harm the Company’s financial condition. Failure to meet projected revenue levels, raise additional funding or manage spending may adversely impact the Company’s ability to achieve its long term intended business objectives. The Company will continue to evaluate its financial condition based upon changing future economic conditions and the achievement of estimated revenue and will consider the implementation of cost reductions if and as circumstances warrant.

Going Concern

These condensed 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. As of June 30, 2014, the Company’s cash, cash equivalents, short-term investments and restricted cash balances were $32.2 million. The Company incurred a net loss of $26.7 million and negative cash flows from operations of $19.0 million for the six months ended June 30, 2014. In addition, the Company is also subject to minimum liquidity requirements under its existing borrowing arrangements with White Oak Global Advisors, LLC which require the Company to maintain $15.0 million in liquidity at all times, consisting of at least $13.0 million in cash, cash equivalents and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and up to $2.0 million in certain accounts receivable. Based on the Company’s current operating projections, the Company does not have sufficient liquidity to meet its anticipated cash requirements through the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In order to continue its operations, the Company will need to either obtain sufficient additional financing or adopt cost-cutting measures to sufficiently extend its cash and liquidity. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to the Company or that the Company can implement cost cutting measures sufficient to extend its cash and liquidity. Management is currently considering various financing alternatives. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

7


Table of Contents
2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (“the condensed consolidated financial statements”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and therefore do not contain all of the information and footnotes required by GAAP and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for annual financial statements. The Company’s fiscal year ends on December 31. The condensed consolidated balance sheet as of December 31, 2013 was derived from audited financial statements. In the opinion of the Company’s management, these statements include all adjustments, which are of a normal recurring nature, necessary for a fair presentation. Interim results are not necessarily indicative of results for a full year or any other interim period. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the SEC.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates relate to the recognition of revenue, the evaluation of customer credit risk, the valuation of investments, inventory valuations, the determination of impairment of assets, stock-based compensation, loss contingencies and the valuation of our deferred tax assets, among others. Actual results may differ from those estimates.

Revenue Recognition

The Company’s revenues are primarily derived from the sale of the Sensei system and the Magellan Robotic System and the associated catheters as well as the sale of customer service contracts. Under the Company’s revenue recognition 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 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 customer service is determined through either a signed sales contract or an approved purchase order from the customer. Sales to customers are generally not subject to any performance, cancellation, termination or return rights.

 

    Delivery.

 

    Systems and Disposable Products. Typically, ownership of systems, catheters and other disposable products passes to customers upon shipment, at which time delivery is deemed to be complete.

 

    Customer Service Revenue. The Company recognizes customer service revenue from the sale of product maintenance plans. Revenue from 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.

 

   

Multiple-element Arrangements. It is common for the sale of Sensei and Magellan systems to include multiple elements which qualify as separate units of accounting. These elements commonly include the sale of the system and a product maintenance plan, in addition to installation of the system and initial training. Less commonly, these elements may include the sale of certain disposable products or other elements. Generally, under multiple-element arrangements, the systems are delivered at the beginning of the arrangement and the related revenue is recognized at that time. Installation and training is generally completed within 90 days at which time the revenue is recognized. Customer service revenue associated with the product maintenance plan is recognized ratably over the service period, which is typically one year. Other elements are recognized once delivered in accordance with contract terms. In arrangements that include multiple elements, the Company allocates revenue to the various elements based on vendor-specific objective evidence of fair value (“VSOE”) of the elements if VSOE exists. 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. If VSOE does not exist for an element, the Company allocates revenue based on third-party evidence (“TPE”) of selling price for the elements if TPE exists. TPE is the price of the Company’s or any competitor’s largely interchangeable products or services

 

8


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in standalone sales to similarly-situated customers. If neither VSOE nor TPE exist for a specific element, the Company allocates revenue to the various elements based on its best estimate of the selling price for that element or estimated selling price (“ESP”) using a top-down approach, which takes into account the Company’s target prices and overall pricing objectives. In situations where the Company has delivered certain elements but not delivered other elements, the Company, after it has allocated revenue to the various elements under the relative selling price method based on VSOE, TPE or ESP, defers revenue for the undelivered elements. Because the Company has neither VSOE nor TPE for its systems, the allocation of revenue is based on ESP for the systems sold. The Company determines ESP for its systems by considering multiple factors, including, but not limited to, features and functionality of the system, geographies, type of customer, and market conditions. The Company regularly reviews ESP and maintains internal controls over the establishment and updates of these estimates.

 

    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 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 these or other contingencies are included, all related revenue is deferred until the contingency is resolved. In the third quarter of 2012, the Company began shipping systems under a limited commercial evaluation program to allow certain strategic accounts to install and utilize systems for a limited trial period while the purchase opportunity is being evaluated by the hospital. Systems under this program remain the property of the Company and are recorded in inventory and a sale only occurs upon the issuance of a purchase order from the customer.

 

    Collectability. The Company assesses whether collection is probable 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 probable, which is usually upon receipt of cash. The Company’s sales contracts generally do not allow the 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

The Company had four customers who constituted 15%, 11%, 11% and 10%, respectively, of the Company’s net accounts receivable at June 30, 2014. The Company had three customers who constituted 26%, 22%, and 10%, respectively of the Company’s net accounts receivable at December 31, 2013. As of June 30, 2014, the Company has not experienced any significant losses on its accounts receivable.

Three customers accounted for 27%, 11% and 11%, respectively of revenues during the three months ended June 30, 2014. One customer accounted for 26% of revenues during the three months ended June 30, 2013. Three customers accounted for 18%, 12% and 10%, respectively of revenues during the six months ended June 30, 2014. One customer accounted for 18% of revenues during the six months ended June 30, 2013.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is not permitted. The Company is currently assessing the impact of the adoption of ASU2014-09 on its consolidated financial statements.

In July 2013, FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The standard became effective for the Company beginning January 1, 2014. The Company adopted this guidance in the first quarter of 2014. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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3. Fair Value of Assets and Liabilities

The amortized cost and fair value of assets, along with gross unrealized gains and losses, for the periods ended June 30, 2014 and December 31, 2013 were as follows (in thousands):

 

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

June 30, 2014:

                    

Cash

   $ 4,065       $ —        $ —        $ 4,065       $ 4,065       $ —        $ —    

Money market funds

     26,239         —          —          26,239         20,834         —          5,405   

Corporate equity securities

     1,572         331         —          1,903         —          1,903         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 31,876       $ 331       $ —        $ 32,207       $ 24,899       $ 1,903       $ 5,405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

                    

Cash

   $ 1,665       $ —        $ —        $ 1,665       $ 1,665       $ —        $ —    

Money market funds

     31,724         —          —          31,724         26,330         —          5,394   

Corporate equity securities

     1,572         373         —          1,945         —          1,945         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 34,961       $ 373       $ —        $ 35,334       $ 27,995       $ 1,945       $ 5,394   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company periodically assesses whether significant facts and circumstance have arisen to indicate that an impairment, which is other than temporary, of the fair value of any underlying investment has occurred. In fiscal 2010, 2011 and 2013, the Company determined that the impairment of its investment in Luna Innovations’, or Luna, common stock was other than temporary and as such wrote down the value of that investment and recorded a loss of $1.9 million, $0.3 million and $0.6 million, respectively in other expense on the consolidated statement of operations. No investments have been in an unrealized loss position for longer than twelve months.

Fair Value Measurements

GAAP 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 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 the Company to develop its 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. Investment instruments valued using Level 1 inputs include money market securities and certain of the corporate equity securities which were obtained by the Company as part of the Luna litigation settlement, which are currently marketable.

Investment instruments valued using Level 2 inputs include investment-grade corporate debts, such as bonds and commercial paper and U.S. governmental agency securities. The fair value of these investments is determined based on modeling techniques that include inputs such as the credit rating of the company issuing the debt and the observable market value of similarly-termed corporate debts with similar credit ratings.

 

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The fair value hierarchy of the Company’s assets is as follows (in thousands):

 

     Fair Value Measurements Using         
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1 Inputs)
     Significant other
Observable
Inputs
(Level 2 Inputs)
     Unobservable
Inputs
(Level 3 Inputs)
     Total  

June 30, 2014:

           

Money market funds

   $ 26,239       $ —        $ —        $ 26,239   

Corporate equity securities

     1,903         —          —          1,903   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,142       $ —        $ —        $ 28,142   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013:

           

Money market funds

   $ 31,724       $ —        $ —        $ 31,724   

Corporate equity securities

     1,945         —          —          1,945   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,669       $ —        $ —        $ 33,669   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of the Company’s long-term debt was estimated to be $33.6 million as of June 30, 2014 based on an internal valuation model that utilized the then-current rates available to the Company for debt of a similar term and remaining maturity, which constitutes Level 2 inputs under the fair value hierarchy. 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. See Note 8 for further information regarding the Company’s long-term debt.

 

4. Inventories (in thousands)

 

     June 30,
2014
     December 31,
2013
 

Raw materials

   $ 4,179       $ 4,167   

Work in process

     4,494         5,285   

Finished goods

     2,724         2,751   
  

 

 

    

 

 

 

Total Inventories

   $ 11,397       $ 12,203   
  

 

 

    

 

 

 

 

5. Agreements with Intuitive Surgical

In October 2012, the Company signed an updated license agreement with Intuitive Surgical Operations, Inc. and Intuitive Surgical, Inc. (collectively, “Intuitive Surgical”), under which Intuitive Surgical paid the Company a $20 million licensing fee, and a stock purchase agreement to sell 5,291,000 shares of the Company’s common stock to Intuitive Surgical for an aggregate purchase price of $10 million. The amendment of the license agreement is an update to the co-exclusive cross license agreement signed by the companies in 2005. Under the terms of the amended agreement, Intuitive Surgical’s existing co-exclusive rights to the Company’s patent portfolio to certain non-vascular procedures have been extended to include patents filed or conceived by the Company subsequent to the original 2005 agreement up to and including the period three years subsequent to the amendment though the Company has no obligations to conduct any research activities under the amendment. The Company retains the right to use its intellectual property for all clinical applications, both vascular and non-vascular.

 

6. Agreements with Philips

In February 2011, the Company entered, directly and through a wholly-owned subsidiary, into patent and technology license, sublicense and purchase agreements with Philips to allow them to develop and commercialize the non-robotic applications of the Company’s Fiber Optic Shape Sensing and Localization (“FOSSL”) technology. Under the terms of the agreements, Philips has the exclusive right to develop and commercialize the FOSSL technology in the non-robotic vascular, endoluminal and orthopedic fields. Philips also receives non-exclusive rights in other non-robotic medical device fields, but not to any multi-degree of freedom robotic applications. If Philips does not meet certain specified commercialization obligations, the Company has the rights to re-acquire the licenses granted to Philips for pre-determined payments, which payments in the aggregate would be greater than the upfront payment amounts received by the Company from Philips in connection with the agreements related to the FOSSL technology. The agreement

 

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also contains customary representations, warranties and indemnification provisions by each party. Each party may terminate the agreements for material breach by the other party. Philips also has the right to terminate the agreement and its rights under the agreement if the Company is acquired by a competitor of the relevant business unit of Philips.

Also in February 2011, the Company amended its extended joint development agreement with Philips, increasing the amount of funding provided by Philips for the development of the Vascular System and potentially extending and increasing certain royalty fees to be paid to Philips based on sales of the Vascular System, subject to caps based on the amounts Philips contributes to the development of the system. Under the amendment, the Company will be eligible to receive up to an additional $78.0 million in future payments associated with the successful commercialization by Philips or its collaborators of products containing FOSSL technology. Approximately two-thirds of these potential future payments could arise from Philips’ sublicensing the FOSSL technology and approximately one-third of the potential future payments are based on Philips’ royalty obligations on its sales of products containing the FOSSL technology. The Company would receive less than half of Philips’ proceeds for its sublicensing FOSSL technology, if and following Philips entering into an applicable sublicensing transaction. Philips’ FOSSL-related royalty obligations are calculated on a consistent annual basis between 2014 and 2020 and arise in any year only to the extent that Philips achieves a substantial number of commercial placements of FOSSL-enabled products in the calendar year.

 

7. Commitments and Contingencies

Operating Commitments

The Company leases its office and laboratory facilities in Mountain View, California under an operating lease which expires in January 2020, with an option to extend the lease for another five years. The Company also leases approximately 3,300 square feet of office space in London, England, under an operating lease that ends in June 2020, but the Company has an option to exit the lease in 2015.

As of June 30, 2014, future minimum payments under the leases are as follows (in thousands):

 

Years ending December 31,

   Future Minimum
Lease Payments
 

2014 (remainder of year)

   $ 1,074   

2015

     1,979   

2016

     2,140   

2017

     2,205   

Thereafter

     4,415   
  

 

 

 

Total

   $ 11,813   
  

 

 

 

Rent expense on a straight-line basis was $0.7 million and $1.3 million for the three and six months ended June 30, 2014, respectively, and was $0.6 million and $1.2 million for the three and six months ended June 30, 2013, respectively.

