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HNSN > SEC Filings for HNSN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for HANSEN MEDICAL INC


10-May-2013

Quarterly Report


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 Form 10-Q 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 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.

We were formerly known as Autocath, Inc. and were incorporated in Delaware on September 23, 2002. In March 2007, we established Hansen Medical UK Ltd, a wholly-owned subsidiary located in the United Kingdom and, in May 2007, we established Hansen Medical Deutschland, GmbH, a wholly-owned subsidiary located in Germany. Since inception, we have devoted the majority of our resources to the development and commercialization of our Sensei system and Magellan Robotic System. To date, we have incurred net losses in each year since our inception and, as of March 31, 2013, we had an accumulated deficit of $314.1 million. We expect our losses to continue through at least 2013 as we continue to expand the commercialization of our Sensei system, our Magellan Robotic System and our catheters and continue to develop new 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 received CE Mark approval for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. In May 2007, we received CE Mark approval for our Artisan Control Catheter and also received FDA clearance for the marketing of our Sensei system and Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result, we recorded our first revenues in the second quarter of 2007. We received CE Mark for our Lynx® catheter in July 2010. In July 2011, we received CE Mark for our Magellan Robotic System and in October 2011 received a CE Mark for the Magellan™ Robotic Catheter and related accessories designed for use with the Magellan Robotic System. We received FDA clearance for the marketing of our Magellan Robotic System including the catheter and accessories in June 2012. We received FDA clearance for our Artisan Extend Control Catheter in August 2012 and a CE Mark for our Artisan Extend Control Catheter in December 2012.


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We market our products in the United States primarily through a direct sales force of regional sales employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors to market, sell and support our products.

In November 2009, we entered into agreements with Philips Medical Systems Nederland B.V., a Philips Healthcare company, or Philips, to co-develop integrated products. In December 2009, we entered into an extended joint development agreement with Philips. Under the terms of the extended joint development agreement, we have, with support and collaboration from Philips, developed a vascular robotics platform and associated catheters, or Magellan Robotic System. The Magellan Robotic System does not include our Sensei system or any system used for endoluminal, cardiac or other non-vascular procedures. Pursuant to the Agreement, Philips partially funded our development costs based upon our achievement of development milestones for the Magellan Robotic System and will receive royalties based on sales of the Magellan Robotic System subject to caps. In February 2011, we amended the extended joint development agreement. The amendment of the extended joint development agreement increased the amount of funding provided by Philips for the development of the Magellan Robotic System and extended and increased certain royalty fees to be paid to Philips based on sales of the Magellan Robotic System subject to caps. Funding received from Philips under this agreement including $8.0 million received from the original agreement and $6.0 million associated with the amendment in February 2011 was recognized in 2011. We will pay Philips royalties based on the number of Magellan Robotic Systems and Magellan Robotic Catheters that are sold, subject to caps, through October 2017.

In February 2011, we 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 our Fiber Optic Shape Sensing and Localization, or 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, we have 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 we received from Philips in connection with the agreements related to the FOSSL technology. The agreement 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 we are acquired by a competitor of the relevant business unit of Philips. In connection with the agreements, we received upfront payments of $23.0 million and 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. We 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.

In October 2012, we signed an updated license agreement with Intuitive Surgical Operations, Inc. and Intuitive Surgical, Inc. (collectively, "Intuitive Surgical"), under which Intuitive Surgical paid us a $20 million licensing fee, and a stock purchase agreement to sell 5,291,005 shares of our 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 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.


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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, 2012 filed with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the three months ended March 31, 2013.

Financial Overview

Revenues

Our revenues primarily consist of sales of Sensei systems, catheters, other disposables and post-contract customer service. Beginning in the fourth quarter of 2011, our revenues also include sales of our Magellan Robotic System. In the third quarter of 2012, 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. We have experienced significant fluctuations in quarterly revenues, primarily attributable to still 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 new health care reform legislation that has impacted capital purchases by healthcare providers. We expect these fluctuations to continue throughout 2013. We do not anticipate that revenues in 2013 will be sufficient to eliminate losses.

