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EX-31.1 - EXHIBIT 31.1 - HANSEN MEDICAL INCexhibit31_1.htm
EX-31.2 - EXHIBIT 31.2 - HANSEN MEDICAL INCexhibit31_2.htm
EX-32.2 - EXHIBIT 32.2 - HANSEN MEDICAL INCexhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - HANSEN MEDICAL INCexhibit32_1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
Form 10-Q
(AMENDMENT NO. 1)
___________________________________
(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, 2015
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the registrant’s common stock as of July 31, 2015 was 18,878,228*.
*The number of shares have been retroactively adjusted to reflect the reverse stock split of the Company's outstanding shares of common stock at a ratio of one-for-ten effective on September 22, 2015.
 



EXPLANATORY NOTE

 
This Amendment No. 1 on Form 10-Q/A for the quarter ended June 30, 2015, amends the Form 10-Q that was originally filed with the U.S. Securities and Exchange Commission on August 10, 2015. The sole purpose of this Amendment No. 1 is to correct the condensed consolidated statements of operations to include a deemed dividend related to the accretion of discount on Series A convertible preferred stock of $15.3 million and to update the following financial statements and disclosures that were impacted from the correction:

Updated Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders' Equity.
Updated Condensed Consolidated Statement of Cash Flow disclosure of non-cash investing and financing activity.
Updated Note 9 - Convertible Preferred Stock, Common Stock and Warrants to include disclosure of deemed dividend related to beneficial conversion feature of Series A convertible preferred stock and accretion of discount.
Updated Note 12 - Net Loss Per Share to include disclosure of deemed dividend related to accretion of discount on Series A convertible preferred stock.
Added Note 15 - Restatement of Condensed Consolidated Statements of Operations
Updated Item 4 - Control and Procedures.

Except as described above, no other changes have been made to the Original Filing or any other exhibits. This Amendment speaks as of the filing date of the Original Filing and does not reflect events occurring after the filing date, or modify or update those disclosures that may be affected by subsequent events. As such, this Form 10-Q/A should be read in conjunction with the Original Filing.





PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
HANSEN MEDICAL, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share data)
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,233

 
$
24,528

Short-term investments
1,431

 
1,973

Accounts receivable, net of allowance of $35 as of June 30, 2015 and $0 as of December 31, 2014
2,497

 
5,121

Inventories
11,184

 
11,492

Prepaids and other current assets
986

 
1,678

Total current assets
56,331

 
44,792

Property and equipment, net
2,639

 
2,328

Restricted cash
5,380

 
5,376

Other assets
660

 
1,179

Total assets
$
65,010

 
$
53,675

LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,025

 
$
2,534

Accrued liabilities
3,309

 
4,942

Current portion of deferred revenue
2,494

 
3,422

Total current liabilities
7,828

 
10,898

Deferred rent, net of current portion
313

 
366

Deferred revenue, net of current portion
120

 
105

Long-term debt
34,528

 
34,385

Other long-term liabilities
152

 
152

Total liabilities
42,941

 
45,906

Commitments and contingencies (Note 7)

 

Preferred stock, par value $0.0001, 10,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; zero shares issued and outstanding at June 30, 2015 and December 31, 2014 (Note 9)

 

Stockholders’ equity:
 
 
 
Common stock, par value $0.0001:
 
 
 
Authorized: 30,000 shares; issued and outstanding: 18,876 and 13,326 shares at June 30, 2015 and December 31, 2014, respectively *
19

 
13

Additional paid-in capital
454,535

 
414,361

Accumulated other comprehensive income (loss)
(323
)
 
305

Accumulated deficit
(432,162
)
 
(406,910
)
Total stockholders’ equity
22,069

 
7,769

Total liabilities, preferred stock and stockholders’ equity
$
65,010

 
$
53,675

*The Company’s financial statements have been retroactively adjusted to reflect the reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten effective on September 22, 2015.
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


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,
 
2015
 (as restated)
 
2014
 
2015
(as restated)
 
2014
Revenues:
 
 
 
 
 
 
 
Product
$
1,677

 
$
5,518

 
$
6,151

 
$
7,870

Service
1,415

 
1,369

 
2,735

 
2,716

Total revenues
3,092

 
6,887

 
8,886

 
10,586

Cost of revenues:
 
 
 
 
 
 
 
Product
1,866

 
4,283

 
5,762

 
7,027

Service
868

 
702

 
1,610

 
1,259

Total cost of revenues
2,734

 
4,985

 
7,372

 
8,286

Gross profit
358

 
1,902

 
1,514

 
2,300

Operating expenses:
 
 
 
 
 
 
 
       Research and development
3,899

 
4,809

 
7,334

 
9,224

       Selling, general and administrative
6,433

 
8,146

 
13,135

 
17,307

Total operating expenses
10,332

 
12,955

 
20,469

 
26,531

Loss from operations
(9,974
)
 
(11,053
)
 
(18,955
)
 
(24,231
)
Change in fair value of warrant liability
(1,317
)
 

 
(2,993
)
 

Interest and other expense, net
(1,201
)
 
(1,222
)
 
(2,468
)
 
(2,471
)
Loss before income taxes
(12,492
)
 
(12,275
)
 
(24,416
)
 
(26,702
)
Income tax expense
(15
)
 
(15
)
 
(24
)
 
(33
)
Net loss
(12,507
)
 
(12,290
)
 
(24,440
)
 
(26,735
)
Deemed dividend related to beneficial conversion feature of Series A convertible preferred stock and accretion of discount
(35,546
)
 

 
(35,546
)
 

Cumulative dividend on Series A convertible preferred stock
(812
)
 

 
(812
)
 

Net loss attributable to common stockholders
$
(48,865
)
 
$
(12,290
)
 
$
(60,798
)
 
$
(26,735
)
Basic and diluted net loss per common share *
$
(3.00
)
 
$
(1.10
)
 
$
(4.10
)
 
$
(2.48
)
Shares used to compute basic and diluted net loss per common share *
16,311

 
11,200

 
14,828

 
10,769


*The Company’s financial statements have been retroactively adjusted to reflect the reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten effective on September 22, 2015.
The accompanying notes are an integral part of these condensed consolidated financial statements.