Post-contract Customer Service and Warranties

The Company generally provides one year of post-contract customer service on the sale of its systems. Post-contract customer service revenue is recognized ratably over the term of the service period and associated expenses are charged to cost of revenues as incurred. The Company provides a limited warranty on the sale of systems and catheters and records a warranty reserve at the time of sale to cover the estimated warranty costs. 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):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Balance at beginning of period

   $ 9      $ 9      $ 9      $ 9   

Accruals for warranties issued during the period

     39        68        105        160   

Warranty costs incurred during the period

     (39     (68     (105     (160
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 9      $ 9      $ 9      $ 9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Other

The Company has 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. The Company also has minimum royalty obligations of $200,000 per year under the terms of its cross license agreement with Intuitive Surgical. Additionally, the Company also has royalty obligations under the amended joint development agreement with Philips which provides for the payment of royalties to Philips through October 2017.

Legal Proceedings

From time to time, the Company is involved in litigation that it believes is of the type common to companies engaged in its line of business, including commercial disputes and employment issues. As of the date of this Quarterly Report on Form 10-Q, the Company was not involved in any pending legal proceedings that it believes could have a material adverse effect on its financial condition, results of operations or cash flows. From time to time, the Company may pursue litigation to assert its legal right and such litigation may be costly and divert the efforts and attention of its management and technical personnel which could adversely affect its business.

 

8. Long-term Debt

Oxford Loan

In December 2011, the Company entered into a $30.0 million loan and security agreement with Oxford Finance LLC and Silicon Valley Bank (the “Oxford Loan”). Under the agreement, the Company was obligated to pay interest only payments on the Oxford Loan through June 30, 2013, following which time the Oxford Loan required interest and principal payments through January 1, 2016. The Oxford Loan accrued interest at a stated rate of 9.45% and included an additional final interest payment of 3.95% of the original principal amount. The Oxford Loan provided for a prepayment option that allowed the Company to prepay all of the outstanding principal balance, subject to a pre-payment fee. In connection with the Oxford Loan, the Company issued warrants to purchase 660,793 shares of common stock. The warrants have an exercise price of $2.27 per share and expire in December 2018.

In August 2013, the Oxford Loan was fully repaid and extinguished under the loan agreement’s prepayment option.

White Oak Loan

In July 2013, the Company executed a secured term loan agreement with White Oak Global Advisors, LLC (“White Oak”), as a lender and agent for several lenders. On August 23, 2013, the loan agreement was amended and restated and the loan was funded. The amended loan agreement provides for term loan debt financing of $33.0 million with a single principal balloon payment due at maturity on December 30, 2017. Cash interest accrues at an 11.0% per annum rate and is payable quarterly. Additionally, a 3.0% per annum payment-in-kind accrues quarterly and is accretive to the principal amount owed under the agreement. Substantially all of the proceeds from the loan were used to fully repay and extinguish the prior Oxford Loan. In connection with the loan, the Company incurred costs of approximately $1.5 million including payments to the lender agent totaling $0.7 million and the placement agent totaling $0.3 million that in aggregate are accounted for as debt issuance costs and amortized to interest expense over the life of the loan. Under the amended loan agreement, the Company is obligated to pay White Oak certain servicing, administration and monitoring fees of $32,000 annually. The Company may prepay all or a portion of the outstanding principal balance, subject to paying a prepayment fee of 3.5% of the principal amount of the loan prepaid if the prepayment is made on or before the third anniversary of the funding of the loan or 1.0% of the principal amount of the loan prepaid if the prepayment is made after the third anniversary and on or before the fourth anniversary of the funding of the loan. In addition, if the Company elects to prepay all or a portion of the outstanding principal balance on or prior to August 23, 2014, the Company will be required to pay an additional make-whole amount pursuant to the agreement. The Company is also required to make mandatory prepayments upon certain events of loss and certain dispositions of the Company’s assets as described in the amended loan agreement. In the second quarter of 2014, the Company recognized expense of $0.1 million for the amortization of debt issuance costs related to the White Oak loan.

The loan is collateralized by substantially all of the Company’s assets then owned or thereafter acquired, other than its intellectual property, and all proceeds and products thereof. Two of the Company’s wholly-owned subsidiaries, AorTx, Inc. and Hansen Medical International, Inc., have entered into agreements to guarantee the Company’s obligations under the amended loan agreement and have granted first priority security interests in their assets, excluding any of their intellectual property, to secure their guarantee obligations. Under the amended loan agreement, neither the Company nor AorTx, Inc. and Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. The Company additionally agreed to pledge to lenders shares of each

 

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of its direct and indirect subsidiaries as collateral for the loan. Pursuant to the loan agreement, the Company is subject to certain affirmative and negative covenants and also to minimum liquidity requirements which require the Company to maintain $15.0 million in liquidity at all times, consisting of at least $13.0 million in cash, cash equivalents and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and up to $2.0 million in certain accounts receivable. The loan also limits the Company’s ability to (a) undergo certain change of control events; (b) convey, sell, lease, transfer, assign or otherwise dispose of any of its assets; (c) create, incur, assume, or be liable with respect to certain indebtedness, not including, among other items, subordinated debt; (d) grant liens; (e) pay dividends and make certain other restricted payments; (f) make certain investments; (g) make payments on any subordinated debt; or (h) enter into transactions with any of its affiliates outside of the ordinary course of business, or permit its subsidiaries to do the same. The Company is also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets described in the amended loan agreement. In the event the Company were to violate any covenants or if White Oak has reason to believe that the Company has violated any covenants including a significant adverse event clause, and such violations are not cured pursuant to the terms of the loan and security agreement, the Company would be in default under the loan and security agreement, which would entitle lenders 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. As of June 30, 2014, the Company was in compliance with all financial covenants.

Future annual payments due on the debt outstanding as of June 30, 2014 are as follows (in thousands):

 

Years ending December 31,

      

2014 (remainder of year)

   $ 1,912   

2015

     3,879   

2016

     4,009   

2017

     41,781   
  

 

 

 

Total remaining payments

     51,581   

Less: Amount representing interest

     (17,718
  

 

 

 
     33,863   
  

 

 

 

Less: Current portion of long-term debt

     —    
  

 

 

 

Long-term debt, net of current portion

   $ 33,863   
  

 

 

 

 

9. Stockholders’ Equity

Stock-based Compensation

Total stock-based compensation expense was allocated as follows (in thousands):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Cost of goods sold

   $ 37       $ 143       $ 81       $ 263   

Research and development

     222         354         402         687   

Selling, general and administrative

     399         783         932         1,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 658       $ 1,280       $ 1,415       $ 2,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the award, expected term, risk-free interest rate and expected dividend rate. The Company estimates the expected term based on its historical experience of grants, exercise pattern and post-vesting cancellations. The Company considered its historical volatility over the expected term and implied volatility of traded stock options in developing its estimate of volatility. The estimated grant date fair values of the employee stock options issued under the 2006 Equity Incentive Plan for the periods presented were calculated using the following assumptions:

 

Employee Stock Options:    Three months ended
June 30,
  

Six months ended

June 30,

     2014    

2013

  

2014

  

2013

Expected volatility

     83   81%-83%    72%-78%    81%-89%

Risk-free interest rate

     1.6   0.9%-1.2%    1.2%-1.6%    0.6%-1.2%

Expected term (in years)

     5.18      4.42    4.34    4.38-4.42

Expected dividend rate

     0   0%    0%    0%

The estimated fair values of the shares issued under the Company’s Employee Stock Purchase Plan were calculated using the following assumptions:

 

Employee Stock Purchase Plan:   

Three and six months ended

June 30,

    

2014

  

2013

Expected volatility

   99%-111%    57%-72%

Risk-free interest rate

   0.10%    0.07%-0.1%

Expected term (in years)

   0.50    0.50

Expected dividend rate

   0%    0%

Stock Option and Equity Incentive Plans

Option activity under the Company’s 2002 Stock Option Plan and 2006 Equity Incentive Plan was as follows:

 

     Options
Outstanding
    Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic Value
 
     (In thousands)            (In years)      (In thousands)  

Balance at December 31, 2013

     7,779     $ 3.24        4.79      $ 169  

Options granted

     2,172     $ 1.89        

Options exercised

     (1,238 )   $ 2.09        

Options cancelled

     (1,831 )   $ 4.93        
  

 

 

         

Balance at June 30, 2014

     6,882     $ 2.58        6.07      $ 13  
  

 

 

         

Options vested at June 30, 2014

     3,347     $ 3.18        4.28      $ 5  

Options vested and expected to vest at June 30, 2014

     6,062      $ 2.64         5.66       $ 4   

As of June 30, 2014, total unamortized stock-based compensation related to unvested stock options was $3.3 million, with a weighted-average recognition period of 2.67 years.

 

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Restricted stock unit activity under the 2006 Equity Incentive Plan is as follows:

 

     Restricted Stock
Units
Outstanding
    Weighted-
Average Fair
Value When
Awarded
 
     (In thousands)        

Balance at December 31, 2013

     1,318     $ 1.99  

Awarded

     343     $ 2.51  

Vested

     (624 )   $ 2.00  

Cancelled

     (437 )   $ 2.02  
  

 

 

   

Balance at June 30, 2014

     600     $ 2.20  
  

 

 

   

As of June 30, 2014, total unamortized stock-based compensation related to unvested restricted stock units was $0.6 million, with a weighted-average remaining recognition period of 2.79 years.

As of June 30, 2014, 5,911,635 shares of common stock were available for grant under the 2006 Equity Incentive Plan.

Equity Transactions

In the first quarter of 2014, subsequent to the receipt of regulatory approval for the new 6Fr Magellan catheter in the U.S., Series A warrants for 11.4 million shares of the Company’s common stock were exercised for total proceeds of $14.0 million in accordance with the terms and conditions of a securities purchase agreement dated July 30, 2013. As of June 30, 2014, the Company had remaining outstanding warrants exercisable for up to 22.8 million shares of common stock, which if exercised in full would yield gross proceeds of approximately $39.8 million. See “Note 12 – Subsequent Events” for additional information related to the Company’s outstanding warrants as of the date of filing of this Quarterly Report on Form 10-Q.

 

10. Income Taxes

The Company’s tax provision for the six months ended June 30, 2014 was $33 thousand, which primarily related to foreign taxes. The Company currently has uncertain tax positions related to research and development credits. 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.

 

11. Net Loss Per Share

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Net loss

   $ (12,290   $ (13,446 )   $ (26,735 )   $ (30,633

Weighted average shares used to compute basic and diluted net loss per share

     112,003       67,615       107,692       67,456  

Basic and diluted net loss per share

   $ (0.11   $ (0.20 )   $ (0.25 )   $ (0.45

 

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The following table sets forth potential shares of common stock that 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):

 

     June 30,  
     2014      2013  

Stock options outstanding

     6,882         8,336   

Unvested restricted stock units

     600         1,721   

Estimated shares issuable under the employee stock purchase plan

     58         54   

Warrants

     23,425         661   

 

12. Subsequent Events

On July 30, 2014, the Company entered into a definitive agreement (the “Exchange Agreement”) with certain warrantholders (the “Warrantholders”) to cancel and exchange (the “Exchange”) an aggregate of 10,221,173 of the Company’s outstanding Series B Warrants to purchase shares of the Company’s common stock, that have an exercise price of $1.50 per share (the “Series B Warrants”) and an aggregate of 10,221,173 of the Company’s outstanding Series C Warrants to purchase shares of common stock, that have an exercise price of $2.00 per share (the “Series C Warrants”) issued in connection with the Company’s previously announced August 2013 private placement (the “2013 Transaction”), in exchange, the Company will issue warrants (the “Exchange Warrants”) to purchase an aggregate of 26,728,369 shares of common stock (the “Exchange Warrant Shares”). The Exchange is contingent on the Company’s receipt of NASDAQ approval.

The Exchange Warrants will be comprised of the following two tranches: (a) Series B/C Exchange Warrants (“Series B/C Exchange Warrants”) exercisable for an aggregate of 20,442,346 shares of common stock, with an exercise price equal to $1.13, the NASDAQ consolidated closing bid price for the Common Stock on July 29, 2014, the last completed trading day before the Exchange Agreement was executed (the “Closing Bid Price”); and (b) Series D Warrants (“Series D Warrants”) exercisable for an aggregate of 6,286,023 shares of common stock, with an exercise price equal to the Closing Bid Price. Pending the satisfaction of certain closing conditions, the Series B/C Exchange Warrants will be issued and will be subject to mandatory exercise within 14 days of issuance and assuming such exercise, would result in gross proceeds to the Company of approximately $23.1 million. Pending the satisfaction of certain closing conditions, the Series D Warrants will have an exercise period of five years, and if fully exercised, would result in additional gross proceeds to the Company of approximately $7.1 million. The Series B Warrants and Series C Warrants previously carried an expiration date of August 2015. The remaining Series B Warrants and Series C Warrants not included in the Exchange will remain outstanding until their exercise or expiration.

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

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

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 Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and notes thereto appearing elsewhere, are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “could,” “intends,” “might,” “plans,” “anticipates,” “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. These forward-looking statements include, among others, statements regarding our strategies and expectations regarding our future revenues, cost of revenues and other expenses and losses. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Quarterly Report on Form 10-Q, 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 condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

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 solid stability and control in electrophysiology procedures. Our Magellan™ Robotic System is designed to allow physicians to instinctively navigate flexible catheters in the vasculature. We believe our systems and the corresponding disposable catheters 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 systems have the potential to benefit patients, physicians, hospitals and third-party payors by improving outcomes and permitting complex procedures to be performed interventionally.