Cost of Revenues

Cost of revenues consists primarily of materials, direct labor, 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. 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 2013 due, among other things, to fluctuations in shipments and revenue levels, average selling prices, the mix of products sold including our Magellan Robotic System, manufacturing levels and manufacturing yields.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, software development, product development, quality assurance and clinical and regulatory expenses, including costs to develop our Sensei 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. We expect research and development expenses for the remainder of 2013 to decline over 2012 levels as we focus on commercializing our existing products.


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Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, sales, legal and administrative personnel, including sales commissions and stock-based compensation. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services (including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products) and accounting services, consulting fees and travel expenses. We expect our selling, general and administrative expenses for the remainder of 2013, net of stock-based compensation charges, to increase compared with 2012 levels as we continue to actively manage our general and administrative employee costs while maintaining our sales and clinical support groups which we believe are necessary for the continued commercialization of our electrophysiology products and the introduction of our Magellan Robotic System.

Our operating expenses will increase in 2013 as compared to 2012 also due to the 2.3% excise tax imposed on the sale of certain medical devices in the United States which began on January 1, 2013 as part of the Affordable Care Act.

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
                                                        March  31,
                                                     2013           2012
            Cost of revenues                      $       120       $ (15 )
            Research and development                      333         (82 )
            Selling, general and administrative           687         376

            Total                                 $     1,140       $ 279

Total stock-based compensation for the first quarter of 2012 included a $740,000 reduction in expense resulting from an out of period adjustment related to compensation recorded in 2011 and prior periods for our employee stock purchase plan. This out of period correction is not material to the quarter ended March 31, 2012 or prior periods. Excluding the effect of the $740,000 expense reduction, total stock-based compensation for the first quarter of 2013 increased slightly compared to the first quarter of 2012 primarily to more awards in the first quarter of 2013 compared to the first quarter of 2012.

Results of Operations

Comparison of the quarter ended March 31, 2013 to the quarter ended March 31, 2012

Revenues



                                 Three Months Ended
                                     March  31,                  Change
                                  2013          2012          $            %
                                           (Dollars in thousands)
              Product          $    1,626      $ 3,281     $ (1,655 )      (50 )%
              Service               1,325        1,373          (48 )       (4 )%

              Total revenues   $    2,951      $ 4,654     $ (1,703 )      (37 )%

Product revenue in the first quarter of 2013 included the recognition of revenue on one Sensei robotic system and 592 catheters. Product revenue in the first quarter of 2012 included the recognition of revenue on four robotic systems (two Sensei robotic systems and two Magellan Robotic Systems) and 574 catheters. The decline in product revenue was primarily due to a 75% decrease in systems sold, partially offset by the 3% increase in catheters sold.


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We have experienced significant fluctuations in quarterly revenues, primarily attributable to still 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 health care reform legislation that has impacted capital purchases by healthcare providers. We expect these fluctuations to continue throughout 2013. We do not anticipate that revenues in 2013 will be sufficient to eliminate losses.

Cost of Revenues and Gross Profit



                                       Three Months Ended
                                           March  31,                   Change
                                       2013           2012           $            %
                                                  (Dollars in thousands)
       Product                       $   1,859       $ 3,471      $ (1,612 )      (46 )%
       Service                             623           451           172         38 %

       Total cost of revenues        $   2,482       $ 3,922      $ (1,440 )      (37 )%
       As a percentage of revenues        84.1 %        84.3 %
       Gross profit                  $     469       $   732      $   (263 )      (36 )%
       As a percentage of revenues        15.9 %        15.7 %

Gross profit for the first quarter of 2013 was $469,000, or 16% of revenues, compared to $732,000, or 16% of revenues in the first quarter of 2013. The flat gross margin percentage in the first quarter of 2013 compared to the first quarter of 2012 was primarily driven by a decline in system unit volume as systems have higher gross margins. These items were offset by lower costs to manufacture our products and a higher proportion of service revenue as a percent of total revenue.

Specifically, the number of robotic systems recognized as revenue decreased 75% in the first quarter of 2013 compared to the first quarter of 2012. The number of catheters sold increased by 3% in the first quarter of 2013 compared to the first quarter of 2012.