4


HANSEN MEDICAL, INC.
Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (As Restated)
(Unaudited)
(In thousands)
 
Convertible Preferred Stock
 
 
Common Stock
 
Additional Paid-
In Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
Shares *
 
Amount
 
 
 
 
Balances, December 31, 2014

 
$

 
 
13,326

 
$
13

 
$
414,361

 
$
305

 
$
(406,910
)
 
$
7,769

Issuance of common stock under equity incentive plan

 

 
 

 

 
4

 

 

 
4

Issuances of common stock from restricted stock units

 

 
 
24

 

 

 

 

 

Withholding taxes paid on vested restricted stock units

 

 
 

 

 
(25
)
 

 

 
(25
)
Issuance of common stock under employee stock purchase plan

 

 
 
24

 

 
165

 

 

 
165

Employee share-based compensation expense

 

 
 

 

 
1,772

 

 

 
1,772

Issuance of Series A convertible preferred stock,net of discount related to warrants of $14,776 and issuance cost of $546
54

 
19,678

 
 

 

 

 

 

 

Beneficial conversion feature of Series A convertible preferred stock

 
(20,224
)
 
 

 

 
20,224

 

 

 
20,224

Deemed dividend related to beneficial conversion feature of Series A Convertible preferred stock and accretion of discount

 
35,546

 
 

 

 
(35,546
)
 

 

 
(35,546
)
Reclassification of Series E warrant liability to equity

 

 
 

 

 
17,774

 

 

 
17,774

Cumulative dividend on Series A convertible preferred stock

 
812

 
 

 

 

 

 
(812
)
 
(812
)
Issuance of common stock upon conversion of Series A convertible preferred stock
(54
)
 
(35,000
)
 
 
5,510

 
5

 
34,995

 

 

 
35,000

Issuance of common stock related to Series A convertible preferred stock dividend

 
(812
)
 
 

 
1

 
811

 

 

 
812

Retirement of treasury shares

 

 
 
(8
)
 

 

 

 

 

Net loss

 

 
 

 

 

 

 
(24,440
)
 
(24,440
)
Change in unrealized loss on investments

 

 
 

 

 

 
(544
)
 

 
(544
)
Translation adjustments

 

 
 

 

 

 
(84
)
 

 
(84
)
Balances, June 30, 2015

 
$

 
 
18,876

 
$
19

 
$
454,535

 
$
(323
)
 
$
(432,162
)
 
$
22,069


*The Company’s financial statements have been retroactively adjusted to reflect the reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten effective on September 22, 2015.

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

5


HANSEN MEDICAL, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(12,507
)
 
$
(12,290
)
 
$
(24,440
)
 
$
(26,735
)
Other comprehensive loss, net:
 
 
 
 
 
 
 
Change in unrealized losses on investments
(442
)
 
(125
)
 
(544
)
 
(42
)
Foreign currency translation adjustment
(20
)
 
17

 
(84
)
 
19

Change in other comprehensive loss
(462
)
 
(108
)
 
(628
)
 
(23
)
Comprehensive loss
(12,969
)
 
(12,398
)
 
(25,068
)
 
(26,758
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


HANSEN MEDICAL, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(24,440
)
 
$
(26,735
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
514

 
1,345

Stock-based compensation
1,772

 
1,415

Payment-in-kind interest on loan
521

 
505

Amortization of deferred finance costs and discount on debt
193

 
193

Change in fair value of warrant liability
2,993

 

Provision (recovery) of doubtful accounts
35

 
(100
)
Write-off of discontinued product line inventory
121

 

Gain from sales of property and equipment
(36
)
 

Loss on sale of financing receivable

 
19

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,625

 
1,159

Inventories
(518
)
 
27

Deferred cost of revenues
70

 
78

Prepaids and other current assets
621

 
493

Other long-term assets
(52
)
 
780

Accounts payable
(788
)
 
(351
)
Accrued liabilities
(1,633
)
 
1,321

Deferred revenue
(913
)
 
316

Other long-term liabilities
(53
)
 
522

Net cash used in operating activities
(18,968
)
 
(19,013
)
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(156
)
 
(331
)
Proceeds from sales of property and equipment
36

 

Change in restricted cash
(4
)
 
(11
)
Net cash used in investing activities
(124
)
 
(342
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of Series A convertible preferred stock
35,000

 

Proceeds from exercise of Series A warrants

 
14,000

Costs related to issuance of Series A convertible preferred stock
(267
)
 

Proceeds from exercise of common stock options
3

 
2,586

Proceeds from employee stock purchase plan
165

 
293

Withholding taxes paid on vested restricted stock units
(20
)
 
(620
)
Net cash provided by financing activities
34,881

 
16,259

Effect of exchange rate changes on cash and cash equivalents
(84
)
 

Net increase (decrease) in cash and cash equivalents
15,705

 
(3,096
)
Cash and cash equivalents at beginning of period
24,528

 
27,995

Cash and cash equivalents at end of period
$
40,233

 
$
24,899

Supplemental disclosure of:
 
 
 
Cash paid for interest
$
1,908

 
$
1,851

Non-cash investing and financing activity:
 
 
 
Equipment transfer from inventories to property and equipment
$
705

 
$

Series A convertible preferred stock issuance costs not yet paid
$
279

 
$

Cumulative dividend on Series A convertible preferred stock
$
812

 
$

Deemed dividend related to beneficial conversion feature of Series A convertible preferred stock and accretion of discount (as restated)
$
35,546

 
$

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

7


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 in September 2002 and is headquartered in Mountain View, California. The Company has wholly-owned subsidiaries located in the United Kingdom and Germany. Both subsidiaries are engaged in marketing the Company’s products in the Europe, Middle East and Africa (“EMEA”) region.
Need to Raise Additional Capital
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. Since inception, the Company has incurred cumulative net losses of approximately $432.2 million. The Company expects such losses to continue as it commercializes its technologies and develops new applications and products.
The Company continues to face significant uncertainties and challenges. The Company faces uncertainty related to the commercialization of its MagellanTM Robotic System (“Magellan System”), and its projected revenue is heavily dependent on a successful commercialization of this system and Sensei® Robotic System (“Sensei System”). In addition, the Company is also subject to minimum liquidity requirements under its existing borrowing arrangements with White Oak Global Advisors, LLC (“White Oak”), 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 and the remaining $2.0 million in eligible accounts receivable. In addition, White Oak also requires that the Company’s investment in a Certificate of Deposit, along with the investment in Luna Innovations, Inc., to be restricted subject to lenders’ control.
On March 11, 2015, the Company raised $35.0 million in gross proceeds from the sale of Series A convertible preferred stock and a related issuance of Series E warrants (“Series E Warrants”) to purchase common stock (see Note 9). As of June 30, 2015, the Company’s cash, cash equivalents, short-term investments and restricted cash balances were $47.0 million. The Company anticipates that its existing available capital resources as of June 30, 2015 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company will need to obtain sufficient additional funding to satisfy its current and longer term liquidity requirements 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 its continuing cash needs. 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 current and longer term needs, the Company may be required to extend its existing cash and liquidity by adopting additional 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 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 will consider the implementation of additional cost reductions if and as circumstances warrant. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Basis of Presentation
The 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

