UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________

Form 10-Q

___________________________________

(Mark One)

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

For the quarterly period ended March 31, 2016

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 May 11, 2016 was 18,989,610.

INDEX

PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015	4
	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2016	5
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II – OTHER INFORMATION		37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
Signatures		68

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANSEN MEDICAL, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except per share data)

	March 31, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	12,504		$	20,375
Short-term investments	—			1,501
Accounts receivable, net of allowance of $23 as of March 31, 2016 and $23 as of December 31, 2015	2,609			4,551
Inventories	9,603			8,659
Prepaids and other current assets	1,310			1,814
Total current assets	26,026			36,900
Property and equipment, net	2,399			2,325
Restricted cash	6,098			6,113
Other assets	145			380
Total assets	$	34,668		$	45,718
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	991		$	664
Accrued liabilities	4,011			4,113
Current portion of deferred revenue	3,124			3,923
Current portion of deferred rent	335			—
Short-term debt	33,824			35,141
Total current liabilities	42,285			43,841
Deferred rent, net of current portion	—			262
Deferred revenue, net of current portion	36			91
Other long-term liabilities	79			76
Total liabilities	42,400			44,270
Commitments and contingencies (Note 7)
Preferred stock, par value $0.0001, 10,000 shares authorized; zero shares issued and outstanding	—			—
Stockholders’ equity:
Common stock, par value $0.0001:
Authorized: 30,000 shares; issued and outstanding: 18,992 and 18,897 shares at March 31, 2016 and December 31, 2015, respectively *	2			2
Additional paid-in capital	455,989			455,585
Accumulated other comprehensive loss	(122		)	(210		)
Accumulated deficit	(463,601		)	(453,929		)
Total stockholders’ equity	(7,732		)	1,448
Total liabilities, preferred stock and stockholders’ equity	$	34,668		$	45,718

*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-teneffective on September 22, 2015.

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

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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

	Three Months Ended March 31,
	2016			2015
Revenues:
Product	$	1,633		$	4,474
Service	1,409			1,320
Total revenues	3,042			5,794
Cost of revenues:
Product	1,299			3,896
Service	777			742
Total cost of revenues	2,076			4,638
Gross profit	966			1,156
Operating expenses:
Research and development	3,050			3,435
Selling, general and administrative	5,865			6,702
Total operating expenses	8,915			10,137
Loss from operations	(7,949		)	(8,981		)
Change in fair value of warrant liability	—			(1,676		)
Interest and other expense, net	(1,715		)	(1,267		)
Loss before income taxes	(9,664		)	(11,924		)
Income tax expense	(8		)	(9		)
Net loss	$	(9,672	)	$	(11,933	)
Basic and diluted net loss per share *	$	(0.51	)	$	(0.90	)
Shares used to compute basic and diluted net loss per share *	18,947			13,328

*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-teneffective on September 22, 2015.

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

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HANSEN MEDICAL, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

	Common Stock			Additional Paid- In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares *	Amount
Balances, December 31, 2015	18,897	$	2	$	455,585		$	(210	)	$	(453,929	)	$	1,448
Issuances of common stock from restricted stock units	95	—		—			—			—			—
Withholding taxes paid on vested restricted stock units	—	—		(9		)	—			—			(9		)
Employee share-based compensation expense	—	—		413			—			—			413
Net loss	—	—		—			—			(9,672		)	(9,672		)
Unrealized loss on investment reclassified to other expense	—	—		—			72			—			72
Foreign currency translation adjustments	—	—		—			16			—			16
Balances, March 31, 2016	18,992	$	2	$	455,989		$	(122	)	$	(463,601	)	$	(7,732	)

*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-teneffective on September 22, 2015.

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

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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2016			2015
Net loss	$	(9,672	)	$	(11,933	)
Other comprehensive income (loss), net:
Amount reclassified to other expense	72			(102		)
Foreign currency translation adjustment	16			(64		)
Change in other comprehensive income (loss)	88			(166		)
Comprehensive loss	(9,584		)	(12,099		)

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

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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(9,672	)	$	(11,933	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	234			244
Stock-based compensation	413			610
Payment-in-kind interest on loan	269			258
Amortization of deferred finance costs and discount on debt	35			97
Change in fair value of warrant liability	—			1,676
Provision of doubtful accounts	15			—
Inventory write-off	16			—
Realized loss on investment	357			—
Changes in operating assets and liabilities:
Accounts receivable	1,927			1,375
Inventories	(1,253		)	608
Prepaids and other current assets	274			161
Other long-term assets	60			(65		)
Accounts payable	327			(81		)
Accrued liabilities	(30		)	(464		)
Deferred revenue	(853		)	(427		)
Other long-term liabilities	3			17
Net cash used in operating activities	(7,878		)	(7,924		)
Cash flows from investing activities:
Purchase of property and equipment	(15		)	(47		)
Proceeds from sale of short-term investment	1,215			—
Change in restricted cash	15			14
Net cash provided by (used in) investing activities	1,215			(33		)
Cash flows from financing activities:
Proceeds from issuance of Series A convertible preferred stock	—			35,000
Payment of short-term debt	(1,215		)	—
Costs related to issuance of Series A convertible preferred stock and common stock	—			(107		)
Withholding taxes paid on vested restricted stock units	(9		)	—
Net cash provided by (used in) financing activities	(1,224		)	34,893
Effect of exchange rate changes on cash and cash equivalents	16			(64		)
Net increase (decrease) in cash and cash equivalents	(7,871		)	26,872
Cash and cash equivalents at beginning of period	20,375			24,528
Cash and cash equivalents at end of period	$	12,504		$	51,400
Supplemental disclosure of:
Cash paid for interest	$	954		$	945
Non-cash investing and financing activity:
Equipment transfer from inventories to property and equipment	$	293		$	692

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

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HANSEN MEDICAL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. The Company

Nature of Operations

Hansen Medical, Inc. (the “Company”) develops, manufactures, markets and sells 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 and selling the Company’s products in the Europe, Middle East and Africa (“EMEA”) region.

Going Concern

These condensed consolidated financial statements are prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. Since inception, the Company has incurred cumulative net losses of approximately $463.6 million. The Company expects such losses to continue through at least the year ending December 31, 2016 as it continues to commercialize its technologies and develop new applications and products. The Company also has a negative working capital of $16.3 million.

The Company continues to face significant uncertainties and challenges. The Company faces uncertainty related to the commercialization of its Magellan^TM Robotic System ("Magellan System") and its projected revenue is heavily dependent on a successful commercialization of this 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, restricted cash and investments and the lesser of $2.0 million or 65% in eligible accounts receivable. Additionally, the Company is required by White Oak to obtain an audit opinion from its independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about its ability to continue as a going concern or any qualification or exception as to the scope of such audit. As of March 31, 2016, the Company was not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, the Company entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, the Company made a prepayment to White Oak, with respect to its obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from the Company’s restricted account. In the first quarter of 2016, the Company sold its investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of its short-term debt with White Oak. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was classified as a short-term liability. As of March 31, 2016, the Company’s cash, cash equivalents, and restricted cash balances were $18.6 million.

The Company anticipates that its existing available capital resources as of March 31, 2016 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, that it will achieve or maintain compliance with debt covenants, 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.

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On April 20, 2016, the Company, Auris Surgical Robotics, Inc. ("Parent"), and Pineco Acquisition Corp., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each share of Hansen common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by Parent or any of its subsidiaries, shares held by Hansen as treasury stock, and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $4.00 in cash, without interest (the "Merger Consideration"). The completion of the merger is subject to normal closing and other conditions and is expected during the third quarter of 2016.

Additionally, concurrently with entering into the Merger Agreement, certain Company stockholders owning approximately 64.6% of the outstanding shares of the Company common stock, including Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities and an affiliated entity of Lawrence T. Kennedy, Jr. (the "Rollover Stockholders"), executed and delivered a stock purchase agreement with Parent whereby each Rollover Stockholder has unconditionally agreed to acquire shares of preferred stock of Parent immediately following the Effective Time on the terms set forth therein, in exchange for an investment of approximately $49 million (representing the aggregate amount of consideration payable to the Rollover Stockholders in the Merger).

The accompanying condensed 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 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, 2015 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, 2015 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.