 

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From inception to June 30, 2014, we have incurred losses totaling approximately $379.4 million and have not generated positive cash flows from operations. We expect such losses to continue through at least the year ending December 31, 2014 as we continue to commercialize our technologies and develop new applications and products. We have financed our operations primarily through the sale of public and private equity securities, the issuance of debt, partnering and the licensing of intellectual property.

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, we use a combination of a direct sales force and distributors to market, sell and support our products.

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.

Our significant accounting policies are fully described in Note 2 to our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies during the three months ended June 30, 2014.

Financial Overview

Revenues

Our product revenues primarily consist of sales of Magellan Robotic and Sensei systems, catheters and other disposables. Our service revenue primarily consists of system service and customer training, which are typically entered into at the time systems are sold. These service contracts have been generally renewed at the end of the service period. In the third quarter of 2013, we began shipping systems under a limited commercial evaluation program to allow certain strategic accounts to install and utilize systems for a limited trial period while the purchase opportunity is being evaluated by the hospital. Systems under this program remain our property and are recorded in inventory and a sale only occurs upon the issuance of a purchase order from the customer. Customers with evaluation systems must purchase catheters from us, which catheters are required for the use of our systems.

Cost of Revenues

Cost of revenues consists primarily of materials, direct labor including stock based compensation, depreciation, overhead costs associated with manufacturing, training and installation costs, royalties, provisions for inventory valuation, warranty expenses and the cost associated with our post-contract customer service.

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 system, Magellan Robotic System and their respective disposable 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.

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.

 

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Loss on Settlement of Litigation

On May 9, 2013, we and the plaintiff parties entered into a stipulation of settlement in the matter Curry v. Hansen Medical, Inc. et al., Case No. 09-05094 and consolidated actions, pursuant to which the plaintiffs received an aggregate of $8.5 million, $4.0 million of which was funded in cash by our insurer and other sources. We funded the remaining portion by issuing $4.25 million worth of our common stock, and paying $250,000 in cash. We recorded a loss on litigation settlement of $4.5 million in the first quarter of 2013.

Stock-Based Compensation Expense

Cost of revenues, research and development and general and administrative expense included stock-based compensation expense for stock-based awards as follows (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  

Cost of revenues

   $ 37       $ 143       $ 81       $ 263   

Research and development

     222         354         402         687   

Selling, general and administrative

     399         783         932         1,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 658       $ 1,280       $ 1,415       $ 2,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation for the first three and six months of 2014 decreased compared to the same period in 2013 primarily due to less restricted stock units granted during these periods.

Results of Operations

Comparison of the quarter ended June 30, 2014 to the quarter ended June 30, 2013:

Revenues

 

     Three months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $      %  

Product

   $ 5,518       $ 2,034       $ 3,484         171 %

Service

     1,369         1,309         60         5 %
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 6,887       $ 3,343       $ 3,544         106 %
  

 

 

    

 

 

    

 

 

    

Product revenue in the second quarter of 2014 included the recognition of revenue on four Magellan systems and one Sensei system, and 928 catheters. Product revenue in the second quarter of 2013 included the recognition of revenue on one Sensei system and 875 catheters. The increase in product revenue was primarily due to increase in the number of systems and catheters sold, as well as higher average selling prices (“ASP”) on four systems sold in the EMEA market.

We have experienced significant fluctuations in quarterly revenues, primarily attributable to being in the early stages of our commercial launch and difficult general economic and capital market conditions, slower than expected macro-economic recovery and uncertainty created by the Affordable Care Act that has impacted capital purchases by healthcare providers. We expect these fluctuations to continue through 2014.

Cost of Revenues and Gross Profit

 

(Dollars in thousands)    Three months ended June 30,     Change  
     2014     2013     $      %  

Product

   $ 4,283      $ 2,108      $ 2,175         103 %

Service

     702        659        43         7 %
  

 

 

   

 

 

   

 

 

    

Total cost of revenues

   $ 4,985      $ 2,767      $ 2,218         80 %
  

 

 

   

 

 

   

 

 

    

As a percentage of revenues

     72 %     83 %     

Gross profit

   $ 1,902      $ 576      $ 1,326         230 %

As a percentage of revenues

     28 %     17 %     

 

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Gross profit for the second quarter of 2014 was $1.9 million, or 28% of revenues, compared to $0.6 million, or 17% of revenues in the second quarter of 2013. The increase is primarily attributable to an increased gross margin in product sales, which was driven by increased system unit volume sales. Service costs increased marginally and were in line with the marginally increased service revenues. We expect that cost of revenues, both as a percentage of revenues and on a dollar basis, will continue to vary from quarter to quarter in 2014 due to, among other things, fluctuations in shipments and revenue levels, ASP, the mix of products sold, customer mix, and manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development

 

(Dollars in thousands)    Three months ended June 30,      Change  
     2014      2013      $      %  

Research and development

   $ 4,809       $ 4,478       $ 331         7 %

Research and development expenses in the second quarter of 2014 were higher compared to the second quarter of 2013 due to additional prototype material costs for new product initiatives, and due to increased headcount. We expect research and development expenses for the remainder of 2014 to increase moderately due to development of continued clinical trials and new product and technology development initiatives.

Selling, General and Administrative

 

     Three months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $     %  

Selling, general and administrative

   $ 8,146       $ 8,597       $ (451     (5 )% 

Selling, general and administrative expenses decreased marginally in the second quarter of 2014 compared to the second quarter of 2013 as a result of $1.3 million decrease in general and administrative expenses primarily resulting from a $1.2 million decrease in legal expenses associated with a settlement of the securities class action lawsuit, patent filing expenses and other corporate matters, which was partially offset by an increase of $0.6 million in sales and marketing expenses, primarily as a result of payroll cost increase of $0.5 million due increased headcount and sales,.

We expect our selling, general and administrative expenses for the remainder of 2014 to increase moderately due to increased commissions on expected increases in sales levels, and marginal growth of our sales force compared to 2013.

Interest Income

 

     Three months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $     %  

Interest income

   $ 3       $ 4       $ (1 )     (25 )%

Interest income from cash, cash equivalents and investments decreased in the second quarter of 2014 compared to the second quarter of 2013 primarily due to lower levels of invested cash and cash equivalents.

Interest and Other Expense, net

 

(Dollars in thousands)    Three months ended June 30,     Change  
     2014     2013     $     %  

Interest and other expense, net

   $ (1,225 )   $ (936 )   $ (289     31 %

Interest and other expense, net increased in the second quarter of 2014 compared to the second quarter of 2013 as our borrowing rates increased as a result of changing our loan provider, this caused our interest expense to increase by $0.3 million.

 

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Income Tax Expense

 

(Dollars in thousands)    Three months ended June 30,     Change  
     2014     2013     $      %  

Income tax expense

   $ (15 )   $ (15 )   $ —           0 %

Income tax expense in the second quarter of 2014 was comparable to the second quarter of 2013 as it relates to foreign subsidiaries. We expect income tax expense to increase in 2014 over 2013 levels.

Comparison of the six months ended June 30, 2014 to the six months ended June 30, 2013:

Revenues

 

     Six months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $      %  

Product

   $ 7,870       $ 3,660       $ 4,210         115 %

Service

     2,716         2,634         82         3 %
  

 

 

    

 

 

    

 

 

    

Total revenues

   $ 10,586       $ 6,294       $ 4,292         68 %
  

 

 

    

 

 

    

 

 

    

Product revenue in the first half of 2014 included the recognition of revenue on five Magellan and two Sensei systems, and 1,613 catheters. Product revenue in the first half of 2013 included the recognition of revenue on two Sensei systems and 1,467 catheters. The increase in product revenue was primarily due to increase in number of systems and catheters sold, as well as higher ASP on the four systems sold in the EMEA market.

Cost of Revenues and Gross Profit

 

(Dollars in thousands)    Six months ended June 30,     Change  
     2014     2013     $     %  

Product

   $ 7,027      $ 3,967      $ 3,060        77 %

Service

     1,259        1,282        (23     (2 )%
  

 

 

   

 

 

   

 

 

   

Total cost of revenues

   $ 8,286      $ 5,249      $ 3,037        58 %
  

 

 

   

 

 

   

 

 

   

As a percentage of revenues

     78 %     83 %    

Gross profit

   $ 2,300      $ 1,045      $ 1,255        120 %

As a percentage of revenues

     22 %     17 %    

Gross profit for the first half of 2014 was $2.3 million, or 22% of revenues, compared to $1.0 million, or 17% of revenues in the first half of 2013. The increase is primarily attributable to an increased gross margin in product sales, which was driven by increased system unit volume sales. Gross margin rate on service revenue was relatively flat, over the two comparative periods.

We expect that cost of revenues, both as a percentage of revenues and on a dollar basis, will continue to vary from quarter to quarter in 2014 due to, among other things, fluctuations in shipments and revenue levels, ASP, the mix of products sold, customer mix, and manufacturing levels and manufacturing yields.

 

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Operating Expenses

Research and Development

 

(Dollars in thousands)    Six months ended June 30,      Change  
     2014      2013      $      %  

Research and development

   $ 9,224       $ 8,590       $ 634         7 %

Research and development expenses in the first half of 2014 were higher compared to the first half of 2013 due to increased costs associated with our 6Fr Magellan Catheters and other product development initiatives of approximately $0.8 million, offset by a decrease of $0.2 million in depreciation on fully depreciated assets.

Selling, General and Administrative

 

     Six months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $      %  

Selling, general and administrative

   $ 17,307       $ 16,015       $ 1,292         8 %

Selling, general and administrative expenses increased during the first half of 2014 compared to the first half of 2013. The increase resulted from increased spending of $0.6 million in commissions as a result of increased sales, $0.6 million for development of our global sales organization, $0.5 million of increased prototyping materials/non-capital equipment/advertising and promotion related to mobile lab costs and a $0.8 million due to executive transitions, and a $0.1 million increase in cost of Directors and Officers insurance. These increases were offset by savings of $1.4 million from a decrease in general legal and litigation fees related to settlement of class action lawsuit.

Loss on Settlement of Litigation

 

     Six months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $     %  

Loss on settlement of litigation

   $ —         $ 4,500       $ (4,500     100 %

On May 9, 2013, we and the plaintiff parties entered into a stipulation of settlement in the matter Curry v. Hansen Medical, Inc. et al., Case No. 09-05094 and consolidated actions, pursuant to which the plaintiffs received an aggregate of $8.5 million, $4.0 million of which was be funded in cash by our insurer and other sources. We funded the remaining portion by issuing $4.25 million worth of our common stock and paid $250,000 in cash. We recorded a loss on litigation settlement of $4.5 million in the first quarter of 2013.

Interest Income

 

     Six months ended June 30,      Change  
(Dollars in thousands)    2014      2013      $     %  

Interest income

   $ 6       $ 14       $ (8     (57 )%

Interest income from cash, cash equivalents and investments decreased in the first half of 2014 compared to the first half of 2013 primarily due to lower levels of invested cash and cash equivalents.

Interest and Other Expense, net

 

(Dollars in thousands)    Six months ended June 30,     Change  
     2014     2013     $      %  

Interest and other expense, net

   $ (2,477 )   $ (2,534 )   $ 57         (2 )%

Interest and other expense, net decreased in the first half of 2014 compared to the first half of 2013, primarily due to $0.6 million of write down of equity investment in Luna Innovations in 2013, partially offset by $0.6 million of increased interest expenses in 2014 as a result of changing our loan provider.

 

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Income Tax Expense

 

(Dollars in thousands)    Six months ended
June 30,
    Change  
     2014     2013     $     %  

Income tax expense

   $ (33   $ (53 )   $ (20     (38 )%

Income tax expense decreased in the first half of 2014 compared to the first half of 2013 primarily due to revisions of estimated tax rate and provisions in 2013.

Liquidity and Capital Resources

Historical Financing Activities

We have incurred significant losses since our inception in September 2002 and, as of June 30, 2014 we had an accumulated deficit of $379.4 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 and, beginning in 2009 through partnering and licensing of intellectual property. In November 2011, we sold approximately 4,785,000 shares of our common stock, resulting in approximately $10.0 million of net proceeds. In October 2012, we sold 5,291,005 shares of our common stock, resulting in approximately $10.0 million of net proceeds. In July 2013, we sold approximately 28,455,284 shares of our common stock in a private placement transaction, resulting in approximately $37.2 million of net proceeds.

Oxford Loan

In December 2011, we entered into a $30.0 million loan and security agreement with Oxford Finance LLC and Silicon Valley Bank (the “Oxford Loan”). Under the loan agreement, we were obligated to pay interest only payments on the Oxford Loan through June 30, 2013, following which time the Oxford Loan required interest and principal payments through January 1, 2016. The Oxford Loan accrued interest at a stated rate of 9.45% and included an additional final interest payment of 3.95% of the original principal amount. The Oxford Loan provided for a prepayment option that allowed us to prepay all of the outstanding principal balance, subject to a pre-payment fee. In connection with the Oxford Loan, we issued warrants to purchase 660,793 shares of common stock. The warrants have an exercise price of $2.27 per share and expire in December 2018.