8


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, 2014 was derived from audited financial statements. In the opinion of the Company’s management, these unaudited financial 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, 2014 as filed with the SEC.
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassification of Prior Period Balances
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
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, the valuation of warrants, and 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 System and the associated catheters as well as the sale of customer service contracts, which include post-contract customer support (“PCS”). The Company sells its products directly to customers as well as through distributors. Under the Company’s revenue recognition policy, revenues are recognized when persuasive evidence of an arrangement exists, title and risk of loss has passed, delivery to the customer has occurred or the services have been fully rendered, the sales price is fixed or determinable and collectability is reasonably assured.
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, or 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 its PCS contracts which include planned and corrective maintenance services, software updates, bug fixes, and warranties. 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 have standalone value and 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. For multiple-element arrangements revenue is allocated to each element based on their relative selling prices. Relative selling prices are based first on vendor specified objective evidence (“VSOE”), then on third-party evidence of selling price (“TPE”) when VSOE does not exist, and then on management’s best estimate of the selling price (“ESP”) when VSOE and TPE do not exist. Because the Company has neither VSOE nor TPE for its system, the allocation of revenue is based on ESP for the

9


systems sold. The objective of ESP is to determine the price at which the Company would transact a sale, had the product been sold on a stand-alone basis. 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, or extended payment terms or 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. The Company also ships under a limited commercial evaluation program to allow certain strategic accounts to install and utilize systems for a limited trial period of three to six months 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 reasonably assured 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 reasonably assured, the revenue is deferred and recognized at the time collection becomes reasonably assured, 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 and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts at two financial institution. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
The Company had one customer who constituted 29% of the Company’s accounts receivable at June 30, 2015. The Company had four customers who constituted 26%, 14%, 12% and 12%, respectively, of the Company’s net accounts receivable at December 31, 2014. As of June 30, 2015, the Company has not experienced any significant losses on its accounts receivable.
One customer accounted for 16% of total revenues during the three months ended June 30, 2015. Three customers accounted for 27%, 11% and 11%, respectively, of total revenues during the three months ended June 30, 2014. Three customers accounted for 15%, 11% and 10%, respectively, of total revenues during the six months ended June 30, 2015. Three customers accounted for 18%, 12% and 10%, respectively, of total revenues during the six months ended June 30, 2014.
Most of the products developed by the Company require clearance from the U.S. Food and Drug Administration (“FDA”) or corresponding approval by foreign regulatory agencies prior to commercial sales. These clearances and approvals are required for both the Sensei and Magellan Systems and all related catheters and accessories:
Sensei: The Company received CE Mark approval to market its Sensei System in Europe in the fourth quarter of 2006 and received CE Mark approval to market its Artisan® Control Catheter in Europe in May 2007. The Company received FDA clearance for the marketing of its Sensei System and Artisan catheters for manipulation, positioning and control of certain mapping catheters during electrophysiology (“EP”) procedures in the United States in May 2007.
Magellan: At the current time the Company has received clearance and approval for the Magellan System and the Magellan 6Fr, 9Fr and 10Fr Robotic Catheters and related accessories in various territories. The Company received CE Mark approval for its Magellan System in July 2011 and received CE Mark approval for the Magellan 9Fr Robotic Catheter and related accessories in October 2011. The Magellan 6Fr Robotic Catheter received CE Mark approval in October 2014, while the Magellan 10Fr Robotic Catheter received CE Mark approval in April 2015. The Company received FDA clearance for marketing its Magellan System, including the Magellan 9Fr Robotic Catheter and accessories in June 2012, the Magellan 6Fr

10


Robotic Catheter in February 2014, and the Magellan 10Fr Robotic Catheter in July 2015. The FDA clearances and CE Mark approvals enable the company to initiate use of all Magellan Systems and catheters with its customers in the United States, the European Union and certain other geographies. However, there can be no assurance that current products or any new products the Company develops in the future will receive the clearances or approvals necessary to allow the Company to market those products in certain desirable markets. If the Company is denied clearance or approvals or clearance or approvals are delayed, it could have a material adverse impact on the Company.
The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert, and have asserted in the past, that the Company’s products or the use of the Company’s products are covered by United States or foreign patents held by them. This risk is heightened due to the numerous issued and pending patents relating to the use of catheter-based procedures in the medical technology field.
Fair Value 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.
Beneficial Conversion Feature
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 470-20, Debt with Conversion and Other Options, the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible instruments that have conversion features at fixed rates that are in the-money when issued in the second quarter of 2015. The BCF present in a convertible instrument is recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in-capital. The BCF is calculated at the commitment date as the difference between the conversion price and the fair value of the Company’s common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible (intrinsic value). The amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument.
Stock-based Compensation
The Company accounts for share-based compensation plan in accordance with the provisions of FASB ASC No. 718-10-30, Stock Compensation Initial Measurement, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options, restricted stock units (“RSUs”), performance stock units (“PSUs”) and employee stock purchases under our Employee Stock Purchase Plan (“ESPP”) based on estimated fair values and recognizes stock-based compensation expense, net of estimated forfeitures, on a ratable basis over the requisite service period. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton (“BSM”) option valuation model.
The BSM option valuation model determines the fair value of stock-based awards using the following assumptions
Expected Volatility. The Company’s estimate of volatility is based on the historical volatilities of its stock price.

11


Expected Term. The Company estimates the expected term based on its historical settlement experience related to vesting and contractual terms while giving consideration to awards that have life cycles less than the contractual terms and vesting schedules in accordance with authoritative guidance.
Risk-Free Interest Rate. The risk-free interest rate that the Company uses in the BSM option valuation model is the implied yield in effect at the time of option grant based on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the option grants. For ESPP grants, the Company uses the 6-month Constant Maturity Treasury rate.
Dividend Yield. The Company has never paid any cash dividends on its common stock and it does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses a dividend yield of zero in the BSM option valuation model.
The Company measures the fair value of RSUs and PSUs using the closing stock price of a share of the Company’s common stock on the grant date. In addition, the Company also estimates a forfeiture rate for its stock options and RSUs. The Company estimates its forfeiture rate based on an analysis of its actual forfeitures based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and, if the actual number of future forfeitures differs from its estimates, the Company might be required to record adjustments to its stock-based compensation in future periods. For PSUs, the Company recognizes stock-based compensation expense based on the probable outcome that the performance condition will be achieved.
Recent Accounting Pronouncements
In May 2014, the 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 guidance is originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of the previously issued guidance ASU 2014-09 by one year for public business entities. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. Under current guidance, an entity reports debt issuance costs in the balance sheet as deferred charges (i.e. as an asset). For public companies, the ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Entities would apply the new guidance retrospectively to all prior periods. The Company is currently assessing the impact of the adoption of ASU 2015-03 on its consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from GAAP the concept of extraordinary items, and is effective for annual periods beginning after December 15, 2015, with early adoption permitted. The change primarily involves presentation and disclosure and, therefore, is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods beginning thereafter, with early adoption permitted. The Company has been assessing the going concern issue since 2010 on an interim and annual basis and is currently assessing whether this new guidance will have an impact on the Company’s consolidated financial statements or footnotes.