Reverse Split of Common Stock

On May 12, 2015, at the Annual Meeting of Stockholders of the Company, the stockholders approved a series of alternate amendments to the Company’s Certificate of Incorporation (the "Certificate") to effect, at the discretion of the Company’s Board of Directors (the "Board"), a reverse stock split of the Company’s common stock whereby each outstanding four, six, eight or ten shares would be combined into one share of common stock and a proportional reduction in the number of authorized shares of common stock. On September 18, 2015, the Board approved a reverse stock split of the Company’s outstanding shares of common stock at a ratio of one-for-ten and the related amendment to the Certificate providing for the combination of each outstanding ten shares of Company common stock into one share of Company common stock. The amendment to the Certificate was filed with the Secretary of State of the State of Delaware on September 22, 2015, decreasing the Company’s authorized common stock from 300,000,000 to 30,000,000. Historical share information presented in the accompanying financial statements has been retroactively adjusted to reflect this reverse stock split.

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

9

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 preferred stock, and deferred tax assets, among others. Actual results may materially 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 Magellan Transport System (“MTS”) and associated catheters and drapes, 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 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 (or longer, in certain limited circumstances) 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

10

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 and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts at one 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 30% of the Company’s net accounts receivable at March 31, 2016. The Company had four customers who constituted 19%, 18%, 12% and 12%, respectively, of the Company’s net accounts receivable at December 31, 2015. As of March 31, 2016, the Company has not experienced any significant losses on its accounts receivable.

Two customers accounted for 15% and 10%, respectively, of total revenues during the three months ended March 31, 2016. Three customers accounted for 22%, 13% and 10%, respectively, of total revenues during the three months ended March 31, 2015.

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, 10Fr and eKit 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 Robotic Catheter in February 2014, and the Magellan 10Fr Robotic Catheter in July 2015 and the Magellan eKit in February 2016. 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

11

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.

Stock-based Compensation

The Company accounts for share-based compensation plan in accordance with the provisions of The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("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.

• 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 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. In July 2015, the FASB deferred the effective date of this ASU from December 15, 2016 to December 15, 2017, with early adoption permitted before annual periods beginning after December 15, 2016. The principles may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements.

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In August 2014, the FASB issued ASU No. 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 thereafter, with early adoption permitted. The Company has been assessing the going concern issue since 2010 on an interim and annual basis and will continue to assess whether the financial conditions based on this new guidance have an impact on the Company’s condensed consolidated financial statements or footnotes.

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 adopted the ASU 2015-03 on its condensed consolidated financial statements beginning in the quarter ended March 31, 2016 and the impact was $0.4 million deduction to its short-term debt presentation on its condensed consolidated balance sheets.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted and should be applied prospectively. The Company does not expect the adoption of this accounting standard update to impact its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which require a lessee to recognize lease assets and liabilities on the balance sheet for all arrangements with terms longer than 12 months. Lessor accounting remains largely consistent with existing U.S. GAAP. The new standard takes effect in 2019 for public business entities and 2020 for all other entities. The Company is currently assessing the impact of the adoption of ASU 2016-02 on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 requires among other things that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2016-09 on its condensed consolidated financial statements.

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 debt. Cash and cash equivalents, short-term investments and accounts receivable, net of allowance, are reported at their respective fair values on the condensed consolidated balance sheets. Short-term debt is reported at its amortized cost on the condensed consolidated balance sheets. The remaining financial instruments are reported on the condensed 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

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								Balance Sheet Classification
	Amortized Cost		Gross Unrealized Losses			Fair Value		Cash and cash Equivalents		Short-term Investments		Restricted Cash
March 31, 2016:
Cash	$	1,029	$	—		$	1,029	$	1,029	$	—	$	—
Money market funds	17,573		—			17,573		11,475		—		6,098
Corporate equity securities	—		—			—		—		—		—
	$	18,602	$	—		$	18,602	$	12,504	$	—	$	6,098
December 31, 2015:
Cash	$	1,408	$	—		$	1,408	$	1,408	$	—	$	—
Money market funds	25,080		—			25,080		18,967		—		6,113
Corporate equity securities	1,572		(71		)	1,501		—		1,501		—
	$	28,060	$	(71	)	$	27,989	$	20,375	$	1,501	$	6,113

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
March 31, 2016:
Money market funds	$	17,573	$	—	$	—	$	17,573
Corporate equity securities	—		—		—		—
	$	17,573	$	—	$	—	$	17,573
December 31, 2015:
Money market funds	$	25,080	$	—	$	—	$	25,080
Corporate equity securities	1,501						1,501
	$	26,581	$	—	$	—	$	26,581

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. In the first quarter of 2016, the Company sold its investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of its short-term debt with White Oak.

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 months ended March 31, 2016.

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

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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 change in fair value of $1.7 million and $3.0 million was recorded in the condensed consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2015, respectively.

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 revalued the warrants and 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 10 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 March 31, 2016.

Short-term Debt

The fair value of the Company’s short-term debt was estimated to be $35.7 million as of March 31, 2016 based on an internal valuation model that utilized the then-current rates available to the Company for debt of a similar term and remaining maturity, which constitutes Level 2 inputs under the fair value hierarchy. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the fair value estimate presented herein is not necessarily indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value. See Note 8 for further information regarding the Company’s short-term debt.

4. Balance Sheet Components

Inventories (in thousands)

	March 31, 2016		December 31, 2015
Raw materials	$	3,662	$	2,613
Work in process	3,354		3,575
Finished goods	2,587		2,471
Total Inventories	$	9,603	$	8,659

Property and equipment, net (in thousands)

	March 31, 2016			December 31, 2015
Furniture and leasehold improvements	$	11,329		$	11,329
Laboratory equipment	12,466			12,158
Computer equipment and software	2,955			2,956
	26,750			26,443
Less: Accumulated depreciation and amortization	(24,351		)	(24,118		)
Property and equipment, net	$	2,399		$	2,325

Accrued liabilities (in thousands)

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	March 31, 2016		December 31, 2015
Accrued salaries, commission, bonus and benefits	$	1,242	$	1,094
Accrued restructuring	921		1,581
Accrued legal and other professional fees	645		228
Tax accruals	359		333
Accrued royalties	278		330
Clinical related accruals	178		60
Other accrued expenses	388		487
Accrued liabilities	$	4,011	$	4,113

5. Agreements with Intuitive Surgical, Inc.

In October 2012, the Company signed an updated license agreement with Intuitive Surgical Operations, Inc. and Intuitive Surgical, Inc. (collectively, “Intuitive”), under which Intuitive 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’s co-exclusive rights extended to include intellectual property rights filed or conceived by the Company in the non-vascular space subsequent to the original 2005 agreement through October 26, 2015. The Company retained the right to use its intellectual property for all clinical applications, both vascular and non-vascular. The Company previously 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 term of the intellectual property capture period expired on October 26, 2015. The cross-licenses and royalty obligations remain in effect.

The Company has minimum royalty obligations of $0.2 million per year under the terms of its cross license agreement with Intuitive. For the three months ended March 31, 2016 and 2015, the Company incurred zero and $0.1 million, respectively, related to the royalty obligations to Intuitive.

6. Agreements with Philips

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

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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 March 31, 2016 and 2015, the Company incurred immaterial and $0.6 million, respectively, of cost related to the royalty obligations to Philips.

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 originally was scheduled to expire in January 2020, with an option to extend the lease for another five years. On December 15, 2015, the Company entered into a Lease Termination Agreement with its landlord for the termination of the Company's existing lease in Mountain View, California (the "Lease Termination"). The Lease Termination is to become effective not earlier than June 1, 2016 but no later than August 31, 2016. Upon the effective date of the Lease Termination, the Company will be released from all of its obligations under the existing lease, except for certain expenses and indemnification obligations as set forth in the Lease Termination. Concurrently, the Company entered into a lease agreement with LBA Realty Fund11-WBP VII, Inc. to rent 32,552 square feet of office and manufacturing space located in San Jose, California with a commencement date of June 1, 2016 but no later than August 1, 2016, and expiring in February 2027.

The Company also rents office space in London, England under an office rental agreement that ends in April 2016.

As of March 31, 2016, future minimum payments under the lease and rental are as follows (in thousands):

Years Ending December 31,	Future Minimum Lease Payments
2016 (remainder of year)	$	1,153
2017	297
2018	610
2019	628
2020	647
Thereafter	4,443
Total	$	7,778

Rent expense on a straight-line basis was $0.6 million for both the three months ended March 31, 2016 and 2015.

