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HNSN > SEC Filings for HNSN > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for HANSEN MEDICAL INC

Form 10-Q for HANSEN MEDICAL INC


9-May-2014

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.

From inception to March 31, 2014, we have incurred losses totaling approximately $367.1 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.


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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 March 31, 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 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.

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, 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.

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.


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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,
                                                    2014           2013
            Cost of revenues                      $     44       $    120
            Research and development                   180            333
            Selling, general and administrative        533            687

            Total                                 $    757       $  1,140

Total stock-based compensation for the first quarter of 2014 decreased compared to the same period in 2013 primarily due to less restricted stock units granted in the first quarter of 2014 compared to the same period in 2013.

Results of Operations

Comparison of the quarter ended March 31, 2014 to the quarter ended March 31, 2013:

Revenues



                                       Three Months Ended
                                            March 31,                 Change
            (Dollars in thousands)      2014          2013         $         %
            Product                  $    2,352      $ 1,626     $ 726       44.6 %
            Service                       1,347        1,325        22        1.7 %

            Total revenues           $    3,699      $ 2,951     $ 748       25.3 %

Product revenue in the first quarter of 2014 included the recognition of revenue for one Magellan Robotic System and one Sensei system, and 685 catheters. Product revenue in the first quarter of 2013 included the recognition of revenue for one Sensei system and 592 catheters. The increase in product revenue was primarily due to a 100% increase in units recorded in revenue coupled with a 28% increase in the average selling prices of systems and a 16% increase in catheters sold partially offset by an 11% decrease in the average selling prices of catheters. Service revenue in the first quarter of 2014 was flat compared to the same period in 2013 due primarily to the timing of service contracts recognized in revenue.

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.


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Cost of Revenues and Gross Profit



                                        Three Months Ended
                                             March 31,                  Change
        (Dollars in thousands)           2014          2013         $           %
        Product                       $    2,744      $ 1,859     $ 885         47.6 %
        Service                              557          623       (66 )      (10.6 )%

        Total cost of revenues        $    3,301      $ 2,482     $ 819         33.0 %

        As a percentage of revenues         89.2 %       84.1 %
        Gross profit                  $      398      $   469     $ (71 )      (15.1 )%
        As a percentage of revenues         10.8 %       15.9 %

Gross profit for the first quarter of 2014 was $0.4 million or 10.8% of revenues, compared to $0.5 million or 15.9% of revenues in the first quarter of 2013. The decrease in gross margin in the first quarter of 2014 compared to the first quarter of 2013 was primarily driven by a decrease in product margins caused by additional costs of $0.3 million related to product testing, as well as $0.1 million related to royalties due to product mix, and $0.4 million due to lower direct labor absorption due to lower production levels. This decrease in product margin was partially offset by an increase in service margins. 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, average selling prices, the mix of products sold, customer mix, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development

Three Months Ended
March 31, Change
(Dollars in thousands) 2014 2013 $ % Research and development $ 4,415 $ 4,112 $ 303 7.4 %

Research and development expenses in the first quarter of 2014 were slightly higher compared to the first quarter of 2013 due to increase in clinical trial costs for the 6Fr Magellan Catheter and additional prototype material costs for new product initiatives. We expect research and development expenses for the remainder of 2014 to increase moderately due to development of new clinical programs and new product and technology development initiatives.

Selling, General and Administrative

Three Months Ended
March 31, Change
(Dollars in thousands) 2014 2013 $ % Selling, general and administrative $ 9,161 $ 7,418 $ 1,743 23.5 %

Selling, general and administrative expenses increased $1.7 million in the first quarter of 2014 compared to the first quarter of 2013 due to $0.9 million of increased costs from the development of our global sales organization and other marketing activities and $0.8 million of increased costs due to the CEO transition. 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.


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Interest and Other Expense, net

Three Months Ended
March 31, Change
(Dollars in thousands) 2014 2013 $ % Interest and other expense, net $ (1,249 ) $ (1,588 ) $ (339 ) (21.3 )%

Interest and other expense, net decreased in the first quarter of 2014 compared to the first quarter of 2013 primarily due to the $0.6 million write down of our equity investment in Luna recognized in the prior year first quarter partially offset by the higher interest and other expense in 2014 attributable to interest and other fees amortized in the current year first quarter for loan obligations.

Income Tax Expense

Three Months Ended
March 31, Change
(Dollars in thousands) 2014 2013 $ % Income tax expense $ (18 ) $ (38 ) $ (20 ) (52.6 )%

Income tax expense decreased in the first quarter of 2014 compared to the first quarter of 2013 primarily due to a decrease in taxable income in foreign jurisdictions.


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Liquidity and Capital Resources

Historical Financing Activities

We have incurred significant losses since our inception in September 2002 and, as of March 31, 2014 we had an accumulated deficit of $367.1 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. 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 August 2013, the Oxford Loan was fully repaid and extinguished under the loan agreement's prepayment option.

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.

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 (the "White Oak Loan"). 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. In the first quarter of 2014, we 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 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, 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


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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
(g) 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 March 31, 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 March 31, 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.

Sources and Uses of Cash

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



                                                             Three Months Ended
                                                                  March 31,
    (Dollars in thousands)                                   2014           2013
    Cash used in operating activities                      $ (10,752 )    $ (9,920 )
    Cash (used in) provided by investing activities             (126 )       6,626
    Cash provided by financing activities                     13,859           114

    Net increase (decrease) in cash and cash equivalents   $   2,981      $ (3,180 )

Operating Activities

Net cash used in operating activities during the first quarter of 2014 and 2013 primarily reflects the net loss for those periods, exclusive of certain items including our accrual for loss on settlement of litigation in 2013, depreciation and amortization expense and stock-based compensation. Additionally, net cash used in operating activities for the first quarter of 2014 was negatively impacted by an increase in inventory of $0.6 million which was offset by decrease of accounts receivable of 0.8 million and decrease of long-term accounts receivable of $1.3 million included in other assets. Net cash used in operating activities for the first quarter of 2013 benefited from a decrease in accounts receivable of $1.9 million, which was offset by an increase in inventory of $1.6 million.


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Investing Activities

Net cash provided by investing activities during the first quarter of 2014 primarily related to purchases of property and equipment of $0.1 million. Net cash provided by investing activities during the first quarter of 2013 primarily relates to 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 quarter of 2014 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 $0.5 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 quarter of 2013 primarily related to the proceeds from the exercise of stock options.

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 March 31, 2014, we have incurred losses totaling approximately $367.1 million and have not generated positive cash flows from operations. We expect such losses to continue through at least the year ended 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 March 31, 2014, our cash, cash equivalents, short-term investments and restricted cash balances were $38.4 million. We incurred an operating loss of $14.4 million and negative cash flows from operations of $10.8 million for the three months ended March 31, 2014. 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, and may not be able to sell our systems and associated catheters in volumes and at prices that allow as to meet the revenue targets necessary to . . .

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