12


3. Fair Value of Assets and Liabilities
The Company’s financial instruments consist principally of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term and long-term debt. Cash and cash equivalents, short-term investments and accounts receivable, net of allowance, are reported at their respective fair values on the consolidated balance sheets. Short-term and long-term debt are reported at their amortized cost on the consolidated balance sheets. The remaining financial instruments are reported on the consolidated balance sheets at amounts that approximate current fair values.
The amortized cost and fair value of assets, along with gross unrealized gains and losses, were as follows (in thousands):
Cash, Cash Equivalents, Short-term Investments and Restricted Cash
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Cash and
cash
Equivalents
 
Short-term
Investments
 
Restricted
Cash
June 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
11,281

 
$

 
$

 
$
11,281

 
$
11,281

 
$

 
$

Money market funds
34,332

 

 

 
34,332

 
28,952

 

 
5,380

Corporate equity securities
1,572

 
(141
)
 

 
1,431

 

 
1,431

 

 
$
47,185

 
$
(141
)
 
$

 
$
47,044

 
$
40,233

 
$
1,431

 
$
5,380

December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
3,586

 
$

 
$

 
$
3,586

 
$
3,586

 
$

 
$

Money market funds
26,318

 

 

 
26,318

 
20,942

 

 
5,376

Corporate equity securities
1,572

 
401

 

 
1,973

 

 
1,973

 

 
$
31,476

 
$
401

 
$

 
$
31,877

 
$
24,528

 
$
1,973

 
$
5,376

Fair Value Measurements
The fair value hierarchy of the Company’s assets that are measured at fair value, by level, 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, 2015:
 
 
 
 
 
 
 
Money market funds
$
34,332

 
$

 
$

 
$
34,332

Corporate equity securities
1,431

 

 

 
1,431

 
$
35,763

 
$

 
$

 
$
35,763

December 31, 2014:
 
 
 
 
 
 
 
Money market funds
$
26,318

 
$

 
$

 
$
26,318

Corporate equity securities
1,973

 
 
 
 
 
1,973

 
$
28,291

 
$

 
$

 
$
28,291

Investment instruments valued using Level 1 inputs include the Company’s money market securities and certain of the corporate equity securities which were obtained by the Company as part of the Luna litigation settlement.
The Company periodically assesses whether significant facts and circumstances have arisen to indicate that an impairment, which is other than temporary, of the fair value of any underlying investment has occurred.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three and six months ended June 30, 2015.

13


The changes in Level 3 liabilities measured at fair value on a recurring basis was as follow (in thousands):
 
Level 3 Input for Six Months Ended June 30, 2015
 
(In thousands)
Balance at December 31, 2014
$

Additions at March 11, 2015
(14,776
)
Change in fair value of warrant liability
(2,993
)
Reclassification to additional paid-in capital
17,769

Balance at June 30, 2015
$

Warrant Liability
In connection with the issuance of Series A convertible preferred stock on March 11, 2015, the Company also issued Series E Warrants to the participating investors to purchase an aggregate of 5,384,600 shares of common stock with an exercise period of two years from the date of issuance. On the date of issuance, the exercise price for the Series E Warrants was the lesser of $9.75 per share or a 50% premium on the per share trailing volume weighted average share price of the common stock on NASDAQ for the ten trading days ending on dates specified in the form of Series E Warrants filed with the SEC. The Series E Warrants were not exercisable until receipt of stockholder approval to among other things increase the number of authorized shares of common stock of the Company. The proposal relating to such approval was presented and received the stockholder approval at the 2015 Annual Meeting of Stockholders of the Company held on May 12, 2015 (the “Requisite Stockholder Approval”). As a result of the contingency which was deemed outside the Company’s control, such Series E Warrants did not originally meet the criteria for classification as equity under ASC 815. As such, the Company classified the Series E Warrants as current liabilities at fair value upon issuance of $14.8 million. The Company used a third party valuation that utilized the Monte Carlo simulation model to estimate the fair value of the Series A convertible preferred stock and Series E Warrants. The valuation used a simulation of the Company’s periodic stock price, expected volatility of the price, adjusted for conversion price, and the remaining contractual term of the warrants. The Series E Warrants were subject to re-measurement at each balance sheet date, with any change in fair value recognized as warrant expense, a component of other income (expense) reflected within the statement of operations. The Company recorded the change in fair value of $1.3 million and $3.0 million in other income (expense) on the condensed consolidated statements of operations for the three and six months ended June 30, 2015.
Upon receipt of Requisite Stockholder Approval, all criteria for the Series E Warrants to be classified as equity were met. Using the BSM model with an exercise price of $9.75 per share for the Series E Warrants, the Company reclassified the warrant liability of $17.8 million, representing the fair value of the Company’s warrant liability as of the Requisite Stockholder Approval date, to additional paid-in capital. See Note 9 for further information regarding the Company’s 2015 private placement of Series A convertible preferred stock and Series E Warrants. All of the Series E Warrants are currently issued and outstanding as of June 30, 2015.
Long-term Debt
The fair value of the Company’s long-term debt was estimated to be $34.5 million as of June 30, 2015 and $34.2 million as of December 31, 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 constitute 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.

14


4. Balance Sheet Components
Inventories (in thousands)
 
June 30,
2015
 
December 31,
2014
Raw materials
$
4,887

 
$
4,996

Work in process
2,934

 
4,571

Finished goods
3,363

 
1,925

Total Inventories
$
11,184

 
$
11,492

Property and equipment, net (in thousands)
 
June 30,
2015
 
December 31,
2014
Furniture and leasehold improvements
$
11,267

 
$
11,455

Laboratory equipment
12,041

 
11,374

Computer equipment and software
2,937

 
2,911

 
26,245

 
25,740

Less: Accumulated depreciation and amortization
(23,606
)
 
(23,412
)
Property and equipment, net
$
2,639

 
$
2,328

Accrued liabilities (in thousands)
 
June 30,
2015
 
December 31,
2014
Accrued salaries, commission, bonus and benefits
$
1,554

 
$
2,835

Accrued royalties
439

 
594

Accrued legal and other professional fees
393

 
169

Tax accruals
323

 
274

Clinical related accruals
208

 
394

Other accrued expenses
392

 
676

Accrued liabilities
$
3,309

 
$
4,942

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 $20.0 million licensing fee, and entered into a stock purchase agreement to buy 529,101 shares of the Company’s common stock for an aggregate purchase price of $10.0 million. The amendment of the license agreement updated 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. However, the Company has no obligation 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. The Company has concluded that the value associated with patents filed or conceived in the three years subsequent to the amendment was de minimis and therefore the $20.0 million upfront payment for the licensing of intellectual property was recognized in the statement of operations in fiscal year 2012. The $10.0 million associated with the stock purchase agreement was recorded to common stock and additional paid-in capital on the balance sheet in 2012.