Other Royalty Obligations

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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 costs in the amount of $100,000 and $35,000, respectively, related to the royalty obligations to Mitsubishi for the three months ended March 31, 2016 and 2015.

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. Except as set forth below, 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.

Between April 25, 2016 and May 6, 2016, four putative class action lawsuits were filed in the Superior Court of the State of California, County of Santa Clara (the “California Court”) against the Company, its directors, Auris, and Sub in connection with the proposed Merger.  The lawsuits are captioned JosephLiu v. Hansen Medical, Inc., et al., 16CV294288 (April 25, 2016), Dawn Stevens-Juhl v. Hansen Medical, Inc., et al., 16CV294354 (April 26, 2016), Howard Huggins v. Hansen Medical, Inc., et al., 16CV294552 (May 2, 2016) and David Simonson v. Cary G. Vance, et al., 16CV294862 (May 6, 2016) (naming the Company’s directors, Auris, and Sub as defendants). On May 12, 2016, the plaintiff in the Stevens-Juhl action requested that the California Court dismiss her complaint without prejudice. The California Court has not yet acted on that request.

These lawsuits each allege that the Company’s directors breached their fiduciary duties to Company stockholders by, among other things, seeking to sell the Company through an allegedly unfair process, for an unfair price, and on unfair terms.  The lawsuits also allege that Auris and Sub aided and abetted those alleged breaches of fiduciary duties.  The lawsuits seek, among other things, equitable relief that would enjoin the consummation of the proposed Merger, rescission of the Merger Agreement (to the extent it has already been implemented) or rescissory damages, and attorneys’ fees and costs.  The Liu and Simonson actions additionally seek an order directing the Company’s directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of the Company’s stockholders and the imposition of a constructive trust, in favor of the plaintiff and the class, upon any benefits improperly received by defendants as a result of their alleged wrongdoing.  The Stevens-Juhl and Huggins actions additionally seek an accounting for any damages suffered by the plaintiff and the class as a result of the defendants’ alleged wrongdoing. 

On May 10, 2016 a putative class action was filed in the Court of Chancery of the State of Delaware against the Company, its directors, twelve entities that are Company stockholders along with two individuals that allegedly control some of those entities (the “Stockholder Defendants”), Auris, and Sub. The lawsuit is captioned Windward Venture Partners, LP v. Hansen Medical, Inc., et al., Civil Action No. 12316 (the “Delaware Action”). The Delaware Action alleges that the Company’s directors breached their fiduciary duties to Company stockholders by, among other things, seeking to sell the Company through an allegedly unfair process, for an unfair price, and on unfair terms.  The lawsuit also alleges that the Stockholder Defendants were controlling stockholders of the Company and breached fiduciary duties they owed to the Company’s other stockholders by, among other things, causing the Company to engage in an unfair transaction to the benefit of the Stockholder Defendants. Auris and Sub are alleged to have aided and abetted these breaches of fiduciary duties. The Delaware Action seeks equitable relief that would enjoin the consummation of the proposed Merger, rescission of the Merger Agreement (to the extent it has already been implemented) or rescissory damages, an accounting for any damages suffered by the plaintiff and the class as a result of the defendants’ alleged wrongdoing, and attorneys’ fees and costs. 

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The Company and its directors believe that the foregoing lawsuits are entirely without merit and intend to vigorously defend against the actions.

8. Short-term Debt

White Oak Loan

In July 2013, the Company executed a loan and security 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 a discount 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 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 March 31, 2016 and 2015.

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 the lesser of $2.0 million or 65% of eligible accounts receivable. Additionally, the Company is required to obtain an audit opinion from its independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about its ability to continue as a going concern or any qualification or exception as to the scope of such audit. 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 March 31, 2016, the Company was not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, the Company entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, the Company made a prepayment to White Oak, with respect to our obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from the Company’s restricted account. In the first quarter of 2016, the Company sold its investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of its short-term debt with White Oak. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was classified as a short-term liability.

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Future minimum payments due on the debt as of March 31, 2016 are as follows (in thousands):

Years Ending December 31,
Total remaining payments	43,277
Less: Amount representing interest	(9,047		)
Less: Debt discount	(406		)
	33,824
Less: Current portion of long-term debt	(33,824		)
Long-term debt, net of current portion	$	—

9.    Restructuring

In November 2015, the Company initiated a cost-saving restructuring plan in order to align its headcount to reduce operating expenses, consolidate its back-office operations by closing its office in the United Kingdom and relocating its headquarter. This restructuring plan would impact approximately 35 full-time positions in its Mountain View, California office and 9 full-time employees in its international offices. The Company recorded restructuring charges of approximately $1.7 million consisting of employee severance and termination benefits, operating lease cancellation fees and expenses related to closing down its United Kingdom office. The Company recorded employee severance costs provided under an ongoing benefit arrangement once they are both probable and estimable in accordance with the provisions of ASC 712. The Company accounted for lease cancellation fees and closing down its United Kingdom office in accordance with ASC 420. Under ASC 420, the Company established a liability for a cost associated with an exit or disposal activity, when the liability was incurred, rather than at the date that the Company committed to an exit plan. The Company reassesses the expected cost to complete the exit or disposal activities at the end of each reporting period and adjusts its remaining estimated liabilities, if necessary.

The Company paid $0.5 million of broker commission to the third party who assisted the Company to negotiate an early termination of its office in Mountain View, California in the first quarter of 2016. The Company recorded $0.2 million as exit costs related to the closing off its office in the United Kingdom. The Company has classified approximately $1.5 million of these charges as restructuring expense and $188,000 as a component of cost of sales. The Company has completed phase one of its restructuring activities in the fourth quarter of 2015 and expects to complete phase 2 by the end of 2016.

The table below presents the restructuring activities for the quarter ended March 31, 2016 (in thousands):

	Employee Severance and Termination Benefits			Operating Lease Cancellation			Exit Cost			Total
Accrued restructuring balance as of January 1, 2016	$	881		$	500		$	200		$	1,581
Additional accruals	—			—			—			—
Cash payments	(79		)	(500		)	(81		)	(660		)
Accrued restructuring balance as of March 31, 2016	$	802		$	—		$	119		$	921

10. 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 the beneficial conversion features

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under ASC 470-20, Debt with Conversion and Other Options. Upon conversion of the preferred stock during the second quarter of 2015, 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. The deemed dividend and cumulative dividend were non-cash transactions during the second quarter of 2015 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 $1.7 million and $3.0 million was recorded on the condensed consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2015, respectively.

The Company had incurred and capitalized approximately $0.5 million of costs associated with this offering, which were recorded as an offset to additional paid-in capital on the condensed consolidated balance sheets.

2014 Warrant Exchange

On July 30, 2014, the Company entered into a definitive agreement (the “Exchange Agreement”) with certain warrantholders 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 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, Black-Scholes options pricing model and other pertinent factors at that date. These variables include the Company’s expected stock price volatility over the

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term of the award, expected term, risk-free interest rate and expected dividend rate. The Company recorded $2.9 million warrant exchange charge in the consolidated statement of operations during the year ended December 31, 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 Warrants and Series D Warrants.

2013 Private Placement Transaction

In March 2013, the Company executed an “at the market” agreement pursuant to which the Company may have offered to sell shares of common stock up to an aggregate offering price of up to $25.0 million. In July 2013, the Company exercised its right to terminate the agreement. No shares were offered or sold pursuant to the agreement.

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; Series B warrants exercisable for an aggregate 1,138,211 shares of common stock, with an exercise price equal to $15.00 per share; 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. Series A warrants were subject to mandatory exercise subsequent to the receipt of regulatory approval for the new 6Fr Magellan 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 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.

11. Stock-based Compensation

On September 22, 2015, the Company effected a reverse stock split of its common stock by a ratio of 1-for-10 (the “Reverse Split”). As a result of the Reverse Split every ten outstanding shares of common stock became one share of common stock. No fractional shares were issued in connection with the Reverse Split. A stockholder who would otherwise have been entitled to receive a fractional share of common stock received a cash payment equal to the closing sales price of the Company’s common stock on September 22, 2015 as reported on the NASDAQ times the amount of the fractional share. The Reverse Split also changed the number of shares of common stock that the Company is authorized to issue from 300,000,000 to 30,000,000 but did not change the par value of the Company’s common or preferred stock or the number of authorized shares of preferred stock. The Reverse Split resulted in a proportionate adjustment to the per share exercise price and the number of shares of common stock issuable upon the exercise of outstanding warrants and stock options, as well as the number of shares of common stock issuable upon the vesting of restricted stock units. All of the information in these financial statements has been presented to reflect the impact of the 1-for-10 Reverse Split on a retroactive basis.