In August 2013, the Oxford Loan was fully repaid and extinguished under the loan agreement’s prepayment option.

White Oak Loan

In July 2013, we executed a secured term loan agreement with White Oak Global Advisors, LLC (“White Oak”), as a lender and agent for several lenders. On August 23, 2013, the loan agreement was amended and restated and the loan was funded. The amended loan agreement provides for term loan debt financing of $33.0 million with a single principal balloon payment due at maturity on December 30, 2017. Cash interest accrues at an 11.0% per annum rate and is payable quarterly. Additionally, a 3.0% per annum payment-in-kind accrues quarterly and is accretive to the principal amount owed under the agreement. Substantially all of the proceeds from the loan were used to fully repay and extinguish the prior Oxford Loan. In connection with the loan, we incurred costs of approximately $1.5 million including payments to the lender agent totaling $0.7 million and the placement agent totaling $0.3 million that in aggregate are accounted for as debt issuance costs and amortized to interest expense over the life of the loan. Under the amended loan agreement, we are obligated to pay White Oak certain servicing, administration and monitoring fees of $32,000 annually. We may prepay all or a portion of the outstanding principal balance, subject to paying a prepayment fee of 3.5% of the principal amount of the loan prepaid if the prepayment is made on or before the third anniversary of the funding of the loan or 1.0% of the principal amount of the loan prepaid if the prepayment is made after the third anniversary and on or before the fourth anniversary of the funding of the loan. In addition, if we prepay all or a portion of the outstanding principal balance on or prior to August 23, 2014, we will be required to pay an additional make-whole amount to pursuant to the agreement. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets as described in the amended loan agreement.

The loan is collateralized by substantially all of our assets then owned or thereafter acquired, other than our intellectual property, and all proceeds and products thereof. Two of our wholly-owned subsidiaries, AorTx, Inc. and Hansen Medical International, Inc., have entered into agreements to guarantee our obligations under the amended loan agreement and have granted first priority security interests in their assets, excluding any of their intellectual property, to secure their guarantee obligations. Under the amended loan agreement, neither us nor AorTx, Inc. and Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. We additionally agreed to pledge to lenders shares of each of our direct and indirect subsidiaries as collateral for the loan. Pursuant to the loan agreement, we are subject to certain affirmative and negative covenants and also to minimum liquidity requirements which require us to maintain $15.0 million in liquidity at all times, consisting of at least $13 million in cash,

 

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cash equivalents and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and up to $2 million in certain accounts receivable. The loan also limits our ability to (a) undergo certain change of control events; (b) convey, sell, lease, transfer, assign or otherwise dispose of any of our assets; (c) create, incur, assume, or be liable with respect to certain indebtedness, not including, among other items, subordinated debt; (d) grant liens; (e) pay dividends and make certain other restricted payments; (f) make certain investments; (g) make payments on any subordinated debt; or (h) enter into transactions with any of our affiliates outside of the ordinary course of business, or permit our subsidiaries to do the same. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets as described in the amended loan agreement. In the event we were to violate any covenants or if White Oak has reason to believe that we have violated any covenants including a significant adverse event clause, and such violations are not cured pursuant to the terms of the loan and security agreement, we would be in default under the loan and security agreement, which would entitle lenders 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 June 30, 2014, we were in compliance with all financial covenants.

Equity Transactions

In the first quarter of 2014, subsequent to the receipt of regulatory approval for the new 6Fr Magellan catheter in the U.S., Series A warrants for 11.4 million shares of our common stock were exercised for total proceeds of $14.0 million in accordance with the terms and conditions of a securities purchase agreement dated July 30, 2013. As of June 30, 2014, we had remaining outstanding warrants exercisable for up to 22.8 million shares of common stock, which if exercised in full would yield gross proceeds of approximately $39.8 million. See “Note 12 – Subsequent Events” in the company’s Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information regarding the Company’s funding efforts as of the date of filing of this Quarterly Report on Form 10-Q.

Sources and Uses of Cash

Cash flow activity for the first half of 2014 and 2013, respectively, is summarized as follows:

 

     Six months ended
June 30,
 
(Dollars in thousands)    2014     2013  

Cash used in operating activities

   $ (19,013 )   $ (20,324 )

Cash (used in) provided by investing activities

     (342     6,525   

Cash provided by financing activities

     16,259        388   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

   $ (3,096   $ (13,411 )
  

 

 

   

 

 

 

Operating Activities

Net cash used in operating activities during the six months ended June 30, 2014 decreased by $1.3 million, primarily due to decreased net loss of $3.9 million, $6.5 million decrease in non-cash expenses principally as a result of a $4.5 million reduction of litigation loss, reduced stock based compensation of $1.0 million and reduced loss on investments of $0.6 million, and these decreases were partially offset by $3.4 million increase in working capital changes principally caused by increase in inventory by $2.0 million, decrease in accounts payable of $2.1 million and increase of $4.0 million in other working capital components.

Changes in EU Regulatory Requirements that may impact our ability to ship product into the EU starting in Q3 2014

On July 1, 2011, the Official Journal of the European Union (“EU”) published the revised Directive 2011/65/EU (RoHS2) on the restriction on the use of certain hazardous substances (six materials specifically identified) in electrical and electronic equipment. This revised Directive (“RoHS2”) became effective July 21, 2011. The EU used a time-phased approach and identified 10 categories of products that needed to meet these new standards at various start dates.

Category 8 includes medical devices and applies to our products. Compliance to this revised directive for category 8 is required by July 22, 2014. All new products held for commerce in the EU must be in compliance with RoHS 2 as of that date. Any remaining inventory that is not in compliance with RoHS2 will be used in product sold in non-EU countries.

RoHS2 compliant products may be sold in both EU and non-EU countries. However, only RoHS2 compliant products may be sold in EU countries. In order to minimize duplicate inventory, we plan to produce all future products in compliance with RoHS2 in order to sell them in both EU and non-EU countries.

The Company is in the process of changing the materials and processes used, where necessary, to bring our products into compliance with RoHS2. It is expected that RoHS2 compliant products will be ready to ship into the EU by September 16, 2014.

 

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To make our products compliant with RoHS2 we may be required to modify some or all of our products or replace one or more components in those products, which, if such modifications are possible, may be time-consuming, expensive to implement and decrease end-user demand, particularly if we increase prices to offset higher costs. Our sales force will continue to actively market our products and accept customer orders while the required modifications are being made. However, if there is a production delay in having RoHS2 compliant product ready for shipment when ordered or if it was determined that our product is not in compliance with RoHS2, we will not be able to ship our products into the EU until the product is in compliance with RoHS2. This delay could have an adverse impact on our revenues for three months ended September 30, 2014 and could affect our revenues for the year ending December 31, 2014.

Investing Activities

Net cash used in investing activities during first half of 2014 was $0.3 million, compared to $6.5 million of cash provided by investing activities during the first half of 2013 primarily as a result of proceeds from the sale of investments as we managed our investment portfolio to provide liquidity and interest income.

Financing Activities

Net cash provided by financing activities during the first half of 2014 was $16.3 million primarily related to the exercise of Series A warrants to purchase 11.4 million shares of common stock for total proceeds of $14.0 million as well as $2.6 million received related to the exercise of stock options, partially offset by $0.6 million of withholding taxes paid on equity awards. Net cash provided by financing activities for the first half of 2013 primarily related to the proceeds from the exercise of stock options. See “Note 12 – Subsequent Events”, to the Company’s Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information related to the Company’s outstanding warrants as of the date of filing of this Quarterly Report on Form 10-Q.

Future Capital Requirements

We recognized our first revenues in 2007, have not achieved profitability and have not generated net income to date. We have experienced significant fluctuations in quarterly shipments and revenues and, beginning in the fourth quarter of 2008, we saw many potential customers lengthen their sales cycles and postpone purchase decisions. From inception to June 30, 2014, we have incurred losses totaling approximately $379.4 million and have not generated positive cash flows from operations. We expect such losses to continue through at least the year ending December 31, 2014 as we continue to commercialize our products, maintain and develop the infrastructure required to manufacture and sell our products, pursue additional applications for our technology platform including our Sensei system and Magellan Robotic System, continue to develop new products and operate as a publicly traded company. As of June 30, 2014, our cash, cash equivalents, short-term investments and restricted cash balances were $32.2 million. We incurred a net loss of $26.7 million and negative cash flows from operations of $19.0 million for the six months ended June 30, 2014. In addition, we are also subject to minimum liquidity requirements under our existing borrowing arrangements with White Oak Global Advisors, LLC which require us to maintain $15.0 million in liquidity at all times, consisting of at least $13.0 million in cash, cash equivalents and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and up to $2.0 million in certain accounts receivable. Based on our current operating projections, we do not have sufficient liquidity to meet our anticipated cash requirements through the next twelve months. These factors raise substantial doubt about our ability to continue as a going concern.

In order to continue operations, we will need to obtain sufficient additional funding and may attempt to do so at any time by, for example, selling equity or debt securities, licensing core or non-core intellectual property assets, entering into future research and development funding arrangements, refinancing or restructuring existing debt arrangements or entering into a credit facility in order to meet our continuing cash needs. If such financing, licensing, funding or credit arrangements do not meet our longer term needs or if future sales do not meet our current forecast, we may be required to extend our existing liquidity by adopting additional cost-cutting measures, including reductions in our work force, reducing the scope of, delaying or eliminating some or all of our planned research, development and commercialization activities and/or reducing marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial condition. There can be no assurance, however, that such a funding alternative will be successfully completed on terms acceptable to us or that the Company can implement cost cutting measures sufficient to extend our cash and liquidity. Management is currently considering various funding alternatives. Failure to raise additional funding or manage our spending may adversely impact our ability to achieve our long term intended business objectives. We will continue to evaluate the extent of our implemented cost-saving measures based upon changing future economic conditions and the achievement of estimated revenue and will consider the implementation of additional cost reductions if and as circumstances warrant.

If we seek additional funding in the future by selling additional equity or debt securities, refinancing or restructuring existing debt arrangements or entering into a credit facility, such additional funding may result in substantial dilution to existing stockholders, may contain unfavorable terms or may not be available on any terms. If we are unable to obtain any needed additional funding, 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 ourselves or on terms that are less attractive than they might otherwise be, any of which could materially harm our business. The timing and exact amounts of our capital requirements will depend on many factors, including but not limited to the following:

 

    our ability to maintain compliance with debt covenants;

 

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

 

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

 

    the success of our research and development efforts;

 

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

 

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

 

    our ability to achieve and maintain manufacturing cost reductions;

 

    our ability to achieve and maintain operating cost reductions;

 

    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 us or individuals indemnified by us;

 

    the emergence of competing or complementary technological developments; 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 June 30, 2014 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      Thereafter  

Operating leases—real estate

   $ 11,813       $ 1,074       $ 4,119       $ 4,475       $ 2,145   

Debt, including interest

     51,581         1,912         7,888         41,781         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 63,394       $ 2,986       $ 12,007       $ 46,256       $ 2,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 and our sales office in London, England. Future debt payments relate to principal and interest payments related to the $33.0 million we have borrowed under our loan agreement with White Oak as of June 30, 2014.

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. We also have royalty obligations under the amended joint development agreement with Philips which provides for the payment of royalties to Philips through October 2017.

Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements under the caption “Recent Accounting Pronouncements” for information regarding new accounting guidance that may impact our financial statements and disclosures.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 June 30, 2014, the fair value of our cash, cash equivalents, short-term investments and restricted cash was approximately $32.2 million, all of which will mature in one year or less. A hypothetical 100 basis point change in interest rates would not result in a material decrease or increase in our interest income nor 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 consists 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 second quarter of 2014, sales denominated in foreign currencies were approximately 4% of total revenue. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements.

ITEM 4. 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 SEC’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.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of June 30, 2014 the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

In connection with management’s annual assessment of the overall effectiveness of our internal controls over financial reporting included in our Form 10-K for the year ended December 31,2013, management based its assessment on the framework set forth in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. On May 14, 2013, COSO issued an updated framework, referred to as the 2013 COSO framework. COSO has indicated that after December 15, 2014, it will consider the 1992 framework to have been superseded. We have reviewed the COSO 2013 framework and plan to integrate the changes into the Company’s internal controls over financial reporting during the remainder of 2014. We expect that management’s assessment of the overall effectiveness of our internal controls over financial reporting for the year ending December 31,2014 will be based on the COSO 2013 framework and that the change will not be significant to our overall control structure over financial reporting.

Our management, including our Chief Executive Officer and Interim Chief Financial Officer, evaluated our “Internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the second quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, except as set forth in the preceding paragraph, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Limitations of the Effectiveness of Controls

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, because of the inherent limitations in all control systems, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that the

 

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control objectives will be met. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation that we believe is of the type common to companies engaged in our line of business, including commercial disputes and employment issues. As of the date of this Quarterly Report on Form 10-Q, we are not involved in any pending legal proceedings that we believe could have a material adverse effect on our financial condition, results of operations or cash flows. From time to time, we may pursue litigation to assert our legal right and such litigation may be costly and divert the efforts and attention of our management and technical personnel which could adversely affect our business.