The Company has minimum royalty obligations of $0.2 million per year under the terms of its cross license agreement with Intuitive Surgical. For the three months ended June 30, 2015 and 2014, the Company incurred an immaterial amount and $0.1 million,respectively, of cost related to the royalty obligations to Intuitive Surgical. For both the six months ended June 30, 2015 and 2014, the Company incurred royalty obligations to Intuitive Surgical of $0.1 million.
6. Agreements with Philips

15


In February 2011, the Company entered, directly and through a wholly-owned subsidiary, into various agreements with Koninklijke Philips Electronics N.V. (“Philips”) to allow Philips to develop and commercialize the non-robotic applications of the Company’s Fiber Optic Shape Sensing and Localization (“FOSSL”) technology (the “FOSSL Agreement”). Under the terms of the FOSSL Agreement, Philips obtained exclusive right to develop and commercialize the FOSSL technology in the non-robotic vascular, endoluminal and orthopedic fields. Philips also received non-exclusive rights in other non-robotic medical device fields, but not to any multi-degree of freedom robotic applications. Under the terms of the FOSSL Agreement, if Philips did not meet certain specified commercialization obligations, the Company reserved 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 FOSSL Agreement also contains customary representations, warranties and indemnification provisions by each party. Each party may terminate the agreement 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.
In February 2011, the Company amended its extended joint development agreement with Philips (the “JDA”), 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 contributed to the development of the system. Under the amendment, the Company was 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 were 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 were to be calculated on a consistent annual basis between 2014 and 2020 in any year only to the extent that Philips achieved a substantial number of commercial placements of FOSSL-enabled products in the calendar year. The Company’s royalty obligations under the JDA provided for the payment of royalties to Philips through October 2017.
In August 2015, the Company and Philips entered into an amendment to the FOSSL Agreement and the JDA (the “Amended Agreements”), extinguishing the Company’s rights to re-acquire the licenses in the non-robotic vascular, endoluminal and orthopedic fields in FOSSL technology in exchange for a reduction of all royalties owed or due between the parties of fifty percent (50%). Under the Amended Agreements, the Company’s royalty obligations to Philips based on sales of the Vascular Systems were reduced by fifty percent (50%). The Company’s royalty obligations continue through October 2017. Similarly, Philips royalty obligations were also all reduced by fifty percent (50%), including but not limited to all royalty obligations due under the Amended Agreements that arise from Philips’ sublicensing the FOSSL technology. Under the Amended Agreements, Philips’ FOSSL-related royalty obligations will be calculated on a consistent basis for the royalty period starting with the first calendar year after the first sale by Philips of a FOSSL system and ending with the sixth calendar year after the first sale, but only to the extent that Philips achieves certain number of commercial placements of FOSSL-enabled products during the royalty period.
The Amended Agreements contain 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.
Under the terms of the Amended Agreements, the Company continues to have no minimum obligation with Philips, and the royalty obligation is based on per unit sales of the Magellan Systems and vascular catheters. For the three months ended June 30, 2015 and 2014, the Company incurred an immaterial amount and $0.5 million, respectively, of cost related to the royalty obligations to Philips. For the six months ended June 30, 2015 and 2014, the Company incurred royalty obligations to Philips of $0.7 million and $0.6 million, respectively.
7. Commitments and Contingencies
Operating Lease and Rental 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 rents office space in London, England under an office rental agreement that ends in April 2016.

16


As of June 30, 2015, future minimum payments under the lease and rental are as follows (in thousands):
Years Ending December 31,
 Future Minimum
Lease Payments
2015 (remainder of year)
$
1,127

2016
2,204

2017
2,216

2018
2,282

2019
1,759

Total
$
9,588

Rent expense on a straight-line basis was $0.8 million and $0.6 million for both the three months ended June 30, 2015 and 2014, respectively, and $1.4 million and $1.3 million for the six months ended June 30, 2015 and 2014, respectively.
Other Royalty Obligations
The Company has minimum royalty obligations of $100,000 per year under a license agreement with Mitsubishi Electric Research Laboratories, Inc. (“Mitsubishi”), which reduces to $55,000 per year if the license becomes non-exclusive. The royalty obligation expires in 2018. The Company incurred cost in the amount of $14,000 and $48,000, respectively, related to the royalty obligations to Mitsubishi for the three months ended June 30, 2015 and 2014. Royalty obligations to Mitsubishi for the six months ended June 30, 2015 and 2014 were $49,000 and $67,000, respectively.
Indemnification
The Company has agreements with each member of its Board of Directors, its President and Chief Executive Officer, its former President and its Interim Chief Financial Officer indemnifying them against liabilities arising from, among other things, actions taken against the Company. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying financial statements.
The Company has agreements with certain customers indemnifying them against liabilities arising from legal actions relating to the customer’s use of intellectual property owned by the Company. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying financial statements.
Legal Proceedings
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
White Oak Loan
In July 2013, the Company executed a secured term loan agreement with 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 and security 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 previous indebtedness. 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, which in aggregate are accounted for as debt issuance costs and amortized to interest expense over the life of the loan. Under the loan and security 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

17


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. 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 loan and security agreement. The Company recognized expense of $0.1 million for the amortization of debt issuance costs related to the White Oak loan for each of the three months ended June 30, 2015 and 2014. The Company recognized expense of $0.2 million for the amortization of debt issuance costs related to the White Oak loan for each of the six months ended June 30, 2015 and 2014.
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 loan and security agreement and have granted first priority security interests in their assets, excluding any of their intellectual property, to secure their guarantee obligations. Under the loan and security 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 pledged to the lenders shares of each of its direct and indirect subsidiaries as collateral for the loan. Pursuant to the loan and security 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 $2.0 million in eligible 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 its assets described in the loan and security 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, 2015, the Company was in compliance with all financial covenants.
Future minimum payments due on the debt as of June 30, 2015 are as follows (in thousands):
Years Ending December 31,
 
2015 (remainder of year)
$
1,970

2016
4,009

2017
41,782

Total remaining payments
47,761

Less: Amount representing interest
(13,233
)
 