Total stock-based compensation expense consisted of the following (in thousands):

	Three Months Ended March 31,
	2016		2015
Cost of goods sold	$	95	$	47
Research and development	117		147
Selling, general and administrative	201		416
Total	$	413	$	610

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.

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No stock options were granted under the 2006 Equity Incentive Plan for the three months ended March 31, 2016 and 2015.

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 Months Ended March 31,
	2016		2015
Expected volatility	98	%	75	%
Risk-free interest rate	0.42	%	0.08	%
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 three month period ended March 31, 2016

	Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands)				(In years)	(In thousands)
Balance at December 31, 2015	790		$	14.08	7.4	$	—
Options granted	—		$	—		$	—
Options exercised	—		$	—		$	—
Options cancelled	(90	)	$	14.92		$	—
Balance at March 31, 2016	700		$	13.97	7.3	$	—
Exercisable as of March 31, 2016	357		$	18.47	6.2	$	—
Exercisable as of March 31, 2016 and expected to vest thereafter (1)	587		$	14.47	7.1	$	—

⁽¹⁾ Options expected to vest reflect an estimated forfeiture rate

The total fair value of options that vested in the three months ended March 31, 2016 and 2015 was $0.2 million and $0.4 million, respectively.

As of March 31, 2016, total unamortized stock-based compensation related to unvested stock options was $1.1 million, with a weighted-average remaining recognition period of 2.10 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 March 31, 2016 and 2015 was $0 and immaterial, respectively.

Restricted stock unit activity for three month period ended March 31, 2016 is as follows:

	Restricted Stock Units Outstanding		Weighted- Average Fair Value When Awarded
	(In thousands)
Balance at December 31, 2015	485		$	9.57
Awarded	845		$	3.24
Vested	(95	)	$	9.29
Cancelled	(208	)	$	9.29
Balance at March 31, 2016	1,027		$	4.46

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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 March 31, 2016 and 2015 was $0.1 million and $0.1 million, respectively. As of March 31, 2016, total unamortized stock-based compensation related to unvested restricted stock units was $2.3 million, with a weighted-average remaining recognition period of 1.92 years.

For the three months ended March 31, 2016, the Company has granted 272,775 PSUs to executives and employees in-lieu of cash bonuses with vesting based on the Company’s 2016 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 2016 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 $1.0 million. For PSUs, the Company recognizes stock-based compensation expense based on the probable outcome that the performance condition will be achieved. For the three months ended March 31, 2016, the Company recognized stock-based compensation related to PSUs of $80,000.

As of March 31, 2016, 139,159 shares of common stock were available for grant under the 2006 Equity Incentive Plan.

12. Income Taxes

The Company’s tax provision for the three months ended March 31, 2016 and 2015 was $8,000 and $9,000, respectively, which relates to foreign taxes. The Company currently has uncertain tax positions in the amount of $2.1 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.

13. 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. 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 March 31,
	2016			2015
Net loss	$	(9,672	)	$	(11,933	)
Cumulative dividend on Series A convertible preferred stock	—			(156		)
Net loss attributable to common stockholders	$	(9,672	)	$	(12,089	)
Weighted average shares used to compute basic and diluted net loss per share	18,947			13,328
Basic and diluted net loss per share	$	(0.51	)	$	(0.91	)

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):

	March 31,
	2016	2015
Stock options outstanding	700	848
Unvested restricted stock units	1,027	284
Estimated shares issuable under the employee stock purchase plan	6	41
Warrants	6,079	6,312

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14. Accumulated Other Comprehensive Income (Loss)

The component of accumulated other comprehensive income (loss), net of tax for the three months ended March 31, 2016 and 2015 are as follows (in thousands):

	Unrealized Gain (Losses) on Securities			Foreign Currency Translation Gain (Losses)			Total
Three Months Ended March 31, 2016:
Beginning balance	$	(72	)	$	(138	)	$	(210	)
Net current-period other comprehensive gain	72			16			88
Ending balance	$	—		$	(122	)	$	(122	)
Three Months Ended March 31, 2015:
Beginning balance	$	392		$	(87	)	$	305
Net current-period other comprehensive loss	(102		)	(64		)	(166		)
Ending balance	$	290		$	(151	)	$	139

15. 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):

	Three Months Ended March 31,
	2016		2015
Revenues:
United States	$	1,593	$	1,962
International	1,449		3,832
Total	$	3,042	$	5,794

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 March 31, 2016 at 52% and 14%, respectively. Revenues in the United States, China, Saudi Arabia and Italy each accounted for 10% or more of total revenues for the three months ended March 31, 2015 at 34%, 22%, 14% and 10%, respectively.

The majority of the Company’s long-lived assets are located in the United States.

16.    Subsequent Events

As disclosed in the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2016, the Company, Auris Surgical Robotics, Inc. ("Parent"), and Pineco Acquisition Corp., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent.

Subject to the terms of the Merger Agreement, which has been unanimously approved by the board of directors of the Company, at the effective time of the Merger (the "Effective Time"), each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by Parent or any of its subsidiaries, shares held by the Company as treasury stock, and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $4.00 in cash, without

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interest (the "Merger Consideration").

Immediately prior to the Effective Time, each outstanding option to purchase shares of Company common stock granted under a Company stock plan will be cancelled for no consideration. Additionally, immediately prior to the Effective Time, each outstanding award of restricted stock units with respect to shares of Company common stock (each, an "RSU Award") granted pursuant to a Company stock plan will be fully vested and cancelled and, in exchange therefor, each holder of any such cancelled RSU Award will be entitled to receive, in consideration of the cancellation of such RSU Award and in settlement therefor, a payment in cash of an amount equal to the product of (i) the Merger Consideration multiplied by (ii) the number of restricted stock units subject to such RSU Award, without interest (less any required tax withholdings). To the extent an RSU Award is subject to performance conditions, the number of restricted stock units that vest will be determined (A) for RSU Awards with a performance period that by its terms has ended prior to the Effective Time, based on actual performance through the end of such performance period, and (B) for RSU Awards with a performance period that by its terms has not ended prior to the Effective Time, by deeming such performance conditions to have been satisfied at 100% of the target levels specified in the applicable equity plans and award agreements.

The Merger Agreement contains customary representations, warranties and covenants of the Company, Parent and Merger Sub, including, among others, covenants by the Company to conduct its business in the ordinary course during the interim period between execution of the Merger Agreement and consummation of the Merger and not to engage in certain kinds of transactions during such period. The Company has also agreed, subject to certain exceptions, not to enter into discussions concerning, or provide confidential information in connection with, any alternative transaction. Parent has agreed, promptly following the Effective Time, to pay or cause to be paid in full all of the Company’s obligations under the loan and security agreement with White Oak. In addition, each of the parties has agreed to use its reasonable best efforts to cause the Merger to be consummated. The board of directors of the Company has agreed to hold a stockholder meeting to consider and vote upon the adoption of the Merger Agreement.

The Merger is subject to satisfaction of the conditions set forth in the Merger Agreement, including the approval by the stockholders of the Company; that none of the lender parties to the loan and security agreement with White Oak shall have exercised any of the rights and remedies available to any of them under either the loan and security agreement with White Oak or the Forbearance Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the loan and security agreement with White Oak) or as a result of the Company breaching or being in default of any of the covenants, agreements or other provisions of the Forbearance Agreement, other than delivering notice of such Event of Default under the loan and security agreement with White Oak or such breach or default under the Forbearance Agreement; that none of the Rollover Stockholders (as defined below) shall have invalidated or terminated the stock purchase agreement with Parent (as described below); and other customary closing conditions. The obligation of each party to consummate the Merger is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions), and the other party having performed in all material respects its obligations under the Merger Agreement, and the obligation of Parent to consummate the Merger is conditioned upon the Company not having suffered a material adverse effect.

The Merger Agreement contains certain termination rights for both the Company and Parent, and provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Parent a termination fee of $3.325 million, including if the Company were to terminate the Merger Agreement in order to accept an unsolicited superior acquisition proposal.