 

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ITEM 1A. RISK FACTORS

Risks Related to Our Business

We have incurred substantial losses since inception and anticipate that we will incur continued losses through at least the year ending December 31, 2014, 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 and expect such losses to continue through at least the year ending December 31, 2014 as we continue to commercialize our technologies and develop new applications and technologies. As of June 30, 2014, we had an accumulated deficit of $379.4 million. We have funded our operations to date principally from the sale of our securities, the issuance of debt and through partnering and the licensing of intellectual property. As of June 30, 2014, our cash, cash equivalents, short-investments and restricted cash total was $32.2 million. We incurred an operating loss of $26.7 million and had negative cash flows from operations of $19.0 million for the six months ended June 30, 2014. In addition, we are also subject to minimum liquidity requirements under our existing borrowing arrangement with White Oak Global Advisors, LLC that requires us to maintain $15.0 million in liquidity, consisting of at least $13.0 million in cash and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and up to $2.0 million in certain accounts receivable. Based on our current operating projections, we do not have sufficient liquidity to meet our anticipated cash requirements through the next twelve months. These factors raise substantial doubt about our ability to continue as a going concern. In order to continue operations, we need to either obtain sufficient additional financing or adopt additional cost-cutting measures to sufficiently extend our cash and liquidity. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to us or that we can implement cost cutting measures sufficient to extend our cash and liquidity. We may seek additional financing at any time by selling additional equity or debt securities, licensing core or non-core intellectual property assets, entering into future research and development funding arrangements, refinancing or restructuring existing debt arrangements, or entering into a credit facility. If we seek additional funding in the future by selling additional equity or debt securities or entering into debt or credit facilities, such additional funding may result in substantial dilution to existing stockholders, may contain unfavorable terms or may not be available on any terms. Conditions 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 is available, the cost to us may be significantly higher than in the past.

In August 2013 we sold 28,455,284 shares of our common stock for $1.23 per share and warrants to purchase an aggregate of 34,146,339 shares of our common stock for $0.125 per warrant in a private placement that raised an aggregate of approximately $39.0 million in gross proceeds at the initial closing. In February 2014, 11,382,117 of the warrants issued in the August 2013 private placement were exercised for gross proceeds to us of approximately $14.0 million. Most recently, on July 30, 2014, we entered into an exchange agreement with certain of the participants in the August 2013 private placement, pursuant to which their outstanding warrants will be exchanged for warrants exercisable for an aggregate of 26,728,369 shares of common stock. The exchange is contingent on our receipt of NASDAQ approval. The exchanged warrants will be comprised of the following two tranches: (a) Series B/C Exchange Warrants (“Series B/C Exchange Warrants”) exercisable for an aggregate of 20,442,346 shares of common stock, with an exercise price equal to $1.13, the NASDAQ consolidated closing bid price for our common stock on July 29, 2014, the last completed trading day before the exchange agreement was executed (the “Closing Bid Price”); and (b) Series D Warrants (“Series D Warrants”) exercisable for an aggregate of 6,286,023 shares of common stock, with an exercise price equal to the Closing Bid Price. Pending the satisfaction of certain closing conditions, the Series B/C Exchange Warrants will be issued and will be subject to mandatory exercise within 14 days of issuance and assuming such exercise, would result in gross proceeds to the Company of approximately $23.1 million. Pending the satisfaction of certain closing conditions, the Series D Warrants will have an exercise period of five years, and if exercised in full would yield approximately $7.1 million in gross proceeds to us. The Series B Warrants and Series C Warrants previously carried an expiration date of August 2015. The remaining Series B Warrants and Series C Warrants not included in the exchange will remain outstanding until their exercise or expiration and if exercised in full would yield approximately $4.1 million in gross proceeds to us. Our ability to access the capital markets and raise funds required for our operations may be severely restricted by general market conditions 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. If adequate funds are not available, 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 and/or reducing marketing, customer support or other resources devoted to our products. If we seek additional funding through partnering and licensing transactions, we could be required to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or on terms that are less attractive than they might otherwise be. Any of these factors could materially harm our business and may negatively impact our ability to continue to operate as a going concern.

Because we may not be successful in significantly increasing sales of our products, the extent of our future losses and the timing of achieving sustained profitability are highly uncertain, and we may never achieve sustained profitable operations. If we require more time than we expect to generate significant revenue and achieve sustained profitability, we may not be able to continue our operations. Even if we achieve significant revenues, we may never become profitable on a sustained basis.

 

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Our efforts to commercialize our Magellan Robotic System and Sensei system may encounter obstacles and delays which could significantly harm our ability to generate revenue.

Our ability to generate revenues depends upon the successful commercialization of our Magellan Robotic System and Sensei system. These commercialization efforts may not succeed for a number of reasons, including those set forth in this Item 1A and that:

 

    our systems may not be accepted by physicians or hospitals;

 

    we may not be able to sell our systems and associated catheters in volumes and at prices that allow us to generate sufficient revenue necessary to achieve liquidity;

 

    the use of our systems by customers may not achieve more predictable procedure times, enable more complex cases or result in other physician or clinical benefits that we believe will drive adoption of our products;

 

    we, or the investigators of our products, may not be able to generate sufficient information regarding outcomes with our systems to satisfy potential purchasers;

 

    the availability and perceived advantages of alternative treatments may hinder acceptance of our systems;

 

    our assumptions regarding the economic value proposition of our systems for hospitals, including the reimbursement rates that hospitals may achieve for procedures using our systems, may not be sufficiently accurate to drive adoption in acceptable quantities;

 

    technological changes may make our products obsolete;

 

    we may not be able to manufacture our systems or catheters in commercial quantities or at an acceptable cost;

 

    we may not have adequate financial or other resources to complete the commercialization of our systems or the development of new products; and

 

    difficult general economic and capital market conditions, slower than expected macro-economic recovery and uncertainty created by the Affordable Care Act has impacted capital purchases by healthcare providers; and

 

    we may not obtain regulatory clearance for the applications for which many physicians wish to use our systems.

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

Successful commercialization of our Magellan Robotic System is subject to manufacturing, marketing, sales and customer service risks which could significantly harm our ability to generate revenue.

We have limited experienced in manufacturing our Magellan Robotic System, Magellan Robotic Catheters and related accessories in commercial quantities and we may encounter unexpected manufacturing problems when scaling up the production of these new products. While we have experience marketing and selling the Sensei system following its initial regulatory approvals in 2007, the marketing and sales effort for our Magellan Robotic System involves different customers, value propositions and purchasing processes, and we are only beginning to gain experience in marketing and selling our Magellan Robotic System. Our Magellan Robotic System is a novel device, and hospitals are traditionally slow to adopt new products and treatment practices. Our Magellan Robotic System is an expensive capital equipment purchase which slows the sales process. Since the Magellan Robotic System has only recently been commercially introduced, our Magellan Robotic System has limited product and brand recognition. Furthermore, 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 in sufficient numbers. The ability to obtain market acceptance of a new product such as the Magellan Robotic System is highly variable and subject to many risks. As a result, our commercialization plans may be delayed, incomplete or unsuccessful. While we have prepared new training materials specifically for our Magellan Robotic System, these materials have not been used extensively and only a limited number of clinical cases have been performed with our Magellan Robotic System. As a result, with greater physician experience with our Magellan Robotic System, we may identify areas where further training is required. In addition, commercial introduction of new products sometimes results in the identification of latent or new product defects or quality issues that were not evident in the testing of the products. If we encounter any of these new product introduction issues with our Magellan Robotic System, our financial condition and results of operations could be adversely impacted.

We may not be able to further develop our Magellan Robotic System as planned, which could significantly harm our ability to achieve future regulatory approvals and market acceptance.

We intend to further develop our Magellan Robotic System, including our Magellan Robotic Catheters and related accessories. Due to the advanced electrical, mechanical, and software capabilities of this new robotic platform, we may encounter challenges in designing, engineering and manufacturing future enhancements to the platform, which may lead to compatibility obstacles with

 

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operating room and catheter laboratory layouts, equipment quality or performance issues, unmet customer expectations regarding features or functionality or other defects in future versions of the platform. Any such difficulties could result in delays in our submissions to regulatory agencies, delays in achieving or the failure to achieve additional regulatory approvals or clearances for enhancements to the system, lack of physician adoption of our system, higher than expected service claims, litigation and negative press coverage.

If we are unable to manufacture our systems and catheters in a manner that yields sufficient gross margins, we will be unable to achieve profitable commercialization.

We do not have significant experience in manufacturing, assembling or testing our current products on a commercial scale. Our products contain expensive materials and are expensive to manufacture, particularly in limited quantities. In addition to increasing sales to increase manufacturing overhead absorption, we need to reduce the variable manufacturing costs of our catheters in order to achieve our operational and financial goals. We face challenges in order to produce disposable catheters effectively, to appropriately phase in new products and designs, to efficiently utilize our manufacturing facility and to achieve planned manufacturing cost reductions. If we are unable to effectively manage these issues, our costs of producing our products will negatively affect our gross margins which will negatively impact our business.

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. We have been engaged in research and product development since our inception in late 2002. Our Sensei Robotic Catheter System, or Sensei system, received U.S. Food and Drug Administration, or FDA, clearance in May 2007 and our corresponding disposable Artisan Control Catheter and Artisan Extend Control Catheter received FDA clearance in May 2007 and August 2012, respectively, 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, for our Artisan Control Catheter in May 2007, for our Lynx catheter in July 2010, for our Magellan Robotic System in July 2011, for our Magellan Robotic Catheter in October 2011 and for our Artisan Extend Control Catheter in December 2012. We received FDA clearance for the commercialization of our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014, and we have also received regulatory approvals for our Sensei system and/or our Magellan Robotic System in several countries outside of the U.S, including Canada. Our Canadian license for the Sensei system, which was issued in December 2011, is conditioned upon our providing yearly safety and effectiveness data for a period of three years for post-market use of the system, including marketing history, a clinical literature review, and up-to-date data on our randomized clinical study. Failure to provide these reports may result in suspension of our license.

The future success of our business will depend on our ability to design and obtain regulatory approval for new products, 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 support and service our 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 fluctuated significantly. We have only recently introduced our Magellan Robotic System and do not have experience selling different systems for different applications. 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 have a debt facility with White Oak Global Advisors, LLC that shall requires us to meet certain restrictive covenants that may limit our operating flexibility.

In August 2013, we entered into an amended and restated $33.0 million loan and security agreement with White Oak Global Advisors, LLC, or White Oak, as a lender and as collateral agent for the lenders under the loan agreement. We are obligated to pay only interest on the loan until the loan’s maturity date, which is December 30, 2017. At our option, we may prepay all or a portion of the outstanding principal balance, subject to paying a prepayment fee of 3.5% of the principal amount of the loan prepaid if our prepayment is made on or before the third anniversary of the funding of the loan or 1.0% of the principal amount of the loan prepaid if our prepayment is made after the fourth anniversary of the funding of the loan. In addition, if we prepay all or a portion of the outstanding principal balance on or prior to August 23, 2014, we will be required to pay an additional make-whole amount to pursuant to the agreement. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets as described in the loan agreement.

The loan agreement contains customary events of default, including if we fail to make a payment on its due date, fail to perform specified obligations, fail to comply with certain covenants in the loan agreement, experience a material adverse change, or become insolvent. We have granted the lenders a first priority security interest in substantially all of our assets, excluding any of our intellectual property, now owned or hereafter acquired, and all proceeds and products thereof. Two of our wholly-owned subsidiaries, AorTx, Inc. and Hansen Medical International, Inc., have guaranteed our obligations under the loan and have granted first priority security interests in their assets, excluding any of their intellectual property, to secure their guarantee obligations. Under the loan agreement, neither we nor Aortx, Inc. and Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. We have also pledged to the lenders shares of each of our direct and indirect subsidiaries as collateral for the loan. We are also

 

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subject to certain affirmative and negative covenants, including a requirement to maintain $15.0 million of liquidity, consisting of at least $13.0 million in cash and investments of which $5.0 million of which shall be restricted funds subject to lenders’ control, and up to $2.0 million in certain accounts receivable. We are subject to limitations on our ability to: undergo certain change of control events; convey, sell, lease, transfer, assign or otherwise dispose of our assets; create, incur, assume, or be liable with respect to certain indebtedness; grant liens; pay dividends and make certain other restricted payments; make loans, acquisitions, or certain investments; create subsidiaries or enter into joint ventures; repurchase certain equity interests; make payments on any subordinated debt; make material changes to our core business or the core business of any of our subsidiaries; enter into transactions with any of our affiliates outside of the ordinary course of business; or permit our subsidiaries to do the same.

As of June 30, 2014, we were in compliance with all financial covenants. In the event we were to violate any covenants or if White Oak believes that we have violated any covenants, and such violations are not cured pursuant to the terms of the loan and security agreement, we would be in default under the loan and security agreement, which would entitle White Oak 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. Complying with these covenants may make it more difficult for us to successfully execute our business strategy.

If Philips is unable to develop or license new products or applications for the FOSSL technology, or such products are not commercially viable, we may not realize the full benefits of our agreements with Philips which would harm our results of operations and could delay and or impair our ability to successfully commercialize that technology.

