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HNSN > SEC Filings for HNSN > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for HANSEN MEDICAL INC


8-Nov-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 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.

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.

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 during the nine months ended September 30, 2013.


Table of Contents

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 the Affordable Care Act 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 to, among other things, 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.

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, 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.


Table of Contents

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          Nine Months Ended
                                              September 30,              September 30,
                                            2013          2012          2013         2012
   Cost of revenues                      $       45      $   168     $      308     $   282
   Research and development                     325          235          1,012         380
   Selling, general and administrative          819          606          2,289       1,639

   Total                                 $    1,189      $ 1,009     $    3,609     $ 2,301

Total stock-based compensation for the first nine months of 2012 included a $0.7 million reduction in expense resulting from an out of period adjustment related to compensation recorded in prior periods for our employee stock purchase plan. This out of period correction which was recorded in the quarter ended March 31, 2012 is not material to the nine months ended September 30, 2012. Excluding the effect of the $0.7 million expense reduction, total stock-based compensation for the nine months of 2013 increased compared to the same period in 2012 primarily due to more awards granted in the first nine months of 2013 compared to the same period in 2012.

Results of Operations

Comparison of the quarter ended September 30, 2013 to the quarter ended September 30, 2012:

Revenues



                                       Three Months Ended
                                          September 30,               Change
            (Dollars in thousands)      2013          2012         $         %
            Product                  $    3,834      $ 3,868     $ (34 )     (0.8 )%
            Service                       1,234        1,235        (1 )     (0.0 )%

            Total revenues           $    5,068      $ 5,103     $ (35 )     (0.7 )%

Product revenue in the third quarter of 2013 included the recognition of revenue for two Sensei systems, two Magellan Robotic Systems, as well as monthly rental income from the conversion of a Magellan evaluation system earlier this year, which is immaterial, and 790 catheters. Product revenue in the third quarter of 2012 included the recognition of revenue for five systems, including one Magellan Robotic Systems and four Sensei systems, two of which were shipped within the period, and three were shipped prior to 2012, and 689 catheters. The decline in product revenue was primarily due to a 20% decrease in units recorded in revenue, partially offset by a 15% increase in catheters sold.

We have experienced significant fluctuations in quarterly revenues, primarily attributable to us still being in the early stages of our commercial launch and due to a continuation of generally soft economic conditions, along with uncertainty created by the Affordable Care Act 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.


Table of Contents

Cost of Revenues and Gross Profit



                                         Three Months Ended
                                            September 30,               Change
         (Dollars in thousands)           2013          2012         $          %
         Product                       $    3,226      $ 3,358     $ (132 )     (3.9 )%
         Service                              502          488         14        2.9 %

         Total cost of revenues        $    3,728      $ 3,846     $ (118 )     (3.1 )%

         As a percentage of revenues         73.6 %       75.4 %
         Gross profit                  $    1,340      $ 1,257     $   83        6.6 %
         As a percentage of revenues         26.4 %       24.6 %

Gross profit for the third quarter of 2013 was $1.3 million or 26.4% of revenues, compared to $1.3 million or 24.6% of revenues in the third quarter of 2012. The increase in gross margin in the third quarter of 2013 compared to the third quarter of 2012 was primarily driven by an increase in product margins caused by product mix partially offset by a decrease in service margins. Service costs increased in 2013 compared to 2012 due to higher costs as a result of a larger installed base of systems with greater utilization per system. 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 to, among other things, fluctuations in shipments and revenue levels, average selling prices, the mix of products sold, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Research and development $ 3,827 $ 3,772 $ 55 1.5 %

Research and development expenses in the third quarter of 2013 were slightly higher compared to the third quarter of 2012 due to increased costs associated with development of the 6Fr Magellan catheter which is expected to receive regulatory approval in the first quarter of 2014.

Selling, General and Administrative

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Selling, general and administrative $ 7,703 $ 5,058 $ 2,645 52.3 %

Selling, general and administrative expenses increased $2.6 million in the third quarter of 2013 compared to the third quarter of 2012. Third quarter of 2012 included a $1.5 million of insurance reimbursement received in connection with the derivative settlement. Third quarter of 2013 included additional charges of $0.8 million incurred in connection with continued derivative litigation as well as $0.4 million of expenses related to the development of our global sales organization and related marketing activities.


Table of Contents

Interest Income

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Interest income $ 6 $ 17 $ (11 ) (64.7 )%

Interest income from cash, cash equivalents and investments decreased in the third quarter of 2013 compared to the third quarter of 2012 primarily due to lower average effective interest rates on the mix of cash and cash equivalents and short-term investments balances in the current period.

Loss on Extinguishment of Debt

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Loss on extinguishment of debt $ (1,935 ) $ - $ (1,935 ) N/A %

In the third quarter of 2013 we fully repaid and extinguished our previous loan obligation to Oxford Finance LLC and Silicon Valley Bank. In connection with the early repayment of debt, we incurred a loss on extinguishment of $1.9 million that primarily included a prepayment penalty of $0.9 million, an additional end of term payment of $0.5 million and a write-off of the unamortized discount from warrants and capitalized issuance costs of $0.5 million.

Interest and Other Expense, net

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Interest and other expense, net $ (1,042 ) $ (875 ) $ (167 ) 19.1 %

Interest and other expense, net increased in the third quarter of 2013 compared to the third quarter of 2012 primarily due to higher interest and other expense in 2013 attributable to interest and other fees amortized in the current period for loan obligations.

Income Tax Expense

Three Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Income tax expense $ (40 ) $ - $ (40 ) N/A %

Income tax expense increased in the third quarter of 2013 compared to the third quarter of 2012 primarily due to an increase in taxable income in foreign jurisdictions.