Concurrently with the Company, Parent and Merger Sub entering into the Merger Agreement, holders of approximately 65.4% of the outstanding shares of Company common stock, including all of the directors and executive officers of the Company, Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities, and an affiliated entity of Lawrence T. Kennedy, Jr., entered into voting agreements in favor of Parent and the Company (collectively, the "Voting Agreements") pursuant to which they agreed, among other things, to vote their shares of Company common stock in favor of the adoption of the Merger Agreement, against any alternative acquisition proposal, and against any reorganization, recapitalization, dissolution, liquidation or winding-up of the Company or any other extraordinary transaction involving the Company other than the Merger. The Voting Agreements terminate upon the termination of the Merger Agreement in accordance with its terms, including if the Company were to terminate the Merger Agreement in order to accept an unsolicited superior acquisition proposal.

Additionally, concurrently with entering into the Merger Agreement, certain Company stockholders owning approximately 64.6% of the outstanding shares of the Company common stock, including Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities and an affiliated entity of Lawrence T. Kennedy, Jr. (the "Rollover Stockholders"), executed and delivered a stock purchase agreement with Parent whereby each Rollover Stockholder has

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unconditionally agreed to acquire shares of preferred stock of Parent immediately following the Effective Time on the terms set forth therein, in exchange for an investment of approximately $49 million (representing the aggregate amount of consideration payable to the Rollover Stockholders in the Merger).

Further, concurrently with the Company entering into the Merger Agreement, the Company and the lender parties under the loan and security agreement with White Oak entered into the Forbearance Agreement. The "going concern" qualification in the opinion and report for this report constitutes an Event of Default (as defined in the loan and security agreement with White Oak). Pursuant to the Forbearance Agreement, the lender parties have agreed not to pursue any remedies related to such "going concern" default during the period from the date of the Forbearance Agreement through the earlier of (x) August 17, 2016 and (y) the date when the forbearance period under the Forbearance Agreement is otherwise terminated (such period, the "Forbearance Period").

In addition, the Company expects that it will fail to comply with the minimum liquidity required by Section 6.10(a) of the loan and security agreement with White Oak at some point during the Forbearance Period. The Company’s failure to comply with such minimum liquidity requirement would constitute an Event of Default under the loan and security agreement with White Oak. Under the Forbearance Agreement, the Lender Parties have agreed not to pursue any remedies related to such minimum liquidity default during the Forbearance Period.

The Forbearance Agreement provides that the Company shall, as promptly as reasonably practicable and in any event at or before the expiration of the Forbearance Period, (x) consummate the Merger and (y) pay and satisfy all obligations owed by the Company to the Lender Parties in full in cash. The failure to consummate the Merger during the Forbearance Period would constitute a default under the Forbearance Agreement.

Pursuant to the Forbearance Agreement, the Company has prepaid $5.0 million of the outstanding principal amount of the term loan under the loan and security agreement with White Oak.

For additional details regarding the terms and conditions of the Merger Agreement, refer to the Merger Agreement and other documentation filed as exhibits to the Current Report on Form 8-K filed with the SEC on April 20, 2016. Additional information regarding the proposed transaction, including risks associated with the proposed transaction, will be contained in a definitive proxy statement to be filed by the Company with the SEC.  No assurance can be given that the Merger will be completed.

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 business 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.

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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 System is designed to allow physicians to instinctively navigate flexible catheters with solid stability and control in electrophysiology procedures. Our Magellan System is designed to allow physicians to instinctively navigate flexible catheters in the vasculature. We believe our systems and the corresponding disposable catheters will enable physicians to perform procedures that historically have been too difficult or time-consuming to accomplish routinely with manually-controlled, hand-held catheters and catheter-based technologies, or that we believe could be accomplished only by the most skilled physicians. We believe that our systems have the potential to benefit patients, physicians, hospitals and third-party payors by improving outcomes and permitting complex procedures to be performed interventionally.

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

Physicians performed approximately 800 procedures in the first quarter of 2016, compared to 891 procedures over the same period in the prior year. Physicians performed 116 vascular-related procedures in the first quarter of 2016 compared to 115 vascular-related procedures for the same period in the prior year.

In July 2015, we received FDA clearance to market our Magellan 10Fr Robotic Catheter in the U.S. We previously received CE Mark clearance for our Magellan 10Fr Robotic Catheter in April 2015.

From inception to March 31, 2016, we have incurred losses totaling approximately $463.6 million and have not generated positive cash flows from operations. We expect such losses to continue through at least the year ended December 31, 2016 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.

On April 20, 2016, we, Auris Surgical Robotics, Inc. ("Parent"), and Pineco Acquisition Corp., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into us (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each share of our common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by Parent or any of its subsidiaries, shares held by us as treasury stock, and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $4.00 in cash, without interest (the "Merger Consideration"). The completion of the merger is subject to normal closing and other conditions and is expected during the third quarter of 2016.

Additionally, concurrently with entering into the Merger Agreement, certain our stockholders owning approximately 64.6% of the outstanding shares of our common stock, including Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities and an affiliated entity of Lawrence T. Kennedy, Jr. (the "Rollover Stockholders"), executed and delivered a stock purchase agreement with Parent whereby each Rollover Stockholder has unconditionally agreed to acquire shares of preferred stock of Parent immediately following the Effective Time on the terms set forth therein, in exchange for an investment of approximately $49 million (representing the aggregate amount of consideration payable to the Rollover Stockholders in the Merger).

Critical Accounting Policies, Estimates and Judgments

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. We base our estimates on our past experience and on other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.

Our significant accounting policies are fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 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, 2016.

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Results of Operations

Comparison of the quarter ended March 31, 2016 to the quarter ended March 31, 2015:

Revenues

Our product revenues primarily consist of sales of Magellan Systems and Sensei Systems, the Magellan Transport System, catheters and other disposables. Our service revenue primarily consists of system service under maintenance plans and customer training, which are typically entered into at the time systems are sold. These maintenance service contracts have been generally renewed at the end of the service period, which is typically one year.

	Three Months Ended March 31,				Change
(Dollars in thousands)	2016		2015		$			%
Product	$	1,633	$	4,474	$	(2,841	)	(64	)%
Service	1,409		1,320		89			7	%
Total revenues	$	3,042	$	5,794	$	(2,752	)	(47	)%

We generated total revenues of $3.0 million in the three months ended March 31, 2016, a decrease of $2.8 million compared to $5.8 million in the three months ended March 31, 2015. We did not recognize revenue for any Systems in the first quarter of 2016 compared to five Magellan Systems in the first quarter of 2015. We sold 870 catheters in the three months ended March 31, 2016, an increase of 4% compared to 837 catheters sold in the three months ended March 31, 2015.

Service revenue in the first quarter of 2016 slightly increased compared to the same period in 2015 primarily due to higher revenue recognized from install base renewals.

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.

Cost of Revenues and Gross Profit

Cost of revenues consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, training and installation costs, royalties, provisions for inventory valuation, warranty expenses and the cost associated with our PCS.

(Dollars in thousands)	Three Months Ended March 31,						Change
	2016			2015			$			%
Product	$	1,299		$	3,896		$	(2,597	)	(67	)%
Service	777			742			35			5	%
Total cost of revenues	$	2,076		$	4,638		$	(2,562	)	(55	)%
As a percentage of revenues	68		%	80		%
Gross profit	$	966		$	1,156		$	(190	)	(16	)%
As a percentage of revenues	32		%	20		%

Gross profit for the first quarter of 2016 was $1.0 million or 32% of revenues, compared to $1.2 million or 20% of revenues in the first quarter of 2015. The increase in gross profit as a percentage of revenues was primarily due to lower standard cost and lower royalty expense due to no system recognized as revenue in the first quarter of 2016 compared to five Magellan Systems recognized as revenue in the first quarter of 2015.

Operating Expenses

Research and Development

Our research and development expenses primarily consist of engineering, software development, product development, pre-clinical quality assurance and clinical and regulatory expenses, including costs to develop our Sensei System, Magellan System and their respective disposable catheters. Research and development expenses include employee compensation, including stock-based compensation expense, consulting services, outside services, materials, supplies, depreciation and travel. We expense research and development costs as they are incurred.

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(Dollars in thousands)	Three Months Ended March 31,				Change
	2016		2015		$			%
Research and development	$	3,050	$	3,435	$	(385	)	(11	)%

Research and development expenses in the first quarter of 2016 were lower compared to the first quarter of 2015 primarily due to a $0.3 million decrease in overall employee compensation and related costs due to lower headcount, a $0.4 million decrease in expenses associated with prototype materials due to delayed R&D projects and a decrease in consulting costs. We are committed to further expand and grow the utility of our robotic platforms and expect to continue to make substantial investments in research and development.