The realization of the full potential benefits of our agreements with Philips, including the receipt of any of the up to $78.0 million in future payments associated with the successful commercialization by Philips or its collaborators of products containing the FOSSL technology, requires the development of new products and applications of technology that are subject to design, engineering and manufacturing challenges, potential safety and regulatory issues that could delay, suspend or terminate clinical studies, regulatory approvals or sales, and our reliance on third parties to develop, obtain regulatory approval for, manufacture, market and sell products containing FOSSL technology. Approximately two-thirds of the up to $78.0 million of potential future payments could arise from Philips’ sublicensing the FOSSL technology, but Philips has no obligations to do so. Under certain circumstances, we have the right to reacquire certain of the rights licensed to Philips for an amount which in the aggregate would be greater than the upfront payment amounts received by us from Philips in connection with the agreements related to the FOSSL technology, however, there can be no assurance that we would have the capital resources to exercise such rights or that we could find another commercial partner or develop commercially such technologies. In addition, Philips’ sales of products containing the FOSSL technology could be sufficient to result in our not having any rights to reacquire any of the rights licensed to Philips, yet too low to result in any royalty payments to us. If any of these events occurred, we would be unable to realize the full financial benefits of our agreements with Philips and may be delayed or unable to monetize the FOSSL technology in other areas, harming our research and development efforts and adversely affecting our business.

We may be unable to complete our clinical 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 for expanded uses and impair our financial position.

We have received IDE approval to investigate the use of our Sensei system and Artisan Control and Artisan Extend catheters in the treatment of atrial fibrillation in a clinical study designed to support the expansion of our current labeling in the U.S. beyond mapping. The study involves the treatment of atrial fibrillation. We enrolled our first patient in May 2010, but in January 2013, proposed a modification to the study protocol to change the study design and reduce the required sample size. The modified study, which plans to enroll a minimum of 125 additional subjects, was approved by the FDA in August 2013 and approximately one-third of the additional patients have been enrolled to date, including a complete enrollment in the randomized portion of the study. The study includes a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180, and 365 days.

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

 

    reaching agreement on acceptable terms with prospective clinical trial sites;

 

    obtaining additional institutional review board approval to conduct the trial at prospective sites; 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 participate in a clinical trial, the proximity of patients to clinical sites and the eligibility criteria for the trial.

In addition, 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;

 

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    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;

 

    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 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 meets target performance goals based upon the manual control of the NaviStar Thermocool catheter, but there is a risk that, even if we achieve our trial 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 larger or longer clinical trial, submit additional follow-up data, or engage in other costly and time consuming activities that may delay the FDA’s clearance or 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 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.

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 hired a new Senior Vice President of Global Sales in January 2013, a new Vice President of Marketing and Business Development in April 2013, a new Chief Operating Officer in December 2013 and our new Chief Executive Officer in May 2014. In addition, the position of Chief Financial Officer is currently held on an interim basis and we expect to hire a full-time Chief Financial Officer by the end of 2014. If we are unable to recruit and retain qualified individuals, including our new Chief Executive Officer and future Chief Financial Officer, our product development and commercialization efforts could be materially delayed or be unsuccessful. We have periodically reduced our work force and we may undertake additional actions to reduce our work force in the future. 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 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.

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 our systems often represents a significant capital purchase for our customers and many customers finance their purchase of our systems 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 one of our systems. Potential customers with limited capital budgets may decide to spend those dollars on other 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. Many potential customers have delayed making a decision to purchase a Sensei or Magellan system, which has significantly impacted our sales, financial condition and results of operations. If we are unable to obtain market acceptance for our products’ value proposition, potential customers may not make these significant capital purchases and our sales, financial condition and results of operations would be harmed.

 

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We have limited sales, marketing and distribution experience and capabilities, which could impair our ability to achieve sustained 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. We received CE Mark approval to market, sell and distribute our Magellan Robotic System in Europe in the third quarter of 2011 and FDA clearance to market, sell and distribute our Magellan Robotic System in the United States in the second quarter of 2012. In the United States, we market our systems and catheters through a direct sales force of regional sales employees, supported by clinical sales representatives 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;

 

    our ability to successfully integrate new management, including our newly hired Chief Executive Officer and future Chief Financial Officer;

 

    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 EU, 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 and maintain appropriate distributors, appropriately disengage from unsuccessful distributors or effectively use our distributors or sales personnel and coordinate our efforts for distribution of our systems and catheters in the EU 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 on a sustained basis.

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 and Magellan Robotic 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 catheters effectively, to appropriately phase in new products such as the Magellan Robotic System and product designs, to efficiently utilize our manufacturing facility and to achieve planned manufacturing cost reductions. These challenges include equipment design and automation, material procurement, low or variable production yields on catheters and quality control and assurance. The costs resulting from these challenges 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. The Company has in the past experienced recalls associated with its manufacturing processes and such recalls may occur again. Any future manufacturing issues may result in our being unable to meet the expected demand for our products, maintain control over our expenses or otherwise successfully manage our manufacturing capabilities. If we are unable to satisfy demand for our systems or 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 and Magellan Robotic System require the use of disposable Artisan catheters and Magellan Robotic Catheters, respectively, our failure to meet demand for catheters from hospitals that have purchased our systems 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.

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 systems and other current products, and have not entered into formal agreements with several of these third parties. We also depend on various third-party suppliers for various components we use in our systems and for our catheters and sheaths. For example, Force Dimension Sàrl, a single-source supplier, manufactures customized motion controllers that are a part of our Sensei system and Magellan Robotic System. We also obtain the motors for our Sensei system and Magellan Robotic 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. In September 2013, we terminated our supply agreement with Plexus Services Corp. in favor of a new supplier for certain components to our robotic systems.

 

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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 on a timely basis 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 purchasing components for inclusion in our products. 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 systems 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/approvals and the CE Certificates of Conformity marks for our medical device products, or if future clearances, approvals or the delivery of CE Certificates of Conformity are delayed, we will be unable to commercially distribute and market our products.

The process of seeking regulatory clearance, approval or CE Certificates of Conformity to market a medical device is expensive and time-consuming and clearance, approval and grant of CE Certificates of Conformity are never guaranteed and, even if granted or obtained, clearance, approval or CE Certificates of Conformity may be suspended, withdrawn 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 using two specified mapping catheters. We received FDA clearance to commercialize our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014. Because the FDA has determined that there is a reasonable likelihood that our Sensei system and Artisan catheters could be used by physicians for uses not encompassed by the scope of the present label and that such uses may cause harm, we are required to label these 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 electrophysiology 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 in the current label. 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 have received IDE approval to investigate the use of our Artisan family of catheters in the treatment of atrial fibrillation in a clinical study designed to support the expansion of our current labeling in the U.S. beyond mapping. The study was planned to involve approximately 300 patients and involves the treatment of atrial fibrillation. We enrolled our first patient in May 2010 and approximately 50 patients were enrolled as of January 2013. A proposed modification to the study protocol was submitted to FDA for review in January 2013. The modified study, which plans to enroll a minimum of 125 additional subjects, was approved by the FDA in August 2013 and approximately one-third of the targeted number of additional patients have been enrolled to date. 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. We cannot assure you that the study will be completed at all or in a timely manner, nor that the study will be executed in a manner consistent with FDA requirements or yield sufficient data to support approval. Clinical studies are subject to FDA audits under the Bioresearch Monitoring program, and if our study execution or that of our participating sites and investigators is found to be deficient, this may result in delays in approval or could prevent approval from being obtained. Any significant violations can also result in further enforcement action, as outlined above.

 

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With regard to our Sensei system, our Magellan Robotic System, or other products, 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 products outside of the United States, we will need to establish and comply with the numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy. We received a CE Certificate of Conformity in the EEA for our Sensei system in September 2006, for our Artisan catheters in May 2007, for our Lynx catheters in September 2010, for our Magellan Robotic System in July 2011 for our Magellan Robotic Catheter and related accessories designed for use with the Magellan Robotic System in October 2011, and for our Artisan Extend catheters in February 2013. However, we may be required to go through new conformity assessment procedures with our Notified Body in the EEA in order to market our products for any additional uses. Regulatory approvals or CE Certificates of Conformity may be difficult and costly to obtain, or may not be granted or obtained at all. If we are unable to maintain our regulatory clearances and CE Certificates of Conformity and obtain future clearances and CE Certificates of Conformity for our products, our financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.

If physicians and hospitals do not believe that our Sensei system and Artisan catheters are a viable alternative to existing mapping technologies used in atrial fibrillation and other cardiac ablation procedures, or if they do not believe that our Magellan Robotic System and Magellan Robotic Catheters are a viable alternative for vascular diseases, they may choose not to use our products.

We believe that physicians will not use, and hospitals will not purchase, our systems unless they determine that they provide 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 studies have been published since the commercial launch of our Sensei system in 2007 on the efficacy, safety and efficiency of our products, especially by comparison to manual techniques. While we believe many of those studies have demonstrated 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 the 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. Reluctance by physicians to use our Sensei system or to perform procedures enabled by the Sensei system would harm sales. Furthermore, we commenced the commercialization of our Magellan Robotic System and Magellan Robotic Catheters for the treatment of vascular diseases, but there is very little clinical data for the system’s safety and efficacy. Reluctance by physicians to use our Magellan Robotic System or to perform procedures enabled by the Magellan Robotic System would harm these sales. Further, unsatisfactory patient outcomes or patient injury in either of our major products 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 adopt the use of our products in their practices, we likely will not become profitable on a sustained basis and our business will be harmed. 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 Magellan Robotic System and, as a result, our business and results of operations, could be harmed.

 

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We expect to derive substantially all of our revenues from sales of our Sensei system, our recently-introduced Magellan Robotic System and the associated catheters and accessories. If hospitals do not purchase our systems, we may not generate sufficient revenues to continue our operations.

Our initial commercial offering consisted primarily of two products, our Sensei system and our corresponding disposable Artisan catheters. The Sensei system has been supplemented by an optional CoHesion Module and, in the third quarter of 2010, we introduced our Lynx catheter in Europe. In order for us to achieve sales, hospitals must purchase our Sensei system and Artisan and Lynx catheters. We also received the CE Mark in Europe for our Magellan Robotic System in July 2011 and for the Magellan Robotic Catheter and related accessories designed for use with the Magellan Robotic System in October 2011. We received FDA clearance to commercialize our Magellan Robotic System including the catheter and accessories in June 2012 and we received FDA clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014. Because we have shipped only slightly more than 110 Sensei systems and our Magellan Robotic System has only recently been commercially introduced, our systems have limited product and brand recognition. Furthermore, 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 Magellan Robotic System, or if they decide that our systems are too expensive to purchase or operate, we may never achieve significant revenue or become profitable. Such a failure to adequately sell our Sensei system or Magellan Robotic System would have a materially detrimental impact on our business, results of operations and financial condition.

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

Our promotional materials and training methods regarding physicians must comply with FDA limitations and other applicable laws and regulations. Both our Magellan and Sensei systems are cleared by the FDA and CE marked in the EEA for defined uses. We believe that the specific procedures for which our products are marketed fall within the scope of the applications that have been cleared by the FDA or are CE marked in the EEA. If the FDA or the competent authorities of the EEA countries determine that our promotional materials or training constitutes promotion of a use which has not been approved or does not fall within the scope of the current CE mark, they could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties.

We have received FDA clearance to market our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control for collecting electrophysiological data within the heart atria with two specified mapping catheters, 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 these 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. We have commenced a clinical trial for the use of our Sensei system and Artisan catheter with an ablation 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 or approval 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. The future of our electrophysiology business 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 quality, 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.

In 2012, FDA cleared our Magellan Robotic System for use to facilitate navigation to anatomical targets in the peripheral vasculature. Our FDA cleared labeling does not further specify the scope of the targets within the peripheral vasculature that are encompassed in the 510(k) clearance. The FDA could disagree with our interpretation of the scope of this clearance. If the FDA concludes that our promotional materials exceed the scope of this clearance, the agency may retroactively require us to seek 510(k) clearance or PMA approval and such uses could be considered off-label use subject to the same restrictions as the use of the Sensei system in cardiac ablation procedures. The FDA also can require us to cease marketing for any claims beyond the scope of the clearance, and can take other enforcement actions as outlined above.

The FDA and other competent authorities and agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance, approval or CE Certificates of Conformity has not been obtained. Moreover, scrutiny of such practices by the FDA and other competent authorities and agencies has recently increased. In the United States,

 

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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. Administrative, civil and criminal sanctions can also be imposed in foreign countries.

For all of our products, including both the Sensei and Magellan systems, we believe that the way in which they are marketed is consistent with the FDA clearance. However, the FDA and the competent authorities in the EEA countries could disagree and require us to stop promoting our products for certain procedures until we obtain FDA clearance or approval or a specific CE Certificate of Conformity for them and/or could require us to initiate corrective actions that could include issuing corrective advertising. In addition, the FDA and the competent authorities in the EEA countries could require us to generate and submit significant quality, safety and efficacy data to support use in those procedures for which the agency or the competent authorities of the EEA countries require clearance, approval or a specific CE Certificate of Conformity. 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 country, federal and state court litigation, which would likely be costly to defend and harmful to our business. If the FDA or another competent 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 and Magellan Robotic 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 and Magellan Robotic System. Convincing physicians to dedicate the time and energy necessary for adequate training in the use of our systems is challenging, and we cannot assure you that we will be successful in these efforts.