Table of Contents

Comparison of the first nine months ended September 30, 2013 to the first nine months ended September 30, 2012:

Revenues



                                     Nine Months Ended
                                       September 30,                 Change
          (Dollars in thousands)     2013          2012          $            %
          Product                  $   7,494     $  9,376     $ (1,882 )     (20.1 )%
          Service                      3,868        3,916          (48 )      (1.2 )%

          Total revenues           $  11,362     $ 13,292     $ (1,930 )     (14.5 )%

Product revenue in the first nine months of 2013 included the recognition of revenue on four Sensei systems, two Magellan Robotic Systems, as well as monthly rental income from the conversion of a Magellan evaluation system earlier this year, which is immaterial, and 2,257 catheters. Product revenue in the first nine months of 2012 included the recognition of revenue for eleven robotic systems, including three Magellan Robotic Systems and 8 Sensei systems, 8 of which were shipped within the period, and three were shipped prior to 2012, and 1,967 catheters. The decline in product revenue was primarily due to a 45% decrease in the number of units recorded in revenue, partially offset by a 15% increase in the number of catheters sold.

We have experienced significant fluctuations in quarterly revenues, primarily attributable to us still being in the early stages of our commercial launch and due to a continuation of generally soft economic conditions, along with uncertainty created by the Affordable Care Act 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



                                        Nine Months Ended
                                          September 30,                 Change
        (Dollars in thousands)          2013          2012          $            %
        Product                       $   7,193     $  9,068     $ (1,875 )     (20.7 )%
        Service                           1,784        1,482          302        20.4 %

        Total cost of revenues        $   8,977     $ 10,550     $ (1,573 )     (14.9 )%

        As a percentage of revenues        79.0 %       79.4 %
        Gross profit                  $   2,385     $  2,742     $   (357 )     (13.0 )%
        As a percentage of revenues        21.0 %       20.6 %

Gross profit in the first nine months of 2013 was $2.4 million or 21.0% of revenues, compared to $2.7 million or 20.6% of revenues during the first nine months of 2012. The decrease in gross profit was primarily due to a 45% decline in volume of units recognized in revenue, partially offset by a 15% increase in the number of catheters sold. Gross margin increased slightly due to an increase in product margin, partially offset by a decrease in a service margin. Service costs increased in 2013 compared to 2012 due to higher costs as a result of a larger installed base of systems with greater utilization per system.

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, manufacturing levels and manufacturing yields.


Table of Contents

Operating Expenses

Research and Development

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Research and development $ 12,417 $ 12,632 $ (215 ) (1.7 )%

Research and development expenses in the first nine months of 2013 were lower compared to the first nine months of 2012 due to reduced costs associated with our Magellan Robotic System and other product development initiatives of approximately $0.7 million, partially offset by an increase of approximately $0.5 million in clinical trial costs and related support expenses.

Selling, General and Administrative

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Selling, general and administrative $ 23,718 $ 19,186 $ 4,532 23.6 %

Selling, general and administrative expenses increased $4.5 million in the first nine months of 2013 compared to the first nine months of 2012. The first nine months of 2012 included a $1.5 million of insurance reimbursement received in connection with the derivative settlement. The first nine months of 2013 included additional charges of $2.0 million incurred in connection with continued derivative litigation as well as $1.0 million of expenses related to the development of our global sales organization and related marketing activities.

We expect our total operating expenses consisting of research and development, selling, general and administrative expenses, net of stock-based compensation charges, and exclusive of the loss on settlement of litigation, 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 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

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Loss on settlement of litigation $ 4,500 $ - $ 4,500 N/A

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 will receive an aggregate of $8.5 million, $4.0 million of which will be funded in cash by our insurer and other sources. We will fund the remaining portion by issuing $4.3 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 during the quarter ended March 31, 2013. A corresponding liability is included in the accompanying condensed consolidated balance sheet as of September 30, 2013. The settlement is subject to Court approval. On July 25, 2013, the Court granted preliminary approval of the settlement and scheduled a hearing on November 21, 2013, at which time we expect the Court will grant final approval.


Table of Contents

Interest Income

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Interest income $ 20 $ 59 $ (39 ) (66.1 )%

Interest income from cash, cash equivalents and investments decreased in the first nine months of 2013 compared to the first nine months of 2012 primarily due to lower average effective interest rates on the mix of cash and cash equivalents and short-term investments balances in the current period.

Loss on Extinguishment of Debt

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Loss on extinguishment of debt $ (1,935 ) $ - $ (1,935 ) N/A %

In the third quarter of 2013 we fully repaid and extinguished our previous loan obligation to Oxford Finance LLC and Silicon Valley Bank. In connection with the early repayment of debt we incurred a loss on extinguishment of $1.9 million that included a prepayment penalty of $0.9 million, an additional end of term payment of $0.5 million and a write-off of the unamortized discount from warrants and capitalized issuance costs of $0.5 million.

Interest and Other Expense, net

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Interest and other expense, net $ (3,576 ) $ (2,701 ) $ (875 ) 32.4 %

Interest and other expense, net increased in the first the nine months of 2013 compared to the first nine months of 2012 primarily due to the $0.6 million write down of our equity investment in Luna Innovations recorded in the first quarter of 2013 as well as higher interest expense of $0.2 million due to costs associated with our loan obligations.

Income Tax Expense

Nine Months Ended
September 30, Change
(Dollars in thousands) 2013 2012 $ % Income tax expense $ (93 ) $ - $ (93 ) N/A

Income tax expense increased in the first nine months of 2013 compared to the first nine months 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 September 30, 2013 we had an accumulated deficit of $340.8 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

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