Selling, General and Administrative

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.

	Three Months Ended March 31,				Change
(Dollars in thousands)	2016		2015		$			%
Selling, general and administrative	$	5,865	$	6,702	$	(837	)	(12	)%

Selling, general and administrative expenses decreased by $0.8 million in the first quarter of 2016 compared to the first quarter of 2015 due to an overall reduction in corporate cost initiatives as we continue to reduce our operating expenses. The decrease was primarily due to a $1.2 million decrease in overall employee compensation and related costs due to lower headcount, a $0.7 million decrease in consulting costs, advertising and travel expenses, partially offset by an increase of $1.4 million in legal and acquisition expenses related to our plan merger with Auris.

Change in Fair Value of Warrant Liability

	Three Months Ended March 31,				Change
(Dollars in thousands)	2016		2015		$			%
Change in fair value of warrant liability	$	—	$	1,676	$	(1,676	)	(100	)%

On March 11, 2015, we raised $35 million in gross proceeds from the sale of 53,846 shares of convertible preferred stock at a per share price of $650. In connection with the issuance of Series A convertible preferred stock on March 11, 2015, we 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. 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 our 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. We 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 our 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 determined at $14.8 million upon issuance and we classified the Series E Warrants as current liabilities. We recorded a warrant expense of $1.7 million for the three months ended March 31, 2015, which resulted from incremental fair value charges for a warrant exchange transaction. There was no such transaction during the three months ended March 31, 2016.

Interest and Other Expense, net

(Dollars in thousands)	Three Months Ended March 31,				Change
	2016		2015		$		%
Interest and other expense, net	$	1,715	$	1,267	$	448	35	%

Interest and other expense, net primarily represent interest expense on our outstanding loan with White Oak Global Advisors, LLC (“White Oak”). Interest and other expense, net for the first quarter of 2016 was higher compared to the first

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quarter of 2015 primarily due to $0.4 million of realized loss from the sale of investment in Luna Innovations, Inc. in March 2016.

Income Tax Expense

(Dollars in thousands)	Three Months Ended March 31,				Change
	2016		2015		$			%
Income tax expense	$	8	$	9	$	(1	)	(11	)%

Income tax expense for the first quarter of 2016 and 2015 primarily represents taxes in foreign jurisdictions.

Liquidity and Capital Resources

Historical Financing Activities

We have incurred significant losses since our inception in September 2002 and, as of March 31, 2016, we had an accumulated deficit of $463.6 million. We have financed our operations to date principally through the sale of capital stock, exercise of warrants, debt financing and the sale of our products and, beginning in 2009, through partnering and licensing of intellectual property. In November 2011, we sold approximately 478,500 shares of our common stock, resulting in approximately $10.0 million of net proceeds. In October 2012, we sold 529,101 shares of our common stock, resulting in approximately $10.0 million of net proceeds. In July 2013, we sold 2,845,528 shares of our common stock, resulting in approximately $37.2 million of net proceeds. Between August 2013 and August 2014, we issued warrants exercisable for up to 4,043,236 shares of our common stock and through December 31, 2015, a total of 3,182,446 warrants have been exercised, resulting in gross proceeds of approximately $37.1 million. In March 2015, we sold 53,846 shares of Series A convertible preferred stock, all of which were converted into 5,509,492 shares of common stock on May 12, 2015, resulting in approximately $35.0 million of proceeds. In connection with the March 2015 financing, we issued Series E Warrants to purchase an aggregate of 5,384,600 shares, all of which remain outstanding as of September 30, 2015 at an exercise price of $9.75 per share.

White Oak Loan

In July 2013, we executed a loan and security agreement with White Oak as a lender and agent for several lenders. On August 23, 2013, the loan and security 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, 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, 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, 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. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets as described in the loan and security agreement. We 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 March 31, 2016 and 2015.

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 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 we nor AorTx, Inc. or Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. We additionally agreed to pledge to the lenders shares of each of our direct and indirect subsidiaries as collateral for the loan. Pursuant to the loan and security 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 $13.0 million in cash, cash equivalents and investments, of which $5.0 million is required to be restricted subject to lenders’ control, and the lesser of $2.0 million or 65% of eligible accounts receivable.

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Additionally, we are required to obtain an audit opinion from our independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about its ability to continue as a going concern or any qualification or exception as to the scope of such audit. The loan also limits our ability to (a) undergo certain change of control events; (b) convey, sell, lease, transfer, assign or otherwise dispose of any of our assets; (c) create, incur, assume, or be liable with respect to certain indebtedness, not including, among other items, subordinated debt; (d) grant liens; (e) pay dividends and make certain other restricted payments; (f) make certain investments; (g) make payments on any subordinated debt; or (h) enter into transactions with any of our affiliates outside of the ordinary course of business, or permit our subsidiaries to do the same. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets as described in the loan and security 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, 2016, we were not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, we entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, we made a prepayment to White Oak, with respect to our obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from our restricted account. In the first quarter of 2016, we sold our investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of our short-term debt with White Oak. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was reclassified as a short-term liability.

Equity Transactions

On July 30, 2013, we entered into a securities purchase agreement to sell an aggregate of 2,845,528 shares of our 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 $15.0 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 $20.0 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 us 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, we entered into an investor rights agreement with the purchasers of the shares and warrants in which we agreed to file a registration statement covering resales of the shares (which occurred in November 2013) and the purchasers agreed not to transact in any shares of our 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 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. All of the Series A Warrants were mandatorily exercised in the first quarter of 2014 pursuant to our achievement of a regulatory milestone as set forth in the Series A Warrants.

On July 30, 2014, we 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 our outstanding Series B Warrants and an aggregate of 1,022,117 of our outstanding Series C Warrants. In exchange, we 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 us 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 us 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.

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On March 11, 2015, we raised $35.0 million in gross proceeds from the sale of 53,846 shares of Series A convertible preferred stock at a per share price of $650. The Series A convertible preferred stock was converted into 5,509,492 shares of common stock. The number of shares of common stock issued were 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 conversion of the Series A convertible preferred stock occurred automatically upon receipt of Requisite Stockholder Approval on May 12, 2015 and the dividends included in the conversion formula were recorded as an increase to the carrying value of Series A convertible preferred stock when declared on May 12, 2015. The proceeds from this transaction were used to support our commercialization efforts with the Magellan System and strengthen our operations.

Sources and Uses of Cash

Cash flow activity in the first three months of 2016 and 2015, respectively, is summarized as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2016			2015
Cash used in operating activities	$	(7,878	)	$	(7,924	)
Cash provided by (used in) investing activities	1,215			(33		)
Cash provided by (used in) financing activities	(1,224		)	34,893

Operating Activities

Net cash used in operating activities in the first quarter of 2016 of $7.9 million primarily reflects the net loss of $9.7 million, exclusive of $1.3 million non-cash charges, primarily in the form of depreciation and amortization, stock-based compensation, payment-in-kind interest on loan and amortization of deferred financing cost and discount on debt. The net loss adjusted for non-cash charges was decreased by a $0.5 million change in operating assets and liabilities, primarily by a $1.9 million decrease in accounts receivable resulting from customer collections, a $0.3 million increase in accounts payable, partially offset by $1.3 million increase in inventory due to raw materials purchased to meet anticipated sales volume for Magellan Systems and $0.9 million decrease in deferred revenue.

Net cash used in operating activities in the first quarter of 2015 of $8.0 million primarily reflects the net loss of $11.9 million, exclusive of $2.9 million non-cash charges, primarily in the form of warrant expense, depreciation and amortization, stock-based compensation, payment-in-kind interest on loan and amortization of deferred financing cost and discount on debt. The net loss adjusted for non-cash charges was offset by a $1.1 million change in operating assets and liabilities, primarily by cash arising from customer collections resulting in a $1.4 million decrease in accounts receivable and a $0.6 million decrease in inventories, offset by a $0.5 million decrease in accruals.

Investing Activities

Net cash provided by investing activities during the first quarter of 2016 primarily relates to proceeds from the sale of our short-term investment in Luna Innovations, Inc. Net cash used in investing activities during the first quarter of 2015 primarily relates to purchases of equipment.

Financing Activities

Net cash used in financing activities during the first quarter of 2016 primarily relates to payment of a portion of our short-term debt with White Oak and withholding taxes paid on vested restricted stock units. Net cash provided by financing activities during the first quarter of 2015 primarily relates to $35.0 million proceeds from sale of convertible Series A preferred stock, offset by $0.1 million payment for stock issuance costs. 