34,528

Less: Current portion of long-term debt

Long-term debt, net of current portion
$
34,528

9. Convertible Preferred Stock, Common Stock and Warrants
2015 Private Placement of Redeemable Convertible Preferred Stock and Warrants
On March 11, 2015, the Company entered into a securities purchase agreement (“Purchase Agreement”) to sell an aggregate of 53,846 shares of Series A convertible preferred stock at a per share price of $650. After receipt of Requisite Stockholder Approval on May 12, 2015, the Series A convertible preferred stock converted into 5,509,492 shares of common stock. The conversion ratio was equal to the number obtained by dividing (i) the sum of $650 and the amount of any accrued but unpaid dividends by (ii) $0.65. The amount of accrued but unpaid dividends included as part of the conversion calculation included an initial rate of 2% (the “first period dividend”) plus an increase of 2% in the second quarter of 2015 (the “second period dividend”) based on the number of days the Series A convertible preferred stock remained outstanding. As a result of the Requisite Stockholder Approval, the first period dividend and second period dividend were the only dividends included in the conversion calculation. On the date of the issuance, the allocated fair value of the common stock was greater than the proceeds received for the Series A convertible preferred stock. As such, the Company accounted for potentially beneficial conversion

18


features under ASC 470-20, Debt with Conversion and Other Options. The Company recorded a deemed dividend charge of $35.5 million for the accretion of a discount on the Series A convertible preferred stock resulting from an allocation of a portion of the proceeds to the warrants and a beneficial conversion feature embedded within the Series A convertible preferred stock, which equals the amount by which the estimated fair value of the common stock issuable upon conversion of the issued Series A convertible preferred stock exceeded the proceeds from such issuance, and a cumulative Series A convertible preferred stock dividend of $0.8 million. Additionally, upon conversion of the preferred stock, a deemed dividend of$15.3 million was recorded due to the discount on the preferred stock created by allocating a portion of the proceeds to the warrants. The deemed dividend and cumulative dividend were non-cash transactions and reflected below net loss to arrive at net loss allocable to common stockholders.
As part of the Purchase Agreement, the Company also issued Series E Warrants to the participating investors to purchase an aggregate of 5,384,600 shares of common stock with an exercise period of two years from the date of issuance. On the issuance date, the exercise price for the Series E Warrants was the lesser of $9.75 per share or a 50% premium on the per share trailing volume-weighted average share price of the common stock on NASDAQ for the ten trading days ending on dates specified in the form of Series E Warrants filed with the SEC. However, certain of the Series E Warrants could not be exercised until the Requisite Stockholder Approval was obtained. As a result of this contingency which was deemed outside the Company’s control as well as the variable number of underlying shares due to the floating exercise price, such Series E Warrants did not meet the criteria for classification as equity under ASC 815. As such, the Company classified the Series E Warrants as current liabilities at fair value upon issuance. The Series E Warrants were subject to re-measurement at each balance sheet date, with any change in fair value recognized as warrant expense, a component of other income (expense) reflected within the statement of operations. The Company used a third party valuation that utilized the Monte Carlo simulation model to estimate the fair value of the Series A convertible preferred stock and Series E Warrants. The valuation used a simulation of the Company’s periodic stock price, expected volatility of the price, adjusted for conversion price, and the remaining contractual term of the Series E Warrants. The fair value of the Series E Warrants was $14.8 million upon issuance. Once the Requisite Stockholder Approval was obtained on May 12, 2015, there was sufficient authorized shares underlying the warrants and the exercise price was fixed at $9.75 per share such that the variable number of shares that could be issued became fixed. As a result, all criteria for classification of the Series E Warrants as equity were met. The Company reclassified the warrant liability amounting to $17.8 million to additional paid-in capital, which equals to the fair value of the Company’s warrant liability on May 12, 2015. The change in fair value of $1.3 million and $3.0 million was recorded in other income (expense) on the condensed consolidated statements of operations for the three and six months ended June 30, 2015.
The Company had incurred and capitalized approximately $0.5 million of costs associated with this offering, which were recorded as an addition to the paid-in capital on the condensed consolidated balance sheet.
2014 Warrant Exchange
On July 30, 2014, the Company entered into a definitive agreement (the “Exchange Agreement”) with certain warrant holders to cancel and exchange (the “Exchange”) an aggregate of 1,022,117 of the Company’s outstanding Series B Warrants and an aggregate of 1,022,117 of the Company’s outstanding Series C Warrants. In exchange, the Company issued warrants (the “Exchange Warrants”) to purchase an aggregate of 2,672,837 shares of common stock. The Exchange was completed in August 2014.
The Exchange Warrants are comprised of the following two tranches: (a) Series B/C exchange warrants (“Series B/C Exchange Warrants”) exercisable for an aggregate of 2,044,235 shares of common stock, with an exercise price equal to $11.30 per share, 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 628,602 shares of common stock, with an exercise price per share equal to the Closing Bid Price. The Series B/C Exchange Warrants were subject to mandatory exercise within 14 days of issuance and were exercised in August 2014, resulting in gross proceeds to the Company of approximately $23.1 million. The Series D Warrants 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.
As a result of a change in the terms and conditions of the Series B and C Warrants, the transaction was treated as a modification of the original award using the accounting guidance in ASC 718-20-35-3; this guidance implies that the entity repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional incremental value. Incremental cost shall be measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price, BSM options pricing model and

19


other pertinent factors at that date. 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 recorded a $2.9 million warrant exchange charge in 2014 based upon the difference between the fair value of the Series B and C Warrants immediately prior to the Exchange and the fair value of the newly issued Series B/C Exchange and Series D Warrants.
2013 Private Placement Transaction
On July 30, 2013, the Company entered into a securities purchase agreement to sell an aggregate of 2,845,528 shares of its common stock at a per share price of $12.30 and warrants to purchase an aggregate of 3,414,634 shares of common stock at a per warrant price of $1.25 in a private placement transaction. The warrants were comprised of the following three series: Series A warrants exercisable for an aggregate 1,138,211 shares of common stock, with an exercise price equal to $12.30 per share (the “Series A Warrants”); Series B warrants exercisable for an aggregate 1,138,211 shares of common stock, with an exercise price equal to $15.00 per share (the “Series B Warrants”); and Series C warrants exercisable for an aggregate 1,138,211 shares of common stock, with an exercise price equal to $20.00 per share (the “Series C Warrants”). The Series A Warrants were subject to mandatory exercise subsequent to the receipt of regulatory approval for the new Magellan 6Fr Robotic Catheter in the U.S., which occurred in February 2014. The financing resulted in gross proceeds to the Company of approximately $39.3 million prior to placement fees and offering costs of approximately $2.1 million. At the closing of the private placement financing, the Company entered into an investor rights agreement with the purchasers of the shares and warrants in which the Company agreed to file a registration statement covering resale of the shares (which occurred in November 2013) and the purchasers agreed not to transact in any shares of the Company’s common stock for a one year period following the closing, subject to certain exceptions. In the first quarter of 2014, subsequent to the receipt of regulatory approval for the new Magellan 6Fr Robotic Catheter in the U.S., Series A Warrants for 1.1 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. All of the Series A Warrants were mandatorily exercised in the first quarter of 2014 pursuant to the Company’s achievement of a regulatory milestone as set forth in the Series A Warrants.
10. Stock-based Compensation
Total stock-based compensation expense consisted of the following (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Cost of goods sold
$
127