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 2013 due, among other things, to fluctuations in shipments and revenue levels, average selling prices, the mix of products sold including our Magellan Robotic System, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development



                                       Three Months Ended
                                           March  31,                 Change
                                        2013          2012         $          %
                                                (Dollars in thousands)
          Research and development   $    4,112      $ 4,298     $ (186 )      (4 )%

Research and development expenses in the first quarter of 2013 were lower compared to the first quarter of 2012 due to reduced costs associated with our Magellan Robotic System and other product development initiatives of approximately $0.6 million, partially offset by an increase of $0.4 million in stock-based compensation. Stock compensation in the first quarter of 2012 includes a reduction in expense of $0.4 million from an out of period adjustment.


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Selling, General and Administrative



                                               Three Months Ended
                                                   March  31,               Change
                                                2013          2012        $        %
                                                      (Dollars in thousands)
       Selling, general and administrative   $    7,418      $ 7,359     $ 59       1 %

Selling, general and administrative expenses were flat in the first quarter of 2013 compared to the first quarter of 2012. Decreases in commission expense as a result of lower sales volume and other employee-related expenses totaling approximately $0.8 million were offset by increases in professional fees, primarily for legal costs due to increased patent application activity of approximately $0.6 million, and stock-based compensation expense of approximately $0.3 million. Stock compensation in the first quarter of 2012 includes a reduction in expense from an out of period adjustment of $0.2 million.

We expect our selling, general and administrative expenses for the remainder of 2013, net of stock-based compensation charges, to increase compared with 2012 levels primarily as a result of our plans to grow our sales and clinical support groups which we believe are necessary for the continued commercialization of our Magellan Robotic System, increased adoption of our Sensei Robotic System, as well as the 2.3% excise tax on the sale of certain medical devices in the United States which began on January 1, 2013 as part of the Affordable Care Act.

Loss on Settlement of Litigation

On May 9, 2013, the 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 will receive an aggregate of $8.5 million, $4 million of which will be funded in cash by our insurer and other sources. We will fund the remaining portion by issuing $4.25 million worth of our common stock, the number of shares to be determined based on the average closing price of the common stock for the 10 trading days preceding final court approval of the settlement of the class action, and paying $250,000 in cash. We recorded a loss on litigation settlement of $4.5 million for the quarter ended March 31, 2013. A corresponding liability is included in the accompanying condensed consolidated balance sheet as of March 31, 2013. The settlement is subject to court approval. While the timing of the court decision is uncertain, we expect to receive court approval of the settlement within approximately six months.

Interest Income



                                   Three Months Ended
                                       March  31,                 Change
                                  2013             2012        $          %
                                           (Dollars in thousands)

Interest income $ 10 $ 21 $ (11 ) (52 )%

Interest income from cash, cash equivalents and investments decreased in the first quarter of 2013 compared to the first quarter of 2012 primarily due to lower levels of invested cash and cash equivalents.


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Interest and Other Expense, net



                                            Three Months Ended
                                                March  31,                 Change
                                             2013           2012         $        %
                                                    (Dollars in thousands)
        Interest and other expense, net   $    (1,598 )    $ (907 )    $ 691       76 %

Interest and other expense, net increased in the first quarter of 2013 compared to the first quarter of 2012 primarily due to the $586,000 write down of our equity investment in Luna Technologies as well as foreign exchange losses.

Income Tax Expense



                                      Three Months Ended
                                          March  31,                Change
                                      2013            2012       $         %
                                              (Dollars in thousands)

Income tax expense $ (38 ) $ - $ 38 100 %

Income tax expense increased in the first quarter of 2013 compared to the first quarter of 2012 primarily due to an increase in taxable income in foreign jurisdictions. We expect income tax expense to continue to increase in 2013 over 2012 levels.

Liquidity and Capital Resources

We have incurred significant losses since our inception in September 2002 and, as of March 31, 2013 we had an accumulated deficit of $314.1 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. Prior to our initial public offering of stock in November 2006, we had received net proceeds of $61.3 million from the issuance of common and preferred stock and $7.0 million in debt financing. Through our initial public offering in 2006 we received net proceeds of $78.3 million. In April 2008, we sold 3,000,000 shares of our common stock, resulting in approximately $39.5 million of net proceeds. In April 2009, we sold 11,692,000 shares of our common stock, resulting in approximately $35.3 million of net proceeds. In April 2010, we sold 16,100,000 shares of our common stock, resulting in approximately $29.8 million of net proceeds. In November 2011, we sold approximately 4,785,000 shares of our . . .

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