Future Capital Requirements

We recognized our first revenues in 2007 and we have not achieved profitability or 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.

We have incurred cumulative net losses of approximately $463.6 million and negative working capital of $16.3 million as of March 31, 2016. We expect such losses to continue through at least the year ending December 31, 2016 as we continue to

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commercialize our products, maintain and develop the infrastructure required to manufacture and sell our products, pursue additional applications for our technology platform, and develop new products. As of March 31, 2016, our cash, cash equivalents and restricted cash balances were $18.6 million. We incurred a net loss of $9.7 million and negative cash flows from operations of $7.9 million for the first quarter of 2016. In addition, we are also subject to minimum liquidity requirements under our existing borrowing arrangements with White Oak 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, and the lesser of $2.0 million or 65% of eligible accounts receivable. In addition, $5.0 million investment in Certificate of Deposit along with investments in Luna Innovations, Inc., is required to be restricted subject to lenders’ control. Additionally, we are required to obtain required to obtain an audit opinion from our independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about the Company’s ability to continue as a going concern or any qualification or exception as to the scope of such audit. As of March 31, 2016, we were not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, we entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, we made a prepayment to White Oak, with respect to our obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from our restricted account. In the first quarter of 2016, we sold our investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of our short-term debt with White Oak. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was reclassified as a short-term liability.

We also maintain $750,000 in restricted cash as collateral to obtain a letter of credit used as lease security for our new office in San Jose, California.

Based on our current operating projections, we do not have sufficient liquidity to meet our anticipated cash requirements through the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

If we seek additional funding in the future by selling additional equity or debt securities, refinancing or restructuring existing debt arrangements or entering into a credit facility, such additional funding may result in substantial dilution to existing stockholders, may contain unfavorable terms or may not be available on any terms. If we are unable to obtain any needed additional funding, we may be required to reduce the scope of, delay, or eliminate some or all of, our planned research, development and commercialization activities or to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or on terms that are less attractive than they might otherwise be, any of which could materially harm our business. The timing and exact amounts of our capital requirements will depend on many factors, including but not limited to the following:

• our ability to achieve and maintain compliance with debt covenants;

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

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

• the success of our research and development efforts;

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

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

• our ability to achieve and maintain manufacturing cost reductions;

• our ability to achieve and maintain operating cost reductions;

• the rate of progress and cost of our clinical trials and other development activities;

• the cost and timing of future regulatory actions;

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property or other legal rights, or participating in litigation-related activities;

• the costs of defending against lawsuits brought against us or individuals indemnified by us;

• the emergence of competing or complementary technological developments; and

• the acquisition of businesses, products and technologies.

We cannot guarantee that future equity or debt financing or credit facilities will be available in amounts or on terms acceptable to us, if at all, or that we can achieve and maintain compliance with debt covenants. This could leave us without adequate financial resources to fund our operations as we plan to conduct them in the future.

On April 20, 2016, we, Auris Surgical Robotics, Inc. ("Parent"), and Pineco Acquisition Corp., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with and into us (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each share of our common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by Parent or any of its subsidiaries, shares held by us as treasury stock, and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be converted into the right to receive $4.00 in cash, without interest (the "Merger Consideration"). The completion of the merger is subject to normal closing and other conditions and is expected during the third quarter of 2016.

Additionally, concurrently with entering into the Merger Agreement, certain our stockholders owning approximately 64.6% of the outstanding shares of our common stock, including Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities and an affiliated entity of Lawrence T. Kennedy, Jr. (the "Rollover Stockholders"), executed and delivered a stock purchase agreement with Parent whereby each Rollover Stockholder has unconditionally agreed to acquire shares of preferred stock of Parent immediately following the Effective Time on the terms set forth therein, in exchange for an investment of approximately $49 million (representing the aggregate amount of consideration payable to the Rollover Stockholders in the Merger).

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of March 31, 2016 and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 years		Thereafter
Operating lease and rental	$	7,778	$	1,153	$	907	$	1,275	$	4,443
Debt, including interest	43,277		43,277		—		—		—
Total	$	51,055	$	44,430	$	907	$	1,275	$	4,443

The table above reflects only payment obligations that are fixed and determinable. Our commitments for operating leases relate principally to the lease for our corporate headquarters in Mountain View, California which will terminate in August 2016 and the new lease in San Jose, California for the period of August 2016 to February 2027. Future debt payments relate to principal and interest payments related to the $33.8 million we have borrowed under our loan agreement with White Oak as of March 31, 2016.

Additionally, we have minimum royalty obligations of $100,000 per year under a license agreement with Mitsubishi Electric Research Laboratories, Inc. which reduces to $55,000 per year if the license becomes non-exclusive. The royalty obligation expires in 2018. We also have minimum royalty obligations of $200,000 per year under the terms of our cross license agreement with Intuitive Surgical. We also have royalty obligations under the amended joint development agreement with Philips which provides for the payment of royalties to Philips through October 2017. As of March 31, 2016, we had $2.1

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million in uncertain tax positions. If it is determined in some future period that these amounts are not allowed to be deducted for tax purposes and if we do not have credits or carryforwards to cover these amounts, they could result in payments by us to taxing authorities.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements and foreign currency exchange risk. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of March 31, 2016, the fair value of our cash, cash equivalents and restricted cash was approximately $18.6 million, all of which will mature in one year or less. A hypothetical 100 basis point change in interest rates would not result in a material decrease or increase in our interest income or in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

A portion of our operations consists of sales activities outside of the United States and, as such, we have foreign currency exposure to non-United States dollar revenues and accounts receivable. Currently, we sell our products mainly in United States dollars, Euros and Great Britain Pounds although we may in the future transact business in other currencies. Future fluctuations in the exchange rates of these currencies may impact our revenues. In the past, we have not hedged our exposures to foreign currencies or entered into any other derivative instruments and we have no current plans to do so. For the three months ended March 31, 2016 and 2015, sales denominated in foreign currencies were approximately 9% and 7%, respectively, of total revenue. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

With the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. In connection with our decision to restate our financial statements for the quarter ended June 30, 2015 and September 30, 2015, 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 based on our remediation result as discussed below, our disclosure controls and procedures were effective as of March 31, 2016.

Material Weaknesses

The design and operating effectiveness of our controls were inadequate to ensure that a complex financial instrument transaction was properly accounted for and reviewed as of December 31, 2015. Specifically, we failed to deduct a non-cash deemed dividend of $15.3 million 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 net loss per common share for the three and six months ended June 30, 2015 and the nine months ended September 30, 2015, which lead to the restatement of our financial statements for the quarter ended June 30, 2015 and September 30, 2015,

Remediation Status

To remedy the material weakness, we have enhanced our procedures to provide additional management and third party oversight and review of our accounting activities over future complex financial instrument transactions. This includes the implementation of additional controls over the selection, monitoring and evaluation of results of third parties utilized to assist

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us with complex financing arrangements.  We believe that the design of the new controls implemented have remediated the material weakness. We have been unable to test the operating effectiveness of our newly implemented controls as of yet. However, we believe that the design of these new controls implemented in the first quarter of 2016 enable us to correctly account for a future complex financial instrument transaction. As such, we consider our material weakness to be remediated at the date of this report.

Changes in Internal Control Over Financial Reporting

Except as described above in our remediation status, there were no 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 March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On April 20, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Auris Surgical Robotics, Inc. (“Auris”) and Pineco Acquisition Corp. (“Sub”), a wholly owned subsidiary of Auris, providing for the merger of Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Auris (the “Merger”). Between April 25, 2016 and May 6, 2016, four putative class action lawsuits were filed in the Superior Court of the State of California, County of Santa Clara (the “California Court”) against us, our directors, Auris, and Sub in connection with the proposed Merger.  The lawsuits are captioned JosephLiu v. Hansen Medical, Inc., et al., 16CV294288 (April 25, 2016), Dawn Stevens-Juhl v. Hansen Medical, Inc., et al., 16CV294354 (April 26, 2016), Howard Huggins v. Hansen Medical, Inc., et al., 16CV294552 (May 2, 2016) and David Simonson v. Cary G. Vance, et al., 16CV294862 (May 6, 2016) (naming our directors, Auris, and Sub as defendants). On May 12, 2016, the plaintiff in the Stevens-Juhl action requested that the California Court dismiss her complaint without prejudice. The California Court has not yet acted on that request.