 
$
37

 
$
174

 
$
81

Research and development
388

 
222

 
535

 
402

Selling, general and administrative
647

 
399

 
1,063

 
932

Total
$
1,162

 
$
658

 
$
1,772

 
$
1,415

The Company uses the BSM 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 the Company’s 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 under the 2006 Equity Incentive Plan for the three and six months ended June 30, 2015 and 2014 were calculated using the following weighted average assumptions:
Employee Stock Options:
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Expected volatility
73
%
 
83
%
 
73
%
 
75
%
Risk-free interest rate
1.3
%
 
1.6
%
 
1.3
%
 
1.4
%
Expected term (in years)
4.13

 
5.18

 
4.13

 
4.34

Expected dividend rate
%
 
%
 
%
 
%

20


The estimated fair values of the shares issued under the Company’s Employee Stock Purchase Plan were calculated using the following weighted average assumptions:
Employee Stock Purchase Plan:
Three and Six Months Ended
June 30,
 
2015
 
2014
Expected volatility
78
%
 
106
%
Risk-free interest rate
0.07
%
 
0.10
%
Expected term (in years)
0.5

 
0.5

Expected dividend rate
%
 
%
Stock Option and Equity Incentive Plans
The following table summarizes the option activity for the six month period ended June 30, 2015:
 
Options
Outstanding
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Balance at December 31, 2014
919

 
$
16.88

 
7.80
 
$

Options granted
91

 
$
9.18

 
 
 
 
Options exercised
(1
)
 
$
5.23

 
 
 
$
2

Options cancelled
(110
)
 
$
33.40

 
 
 
$
24

Balance at June 30, 2015
899

 
14.10

 
P7Y10M28D

 
$
966

Options vested at June 30, 2015
264

 
$
24.30

 
P5Y4M17D

 
$

Options vested and expected to vest at June 30, 2015
714

 
$
14.90

 
P7Y7M24D

 
$
633

The total fair value of options that vested in the three months ended June 30, 2015 and 2014 was $0.4 million and $0.4 million, respectively. The total fair value of options that vested in the six months ended June 30, 2015 and 2014 was $0.8 million and $1.0 million, respectively.
As of June 30, 2015, total unamortized stock-based compensation related to unvested stock options was $2.5 million, with a weighted-average remaining recognition period of 2.36 years.
The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the quoted closing market price of the Company’s common stock on the exercise date. The total intrinsic value of stock options exercised in the three months ended June 30, 2015 and 2014 was $1,000 and 0.4 million, respectively. The total intrinsic value of stock options exercised in the six months ended June 30, 2015 and 2014 was $2,000 and $0.6 million, respectively.
Restricted stock unit activity for six month period ended June 30, 2015 is as follows:
 
Restricted Stock
Units
Outstanding
 
Weighted-
Average Fair
Value When
Awarded
 
(In thousands)
 
 
Balance at December 31, 2014
84

 
$
18.02

Awarded
544

 
$
8.99

Vested
(16
)
 
$
13.70

Cancelled
(30
)
 
$
15.50

Balance at June 30, 2015
582

 
$
9.90

The fair value of restricted stock units is the quoted market price of the Company’s common stock as of the close of the grant date. The total fair value of shares vested pursuant to restricted stock units in the three months ended June 30, 2015 and 2014 was $0.1 million and zero, respectively. The total fair value of shares vested pursuant to restricted stock units in the six

21


months ended June 30, 2015 and 2014 was $0.2 million and $2.0 million, respectively. As of June 30, 2015, total unamortized stock-based compensation related to unvested restricted stock units was $2.2 million, with a weighted-average remaining recognition period of 2.08 years.
In April 2015, the Company granted 308,951 PSUs to executives and employees in-lieu of cash bonuses with vesting based on the Company’s 2015 corporate goals and department goals over the vesting period of 1 year. Each PSU represents the right to receive one share of the Company’s common stock upon the vesting of such PSU, and is subject to the terms of the Company’s 2006 Equity Incentive Plan. Any PSUs not vesting on a vesting date due to the Company’s corporate goals and department goals for the fiscal year 2015 not meeting the target for such fiscal year established by the Compensation Committee shall be forfeited. The grant date fair value of these awards was $2.8 million. For PSUs, the Company recognizes stock-based compensation expense based on the probable outcome that the performance condition will be achieved.
As of June 30, 2015, 198,563 shares of common stock were available for grant under the 2006 Equity Incentive Plan.
11. Income Taxes
The Company’s tax provision for the six months ended June 30, 2015 and 2014 was $24,000 and $33,000, respectively, which primarily consist of foreign taxes. The Company currently has uncertain tax positions in the amount of $4.3 million, none of which would affect the effective tax rate upon realization. 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.
12. Net Loss Per Share
The Company computes basic net loss per share by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. The deemed dividend related to beneficial conversion feature embedded within the Series A convertible preferred stock and accretion of discount and a cumulative deemed dividend of $0.8 million are reflected as an adjustment in the calculation of loss per common share. To determine diluted shares, the Company applies the treasury stock method to determine the dilutive effect of outstanding stock option shares, restricted stock units, Employee Stock Purchase Plan shares and warrants.
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,
 
2015
(as restated)
 
2014
 
2015
(as restated)
 
2014
Net loss
$
(12,507
)
 
$
(12,290
)
 
$
(24,440
)
 
$
(26,735
)
Adjust: Deemed dividend related to beneficial conversion feature of Series A convertible preferred stock and accretion of discount
(35,546
)
 

 
(35,546
)
 

Adjust: Cumulative dividend on Series A convertible preferred stock
(812
)
 

 
(812
)
 

Net loss attributable to common stockholders
$
(48,865
)
 
$
(12,290
)
 
$
(60,798
)
 
$
(26,735
)
Weighted average shares used to compute basic and diluted net loss per common share *
16,311

 
11,200

 
14,828

 
10,769

Basic and diluted net loss per common share *
$
(3.00
)
 
$
(1.10
)
 
$
(4.10
)
 
$
(2.48
)
The following table sets forth potential shares of common stock equivalents that are not included in the calculation of diluted net loss per common share due to the anti-dilutive affect they would have for each period presented (in thousands):

22


 
June 30,
 
2015
 
2014
Stock options outstanding
899

 
688

Unvested restricted stock units
582

 
60

Estimated shares issuable under the employee stock purchase plan
7

 
6

Warrants
6,312

 
2,343


*These numbers have been retroactively adjusted to reflect the reverse stock split of its outstanding shares of common stock at a ratio of one-for-ten effective on September 22, 2015.