It is our policy to train U.S. physicians to only 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 with our Sensei system. This training may be provided in the U.S. 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 U.S. 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 for these off label procedures. 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 could negatively affect our reputation and sales of our products. Furthermore, our inability to educate and train U.S. physicians to use our Sensei system for 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.

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. Similarly, our Magellan Robotic System is a new technology and must compete with established manual interventional techniques. 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.

 

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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.

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 systems have a lengthy sales cycle because they involve a relatively expensive capital equipment purchase, which generally requires the approval of senior management at hospitals, inclusion in the hospitals’ 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, though we have seen sales cycles lengthen towards the longer end of this range as many potential customers have postponed purchase decisions. Additionally, the majority of our revenue is often 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 such as our Magellan Robotic System and Magellan Robotic Catheters could adversely impact our sales cycle, as customers take additional time to assess the benefits of new investments in 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 Sensei system has 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;

 

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    payment of substantial monetary awards to patients;

 

    product recalls or market withdrawals;

 

    loss of revenue; and

 

    the inability to commercialize our products under development.

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. Net cash used in operating activities was $8.3 million for the second quarter of 2014. We expect that our cash used in operations will be significant in each of the next several years, and we will need additional funds to continue the commercialization of both our Sensei system and our Magellan Robotic System in addition to ongoing product expansions.

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 and government investigations;

 

    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.

We may be unable to develop or commercialize our technology for additional applications. The technology underlying our systems is designed to have the potential for applications beyond electrophysiology and vascular disease which require a control catheter to approach diseased tissue. We further believe that the technology underlying our system can provide multiple opportunities to improve the speed and capability of many diagnostic and therapeutic procedures. However, we may be unable, due to limited financial or managerial resources, to develop these applications and seek a separate 510(k) clearance or PMA approval from the FDA for these applications of our technology. Also, due to our limited financial and managerial resources, we 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 and vascular applications as well as the development of other applications. Failure to capitalize on other applications for our technology may limit the addressable market for our products and our ability to grow our revenues and expand our operations.

We are dedicating significant resources to the development and commercialization of our Magellan Robotic System, Magellan Robotic Catheters and associated accessories. These efforts 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.

 

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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 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. In August 2010, we entered into an agreement with St. Jude permitting us to integrate St. Jude’s EnSite Velocity Cardiac Mapping System with our CoHesion Module to provide physicians the ability to visualize, locate and robotically control catheters within the heart to diagnose heart rhythm disorders. This Agreement was amended in February 2014, and will expire in December 2014 unless extended by mutual agreement of the parties. If the agreement is not extended, we may be unable to maintain our ability to offer integration with the EnSite Velocity System with new system sales, or to maintain compatibility with updated or upgraded versions of EnSite Velocity, which could adversely affect our revenues.

We have had material weaknesses in internal control over financial reporting in the past 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.

We evaluated our disclosure controls and procedures as of June 30, 2014 and determined that such controls and procedures were effective as of that date, as more fully set forth in Part I, Item 4 of this Quarterly Report on Form 10-Q. We evaluated our disclosure controls and procedures in association with our assessment of the effectiveness of internal control over financial reporting as of December 31, 2013 and determined that our internal control was effective as of that date, as more fully set forth in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2013. We cannot assure you, however, 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 periodic reports, including the financial statements included in such reports. 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 significant deficiency or 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, which in turn could lead to a decline in our stock price shareholder litigation, regulatory action and other adverse consequences.

Indemnification obligations to our current and former directors and officers and contractual indemnification obligations to underwriters of our securities offerings could adversely affect our ability to defend claims for which we may be liable, our results of operations, our financial condition and our cash flows.

Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers, employees and directors in relation to these matters. In addition, we have contractual indemnification obligations to the underwriters and placement agents in our prior public and private offerings, as applicable, of our equity securities.

 

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Some of these advancement and indemnification obligations may not be covered by our directors’ and officers’ insurance policies or may exceed the coverage limits of those policies. If we incur significant uninsured advancement or indemnity obligations, this could have a material adverse effect on our ability to defend claims for which we may be liable, our results of operations, our financial condition and our cash flows.

Software defects may be discovered in our products which would damage our ability to sell our products, our results of operations, financial condition and cash flows.

Our systems incorporate 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 which would harm our results of operations, financial condition and cash flows.

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 revenues as incurred. We have a limited history of commercial placements of our Sensei systems and a very limited history of commercial placements of our Magellan Robotic Systems 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.

Hospitals or physicians may be unable to obtain coverage or reimbursement from third-party payors for procedures using our Sensei system and Magellan Robotic System, which could affect the adoption or use of our systems 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 systems. Additionally, in the event that a physician uses our Sensei system or Magellan Robotic 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, in prior years, certain regulatory changes were made to the methodology for calculating payments for inpatient procedures in certain hospitals, resulting in a decrease to Medicare payment rates for surgical and cardiac procedures, 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 Sensei technology fall under MS-DRG 251, percutaneous cardiovascular procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication. The Centers for Medicare & Medicaid Services update the MS-DRG payment rates annually effective October 1 through September 30 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 using our technology can vary significantly. At this time, although

 

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payments for these cardiac procedures have not undergone further reductions, we cannot predict the full impact any future rate changes, including rate reductions, will have on our revenues or business. We do not currently know which MS-DRGs will apply to procedures performed with our Magellan Robotic System or whether reimbursement amounts will be considered favorable by hospitals.

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 initiatives 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.

Legislative reforms to the United States healthcare system may adversely affect our revenues and business.

From time to time, legislative reform measures are proposed or adopted that would impact healthcare expenditures for medical services, including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, which makes a number of substantial changes in the way health care is financed by both governmental and private insurers and the way that Medicare providers are reimbursed. Among other things, the Affordable Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which such medical devices are sold, beginning January 1, 2013.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2.0% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. The Bipartisan Budget Act of 2013, enacted on December 26, 2013, extends these cuts to 2023. The ATRA also, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.

Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive pricing, coverage and payment policies, comparative effectiveness reviews of therapies, technology assessments, and managed-care arrangements, are continuing. Government programs, including Medicare and Medicaid, private health care insurance and managed-care plans have attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying reimbursement to outcomes, and other mechanisms designed to constrain utilization and contain costs, including delivery reforms such as expanded bundling of services. Hospitals are also seeking to reduce costs through a variety of mechanisms, which may increase price sensitivity among customers for our products, and adversely affect sales, pricing, and utilization of our products. Some third-party payors must also approve coverage for new or innovative devices or therapies before they will reimburse health care providers who use the medical devices or therapies. We cannot predict the potential impact of cost-containment trends on future operating results.

New regulations related to conflict minerals could adversely impact our business.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements required due diligence efforts in 2013 and 2014, with initial disclosure requirements beginning in May 2014. There have been and will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

 

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Environmental laws and regulations such as the recent RoHS directives, could cause a disruption in our business and operations.

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment and recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various EU member countries. For example, the EU has enacted the WEEE directives. The WEEE directive obligates parties that place electrical and electronic equipment on the market in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment and provide a mechanism to take back and properly dispose of the equipment. Another example are the RoHS2 directives. On July 1, 2011, the Official Journal of the EU published the revised Directive 2011/65/EU (RoHS 2) on the restriction on the use of certain hazardous substances (six materials specifically identified) in electrical and electronic equipment. This revised Directive (RoHS2) became effective July 21, 2011. The EU used a time-phased approach and identified 10 categories of products that needed to meet these new standards at various start dates.

Category 8 includes medical devices and applies to our products. Compliance to this revised directive for category 8 is required by July 22, 2014. All new products held for commerce in the EU must be in compliance with RoHS 2 as of that date. Any remaining inventory that is not in compliance with RoHS2 will be used in product sold in non-EU countries. RoHS2 compliant products may be sold in both EU and non-EU countries. However, only RoHS2 compliant products may be sold in EU countries. In order to minimize duplicate inventory, we plan to produce all future products in compliance with RoHS2 in order to sell them in both EU and non-EU countries. We are in the process of changing the materials and processes used, where necessary, to bring our products into compliance with RoHS2. It is expected that RoHS2 compliant products will be ready to ship into the EU by September 16, 2014.

To make our products compliant with RoHS2 we may be required to modify some or all of our products or replace one or more components in those products, which, if such modifications are possible, may be time-consuming, expensive to implement and decrease end-user demand, particularly if we increase prices to offset higher costs. Our sales force will continue to actively market our products and accept customer orders while the required modifications are being made. However, if there is a production delay in having RoHS2 compliant product ready for shipment when ordered or if it was determined that our product is not in compliance with RoHS2, we will not be able to ship our products into the EU until the product is in compliance with RoHS2. This delay could have an adverse impact on our revenues for three months ended September 30, 2014 and could affect our revenues for the year ending December 31, 2014. There can be no assurance that similar programs will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.

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 periods of significant growth in the scope of our operations. 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 sell our systems 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;

 

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    longer payment cycles;

 

    shipping delays;

 

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

 

    political and economic instability;

 

    potentially adverse tax consequences, tariffs and other trade barriers;

 

    international terrorism and anti-American sentiment;

 

    difficulties 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 financial results are subject to currency fluctuations as a result of our international operations which could decrease our revenues.

In the second quarter of 2014, approximately 67% of our total revenues were generated outside the United States. While some of these revenues were denominated in U.S. dollars, approximately 4% of our total revenues for the second quarter of 2014 were generated in other currencies. We translate results of transactions denominated in local currencies into U.S. dollars using market conversion rates applicable to the period in which the transaction is reported. As a result, changes in exchange rates during a period can unpredictably and adversely affect our consolidated operating results and our asset and liability balances, even if the underlying value of the item in its original currency has not changed. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements.

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.

Significant new accounting pronouncements and taxation rules or practices and updated interpretations of existing accounting pronouncements and taxation rules or practices have occurred in the past and may occur in the future. 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. In addition, a review of existing or prior accounting practices may result in a change in previously reported amounts. For example, the FASB has recently issued new accounting principles around revenue recognition and the SEC is considering adoption of international financial reporting standards. These 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 and, starting in 2012, post grant and inter partes review 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, post grant review, inter partes review, 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.

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

Successfully commercializing our Sensei system, our Magellan Robotic 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 or the sale of our Magellan Robotic System in Europe. 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

 

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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 non-infringement 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 and our Magellan Robotic 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 and our Magellan Robotic System, such as patents and other intellectual property that we have co-exclusively licensed from Intuitive Surgical, or “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 systems 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 successfully do so, and if we are unable to obtain another license from Intuitive, we could be required to abandon use of our existing product technology completely and could have to undergo a substantial redesign and design-around effort, which we cannot assure you would be successful. In October 2012, we signed an updated license agreement with Intuitive. Under the terms of the agreement, Intuitive’s existing co-exclusive rights to our patent portfolio to certain non-vascular procedures have been extended to include patents filed or conceived by us subsequent to the original 2005 agreement up to and including the period three years subsequent to the amendment. We retain the right to use our intellectual property for all clinical applications, both vascular and non-vascular.

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 products 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.

 

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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 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 existing products or 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 quality, safety and efficacy of our products. Approval and CE marking procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval or CE Certificate of Conformity in other countries might differ from that required to obtain FDA clearance. The regulatory approval or CE marking process in other countries may include all of the risks detailed above regarding FDA clearance in the United States. Regulatory approval or the CE marking of a product in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval or a CE Certificate of Conformity in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval or a CE Certificate of Conformity 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, in the EEA, our devices are required to comply with the Essential Requirements laid down in Annex I to the Medical Devices Directive. We are also required to ensure compliance with the relevant quality system requirements laid down in the Annexes to the Medical Devices Directive. Companies compliant with ISO requirements such as “EN ISO 13485: 2003 Medical devices — Quality management systems — Requirements for regulatory purposes” benefit from a presumption of conformity with the relevant Essential Requirements or the quality system requirements laid down in the Annexes to the Medical Devices Directive. Following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements and quality system requirements, the Notified Body issues a CE Certificate of Conformity. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity. We received a CE Certificate of Conformity for our Artisan catheters in May 2007, our Lynx catheters in July 2010, our Magellan Robotic System in July 2011, our Magellan Robotic Catheter and related accessories designed for use with the Magellan Robotic System in October 2011, and our Artisan Extend catheters in February 2013. We cannot be certain that we will be successful in meeting and continuing to meet the requirements of the Medical Devices Directive in the EEA.

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 Sensei system when used with catheters and in procedures not specified in the current label, such as ablation catheters and ablation procedures, and we have already filed Medical Device Reports reporting adverse events during procedures utilizing our

 

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technology. Physicians may be 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 approvals, or CE Certificates of Conformity, 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 and reputation.

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. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory clearances and CE Certificates of Conformity, 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, California Department of Health Services requirements or EEA quality system 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. Similar quality system requirements also apply in the EEA. If our manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an adverse quality system inspection, the FDA, the Notified Body, the competent authorities in the EEA 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 or IDE/PMA approvals that have already been granted;

 

    suspension or withdrawal of our CE Certificates of Conformity;

 

    refusal to grant export approval or issue export documentation for our products; or

 

    criminal prosecution.