13. Accumulated Other Comprehensive Income (Loss)
The component of accumulated other comprehensive income (loss), net of tax for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):
 
Unrealized
Gain
(Losses)
on
Securities
 
Foreign
Currency
Translation
Gain
(Losses)
 
Total
Three Months Ended June 30, 2015:
 
 
 
 
 
Beginning balance
$
290

 
$
(151
)
 
$
139

Net current-period other comprehensive gain (loss)
(442
)
 
(20
)
 
(462
)
Ending balance
$
(152
)
 
$
(171
)
 
$
(323
)
Three Months Ended June 30, 2014:
 
 
 
 
 
Beginning balance
$
456

 
$
(11
)
 
$
445

Net current-period other comprehensive gain (loss)
(125
)
 
17

 
(108
)
Ending balance
$
331

 
$
6

 
$
337

 
Unrealized
Gain
(Losses)
on
Securities
 
Foreign
Currency
Translation
Gain
(Losses)
 
Total
Six Months Ended June 30, 2015:
 
 
 
 
 
Beginning balance
$
392

 
$
(87
)
 
$
305

Net current-period other comprehensive loss
(544
)
 
(84
)
 
(628
)
Ending balance
$
(152
)
 
$
(171
)
 
$
(323
)
Six Months Ended June 30, 2014:
 
 
 
 
 
Beginning balance
$
373

 
$
(13
)
 
$
360

Net current-period other comprehensive loss
(42
)
 
19

 
(23
)
Ending balance
$
331

 
$
6

 
$
337

14. Segment Information
The Company operates its business in one operating segment: the development and marketing of medical devices. The Company’s chief operating decision maker is its Chief Executive Officer who reviews the financial information presented on a consolidated basis for the purpose of making operating decisions and assessing financial performance.
The Company’s medical robotics systems are developed and marketed to a broad base of hospitals and distributors in the United States and internationally. The Company considers all such sales to be part of a single operating segment. Information regarding total revenue is as follows (in thousands):

23


 
Three Months Ended
 June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
United States
$
1,636

 
$
2,181

 
$
3,598

 
$
4,671

International
1,456

 
4,706

 
5,288

 
5,915

Total
$
3,092

 
$
6,887

 
$
8,886

 
$
10,586

Revenues are attributed to countries based on the location of the customer. Revenues in the United States and Belgium each accounted for 10% or more of total revenues for the three months ended June 30, 2015 at 53% and 10%, respectively. Revenues in the United States, China and Saudi Arabia each accounted for 10% or more of total revenues for the six months ended June 30, 2015 at 41%, 15% and 10%, respectively. Revenues in the United States, Japan, Kuwait and Saudi Arabia each accounted for 10% or more of total revenues for the three months ended June 30, 2014 at 32%, 27%, 11% and 11%, respectively. Revenues in the United States and Japan each accounted for 10% or more of total revenues for the six months ended June 30, 2014 at 44% and 18%, respectively.
The majority of the Company’s long-lived assets are located in the United States.
15. Restatement of Condensed Consolidated Statement of Operations

The requirement to restate the Company’s net loss attributable to common stockholders and basic and diluted loss per common share is due to the failure to deduct a one-time, non-cash $15.3 million charge attributable to the deemed dividend on the conversion of Series A convertible preferred stock which occurred on May 12, 2015. The impact of this change is as follows:
 
Three months ended June 30, 2015
 
Six months ended June 30, 2015
(in thousands except per share data)
As Previously Reported
 
As Restated
 
As Previously Reported
 
As Restated
Net loss
$
(12,507
)
 
$
(12,507
)
 
$
(24,440
)
 
$
(24,440
)
Deemed dividend related to beneficial conversion feature of Series A convertible preferred stock
(20,224
)
 
(20,224
)
 
(20,224
)
 
(20,224
)
Deemed dividend on accretion of Series A convertible preferred stock and other

 
(15,322
)
 

 
(15,322
)
Cumulative dividend on Series A convertible preferred stock
(812
)
 
(812
)
 
(812
)
 
(812
)
Net loss attributable to common stockholders
$
(33,543
)
 
$
(48,865
)
 
$
(45,476
)
 
$
(60,798
)
Basic and diluted net loss per common share
$
(2.06
)
 
$
(3.00
)
 
$
(3.07
)
 
$
(4.10
)
Shares used to compute basic and diluted net loss per common share
16,311

 
16,311

 
14,828

 
14,828


The above-mentioned corrections do not have an effect on consolidated net loss and comprehensive loss, and the consolidated balance sheet or statement of cash flows, or total stockholders' equity.


ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

24


In our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, originally filed on August 10, 2015, our management with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), concluded that our disclosure controls and procedures were effective as of June 30, 2015. In connection with our decision to restate our financial statements, our management have carried out a reevaluation, under the supervision of and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective as of June 30, 2015 as a result of the material weakness in our control over financial reporting as discussed below.

However, notwithstanding the material weakness discussed below, we concluded that the interim financial statements included in this Form 10-Q/A present fairly, in all material respects, our financial position, results of operations and cash flows for the period presented in conformity with generally accepted accounting principles.

Material Weakness

The design and operating effectiveness of our controls were inadequate to ensure that a complex financial instrument transaction was properly accounted for and reviewed. Specifically, we failed to deduct a non-cash deemed dividend of $15.3 million for the accretion of a discount upon the conversion of Series A convertible preferred stock in the calculation of net loss attributable to common stockholders for the purposes of determining basic and diluted loss per share for the three and six months ended June 30, 2015.

Changes in Internal Control Over Financial Reporting

As described under the paragraph entitled Material Weakness, there were changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remediation Status

We continue to evaluate the effectiveness of our remediation efforts, including demonstrating that the new or improved controls operate effectively for a reasonable period of time. To remedy the material weakness, we are enhancing our procedures to provide additional management and third party oversight and review of our accounting activities over future complex financial instrument transactions.


25


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: March 31, 2016
By:
/s/ CARY G. VANCE
 
 
Cary G. Vance
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Dated: March 31, 2016
By:
/s/ CHRISTOPHER P. LOWE
 
 
Christopher P. Lowe
 
 
Interim Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)


26