We underwent an FDA inspection, which employed QSIT, in July 2010 and received two inspectional observations. The agency has accepted our responses and the inspection has been closed.

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, or MDRs, or Manufacturers’ Incident Reports in the EEA 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 when the manufacturer becomes aware of information from any source that alleges that a device marketed by the manufacturer 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. A manufacturer may determine that an event may not meet the FDA’s reporting criteria so that an MDR is not necessary. However, the FDA can review a manufacturer’s decision and may disagree. We have made decisions that certain types of events are not MDR reportable. In the EEA, similar reporting requirements are imposed on medical device manufacturers. When a medical device is suspected to be a contributory cause of an event that led or might have led to death of or the serious deterioration of the health of a patient, or user or of other person, its manufacturer or authorized representative in the EU must report the event to the Competent Authority of the EEA country where the incident occurred. There can be no assurance that the FDA or the competent authorities in the EEA country will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA or the competent authorities of the EEA countries disagree with any of our determinations that events are not reportable, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as products withdrawals and 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, and Manufacturer’s Incident Reports 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 or the competent authorities in the EEA countries. As the frequency of use of our technology in electrophysiology and vascular procedures increases, we are experiencing, and anticipate continuing to experience, it being necessary to file an increased number of MDRs and Manufacturer’s Incident Reports. An increased frequency of filing MDRs and Manufacturer’s Incident Reports or a failure to timely file MDRs may result in requests for further information from the FDA or the competent authorities of the EEA countries, which could delay other matters that we may have pending before the FDA, the competent authorities of the EEA or our Notified Body or result in additional regulatory action. An increased frequency of MDRs and Manufacturer’s Incident Reports 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. As a manufacturer we are sometimes required to make decisions about whether to take corrective action in the field and whether to report that activity to the FDA or the competent authorities of the EEA countries. If the FDA or the competent authorities of the EEA countries disagrees with those decisions, we may be subject to enforcement action and our product sales and operating results could suffer.

The FDA and similar foreign competent 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 competent authorities have the authority to require the recall of our products in the event of material deficiencies or defects in design, manufacture or performance of the products and inadequacy in the labeling or Instruction for Use. 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. We have conducted voluntary recalls in the past. Recalls of any of our products would likely divert managerial and financial resources and could have an adverse effect on our financial condition and results of operations.

The FDA requires that certain classifications of recalls be reported to the 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 or other competent authorities. We have in the past initiated voluntary actions involving our products that we determined did not require notification of the FDA, and we may in the future initiate additional voluntary actions that we determine do not require notification of the FDA. If the FDA or the competent authorities of the EEA countries disagree with our determinations, they could require us to report those actions as recalls. Additionally, we have, and may again in the future, take actions in the field that we do not consider to be recalls. If the FDA or other competent authorities disagree with our determinations, they could require us to treat these actions as recalls, issue communications, or report those actions to FDA. The agency may also initiate other enforcement action if they disagree with our recall decisions, including but not limited to issuing warning letters, or more serious actions such as civil or criminal penalties. A future recall announcement or enforcement action could harm our reputation with customers and negatively affect our sales. In addition, the FDA or other competent authorities could take enforcement action for failing to treat certain actions as recalls and 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, approvals or CE Certificates of Conformity and may require us to recall or cease marketing our products until clearances, approvals or CE Certificates of Conformity 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 a determination of whether or not modifications require a new approval, supplement or clearance. A manufacturer of a 510(k) cleared product is required to obtain 510(k) clearance for device modifications that could significantly affect the safety or effectiveness of the device, or constitute a major change in the intended use of the subject device. Accordingly, a manufacturer 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.

For those products sold in the EEA, we must notify and await completion of the review of our Notified Body, before introducing substantial changes to the products or to our quality system. Following its review, our Notified Body will decide whether our existing CE Certificates of Conformity can be maintained or varied, or whether new certificate are 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 review, clearances or approvals. There can be no assurance that the FDA, our Notified Body or the competent authorities of the EEA countries will agree with our approach in such matters or that, if required, subsequent requests for 510(k) clearance, PMA approval or CE Certificates of Conformity will be received in a timely fashion, if at all. The FDA, our Notified Body or the competent authorities of the EEA countries may require us to cease supply, recall and to stop marketing our products as modified or to disable features pending clearance or approval or the granting of a CE Certificate of Conformity 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, approvals or CE Certificate of Conformity 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 our Notified Body or the competent authorities of the EEA countries 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 without submission of a new 510(k) notice or PMA and suspension or withdrawal of our existing CE Certificates of Conformity.

Clinical trials necessary to support any future 510(k), PMA application or CE marking of our products will be expensive and may require the enrollment of large numbers of clinical sites and 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), PMA application or CE marking 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 clinical sites and 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 ability 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 or they can obtain the treatment without participating in our trial through physicians who use the product off-label. We received IDE approval for an approximately 300 patient study for the treatment of atrial fibrillation and enrolled our first patient in May 2010 and approximately 50 patients were enrolled as of January 2013. A proposed modification to the study protocol was submitted to FDA for review in January 2013. The modified study, which plans to enroll as few as 125 subjects, was approved by the FDA in August 2013 and approximately one-third of the targeted number of additional patients have been enrolled to date. The study includes 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 quality, safety and efficacy may be required and we may not adequately develop such protocols to support clearance or approval. Delays in patient enrollment or failure of patients to consent or 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, our Notified Body or the competent authorities of the EEA countries may not consider our data adequate to demonstrate quality, safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.

 

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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.

Our activities, and the activities of our agents, including some contracted third parties, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. Our interactions in the U.S. or abroad with physicians and other potential referral sources who prescribe or purchase our products are subject to government regulation designed to prevent health care fraud and abuse. Relevant U.S. laws include:

 

    the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, paying or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual, for an item or service or the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service, for which payment may be made, in whole or in part, by federal healthcare programs such as the Medicare and Medicaid;

 

    federal civil False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment of government funds 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, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain obligations relating to safeguarding the privacy, security and transmission of individually identifiable health information;

 

    the federal Foreign Corrupt Practices Act of 1997, which makes it illegal to offer or provide money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage 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, state breach notification laws, and state laws governing the privacy and security 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. In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs and/or impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians.

The FDA, the Office of Inspector General for the Department of Health and Human Services, the Department of Justice, states’ Attorneys General and other governmental authorities actively enforce the laws and regulations discussed above. In the U.S., pharmaceutical and device manufacturers have been the target of numerous government prosecutions and investigations alleging violations of law, including claims asserting impermissible off-label promotion of pharmaceutical and medical device products, payments intended to influence the referral of federal or state health care business, and submission of false or fraudulent claims for government payments. The Affordable Care Act also clarified that a person or entity need not have actual knowledge of the Anti-Kickback Statute or specific intent in order to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute. As part of our compliance program, we have reviewed our sales contracts and marketing materials and practices to assure compliance with these federal and state laws, and inform employees and marketing representatives of the Anti-Kickback Statute and their obligations thereunder. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. 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.

The Affordable Care Act also imposes new tracking and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals. Device manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s Health Insurance Program were required to begin tracking such payments on August 1, 2013 and submit reports to CMS by March 31, 2014, and by the 90th day of each subsequent calendar year.

If our past or present 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 federal healthcare programs like Medicare and Medicaid 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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Our international operations expose us to liability under global anticorruption laws.

We are also subject to the U.S. Foreign Corrupt Practices Act, or “FCPA” and similar worldwide anti-bribery laws in non-U.S. jurisdictions which generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States involve governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not protect us from negligent, reckless or criminal acts committed by our employees or agents. Moreover, even a perceived or alleged violation could result in costly investigations or proceedings that could harm our financial position and reputation.

The application of state certificate of need regulations and compliance by providers with federal and state licensing requirements, as well as accreditation 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 and Magellan systems. 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 and Magellan systems. 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 July 31, 2014, our closing stock price has fluctuated from a low of $1.12 to a high of $38.87. The market price for our common stock may be affected by a number of factors, including those set forth in this Item 1A as well as:

 

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

 

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

 

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

 

    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;

 

    additions or departures of key scientific or management personnel;

 

    the pace of enrollment or results of our clinical trial of at least 125 patients or any other clinical trials;

 

    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;

 

    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;

 

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

 

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    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 and governmental investigations both on us and on our public perception.

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.

Based on our review of publicly available filings as of July 31, 2014, our five largest stockholders together with our executive officers and directors beneficially own or control approximately 45.7 percent of our outstanding common stock and the ownership or control by these stockholders may increase to over 50 percent of our outstanding common stock following the exercise of outstanding warrants to purchase shares of our common stock held by such stockholders. Assuming the closing of our July 30, 2014 warrant exchange, two of these beneficial owners will hold warrants to purchase up to 18,265,293 shares of our common stock at a purchase price of $1.13 a share. Upon exercise of these warrants, our five largest stockholders together with our executive officers and directors would beneficially own or control approximately 56.1 percent of our outstanding common stock. Accordingly, our principal stockholders and our executive officers and directors 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.

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 loan agreement, we must obtain the lenders’ prior written consent in order to pay any dividends on our common stock.

 

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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.

Future sales or issuances of shares of our common stock, the announcement to undertake such sales or issuances, or the perception that such sales or issuances may occur, may dilute our existing stockholders and depress the market price of our common stock.

Sales of our common stock or securities convertible into or exercisable for our common stock by us or by our stockholders, announcements of the proposed sales of our common stock or securities convertible into or exercisable for our common stock or the perception that sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock or securities convertible into or exercisable for our common stock in follow-on offerings to raise additional capital or in connection with acquisitions, corporate alliances or settlements with third parties and we plan to issue additional shares to our employees, directors or consultants in connection with their services to us. For example, in August 2013 we sold 28,455,284 shares of our common stock and warrants to purchase an aggregate of 34,146,339 shares of our common stock in a private placement and in July 2014 we issued additional warrants to purchase an aggregate of 6,286,023 shares of our common stock in a subsequent private placement. The issuance of the shares of common stock resulted in immediate dilution to our stockholders and the on-going exercises of outstanding warrants has caused, and may continue to cause, further dilution to our stockholders in the future.

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. 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

 

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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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

  (a) Sales of Unregistered Securities

Not applicable

 

  (b) Uses of Proceeds from Sale of Registered Securities

Not applicable

 

  (c) Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

Exhibits

 

Exhibit
Number

 

Description of Document

    3.1(1)   Amended and Restated Certificate of Incorporation of the Registrant.
    3.2(2)   Amended and Restated Bylaws of the Registrant.
    3.3(3)   Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.
    4.1(4)   Specimen Common Stock Certificate.
    4.2(5)   Stock Purchase Agreement, by and among the Registrant and Oracle Partners, LP, Oracle Institutional Partners, LP and Oracle Ten Fund Master, LP, dated November 7, 2011.
    4.3(5)   Stock Purchase Agreement, by and between the Registrant and Jack W. Schuler., dated November 7, 2011.
    4.4(6)   Form of Warrant to Purchase Stock, issued to the Lenders, dated as of December 8, 2011.
    4.5(7)   Stock Purchase Agreement, by and between Registrant and Intuitive Surgical Operations, Inc., dated as of October 26, 2013.
    4.6(8)   Form of Warrant, dated as of August 8, 2013.
    4.7(9)   Investor Rights Agreement, by and among the Registrant and each purchaser identified therein, dated August 8, 2013.
  10.1+   Offer Letter, by and between the Registrant and Cary G. Vance, dated April 25, 2014.
  10.2+   Retention Letter Agreement, by and between the Registrant and Robert O. Cathcart, dated May 12, 2014.
  10.3+   Retention Letter Agreement, by and between the Registrant and William Sutton, dated May 12, 2014.
  10.4+   Commission Agreement, by and between the Registrant and Joseph Guido, dated May 22, 2014.
  10.5+   Revised Offer Letter, by and between the Registrant and Christopher P. Lowe, dated June 11, 2014.
  10.6+   Separation Agreement, by and between the Registrant and Peter J. Mariani, dated June 18, 2014.
  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).
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Calculation Linkbase Document
101.DEF   XBRL Taxonomy Definition Linkbase Document
101.LAB   XBRL Taxonomy Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K, filed on March 28, 2007 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on February 16, 2007 and incorporated herein by reference.
(3) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on August 9, 2013 and incorporated herein by reference.
(4) Previously filed as an exhibit to Registrant’s Quarterly Report on Form 10-Q, filed on November 8, 2013 and incorporated herein by reference.
(5) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on November 7, 2011 and incorporated herein by reference.

 

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(6) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on December 9, 2011 and incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant’s Annual Report on Form 10-K, filed on March 18, 2013 and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on July 31, 2013 and incorporated herein by reference.
(9) Previously filed as an exhibit to Registrant’s Current Report on Form 8-K, filed on August 8, 2013 and incorporated herein by reference.
* The certifications attached hereto as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q are not deemed filed with the 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 Exchange Act (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.
+ Indicates management contract or compensatory plan.

 

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SIGNATURES

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

 

Dated: August 7, 2014     By:  

/s/ CARY G. VANCE

      Cary G. Vance
      President and Chief Executive Officer
      (Principal Executive Officer)
Dated: August 7, 2014     By:  

/s/ CHRISTOPHER P. LOWE

      Christopher P. Lowe
      Interim Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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