These lawsuits each allege that our directors breached their fiduciary duties to our stockholders by, among other things, seeking to sell the Company through an allegedly unfair process, for an unfair price, and on unfair terms.  The lawsuits also allege that Auris and Sub aided and abetted those alleged breaches of fiduciary duties.  The lawsuits seek, among other things, equitable relief that would enjoin the consummation of the proposed Merger, rescission of the Merger Agreement (to the extent it has already been implemented) or rescissory damages, and attorneys’ fees and costs.  The Liu and Simonson actions additionally seek an order directing the our directors to exercise their fiduciary duties to obtain a transaction that is in the best interests of our stockholders and the imposition of a constructive trust, in favor of the plaintiff and the class, upon any benefits improperly received by defendants as a result of their alleged wrongdoing.  The Stevens-Juhl and Huggins actions additionally seek an accounting for any damages suffered by the plaintiff and the class as a result of the defendants’ alleged wrongdoing. 

On May 10, 2016 a putative class action was filed in the Court of Chancery of the State of Delaware against us, our directors, twelve entities that are Company stockholders along with two individuals that allegedly control some of those entities (the “Stockholder Defendants”), Auris, and Sub. The lawsuit is captioned Windward Venture Partners, LP v. Hansen Medical, Inc., et al., Civil Action No. 12316 (the “Delaware Action”). The Delaware Action alleges that our directors breached their fiduciary duties to our stockholders by, among other things, seeking to sell the Company through an allegedly unfair process, for an unfair price, and on unfair terms.  The lawsuit also alleges that the Stockholder Defendants were controlling stockholders of us and breached fiduciary duties they owed to our other stockholders by, among other things, causing us to engage in an unfair transaction to the benefit of the Stockholder Defendants. Auris and Sub are alleged to have aided and abetted these breaches of fiduciary duties. The Delaware Action seeks equitable relief that would enjoin the consummation of the proposed Merger, rescission of the Merger Agreement (to the extent it has already been implemented) or rescissory damages, an accounting for any damages suffered by the plaintiff and the class as a result of the defendants’ alleged wrongdoing, and attorneys’ fees and costs. 

We and our directors believe that the foregoing lawsuits are entirely without merit and intend to vigorously defend against the actions.

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ITEM 1A. RISK FACTORS

We have incurred substantial losses since inception and anticipate that we will incur continued losses through at least the next year, we may not be able to raise additional financing to fund future losses and we may not be able to continue to operate as a going concern. We have experienced an event of default under our credit agreement which gives the lender the right to request immediate acceleration of repayment.

We have experienced substantial net losses since our inception in late 2002 and expect such losses to continue through at least the year ending December 31, 2016 as we continue to commercialize our technologies and develop new applications and technologies. As of March 31, 2016, we had an accumulated deficit of $463.6 million. We have funded our operations to date principally from the sale of our securities, the issuance of debt and through partnering and the licensing of intellectual property. As of March 31, 2016, our cash, cash equivalents and restricted cash total was $ 18.6 million. We anticipate that our existing available capital resources as of March 31, 2016 and the estimated amounts received through the sale of our products and services will not be sufficient to meet our anticipated cash requirements for the next twelve months. We incurred an operating loss of $9.7 million and had negative cash flows from operations of $7.9 million for the first quarter of 2016. In addition, we are also subject to minimum liquidity requirements under our existing borrowing arrangement with White Oak Global Advisors, LLC ("White Oak") that requires us to maintain $15.0 million in liquidity, 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 the lesser of $2.0 million or 65% of eligible accounts receivable. Additionally, we are required to obtain an audit opinion from our independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about its ability to continue as a going concern or any qualification or exception as to the scope of such audit. As of March 31, 2016, we were not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, we entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, we made a prepayment to White Oak, with respect to our obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from our restricted account. In the first quarter of 2016, we sold our investment in the corporate equity securities and used the proceeds in the amount of $1.2 million to pay a portion of our short-term debt with White Oak. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was classified as a short-term liability.

Based on our current operating projections, we do not have sufficient liquidity to meet our anticipated cash requirements through the next twelve months. These factors raise substantial doubt about our ability to continue as a going concern. In order to meet our current and long-term anticipated cash requirements, we need to obtain additional financing or continue to adopt additional cost-cutting measures. There can be no assurance, however, that such a financing will be successfully completed on terms acceptable to us or that we can implement cost cutting measures sufficient to extend our cash and liquidity. We may seek additional financing at any time by selling additional equity or debt securities, licensing core or non-core intellectual property assets, entering into future research and development funding arrangements, refinancing or restructuring existing debt arrangements, or entering into a credit facility. If we seek additional funding in the future by selling additional equity or debt securities or entering into debt or credit facilities, such additional funding may result in substantial dilution to existing stockholders, may contain unfavorable terms or may not be available on any terms.

Conditions in the global financial and credit markets may limit our ability to raise additional funds. We cannot guarantee that future equity or debt financing will be available in amounts or on terms acceptable to us, if at all. Further, even if financing is available, the cost to us may be significantly higher than in the past. Our ability to access the capital markets and raise funds required for our operations may be severely restricted by general market conditions at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on our flexibility to react to changing economic and business conditions. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future. If adequate funds are not available, we may be required to adopt additional cost-cutting measures, including additional reductions in our work force, reducing the scope of, delaying or eliminating some or all of our planned research, development and commercialization activities and/or reducing marketing, customer support or other resources devoted to our products. If we seek additional funding through partnering and licensing transactions, we could be required to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves or on terms that are less attractive than they might otherwise be. Any of these factors could materially harm our business and may negatively impact our ability to continue to operate as a going concern.

Because we may not be successful in significantly increasing sales of our products, the extent of our future losses and the timing of achieving sustained profitability are highly uncertain, and we may never achieve sustained profitable operations. If

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we require more time than we expect to generate significant revenue and achieve sustained profitability, we may not be able to continue our operations. Even if we achieve significant revenues, we may never become profitable on a sustained basis.

On April 20, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Auris Surgical Robotics, Inc. (“Auris”) and Pineco Acquisition Corp. (“Sub”), a wholly owned subsidiary of Auris, providing for the merger of Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Auris (the “Merger”). Completion of the Merger remains subject to the satisfaction of various conditions, including the approval of the Company’s stockholders and customary closing conditions, many of which are outside of our control. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected time frame, or at all. In addition, if the Merger is not completed by October 20, 2016, subject to certain limitations, either the Company or Auris may choose not to proceed with the Merger.

Additionally, concurrently with entering into the Merger Agreement, certain our stockholders owning approximately 64.6% of the outstanding shares of our common stock, including Larry Feinberg and certain affiliated entities, Jack Schuler and certain affiliated entities and an affiliated entity of Lawrence T. Kennedy, Jr. (the "Rollover Stockholders"), executed and delivered a stock purchase agreement with Parent whereby each Rollover Stockholder has unconditionally agreed to acquire shares of preferred stock of Parent immediately following the Effective Time on the terms set forth therein, in exchange for an investment of approximately $49 million (representing the aggregate amount of consideration payable to the Rollover Stockholders in the Merger).

The pendency of our agreement to be acquired by Auris Surgical Robotics, Inc. or our failure to complete the merger or successfully integrate with Auris Surgical Robotics, Inc. could have an adverse effect on our business.

On April 20, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Auris Surgical Robotics, Inc. (“Auris”) and Pineco Acquisition Corp. (“Sub”), a wholly owned subsidiary of Auris, providing for the merger of Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Auris (the “Merger”). Completion of the Merger remains subject to the satisfaction of various conditions, including the approval of the Company’s stockholders and customary closing conditions, many of which are outside of our control. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected time frame, or at all. In addition, if the Merger is not completed by October 20, 2016, subject to certain limitations, either the Company or Auris may choose not to proceed with the Merger. The Merger gives rise to risks that include:

• the inability to complete the Merger due to the failure to satisfy conditions to the completion of the Merger;

• potential stockholder litigation and the costs thereto that could prevent or delay the Merger or otherwise negatively impact our business and operations, including in connection with the stockholder litigation that has already been filed against us in connection with the Merger Agreement (see “Part II. Other Information - Legal Proceedings” for more information);

• if the Merger is not completed, the price of our common stock will change to the extent that the current market price of our stock reflects an assumption that the Merger will be completed;

• the pendency of the Merger, even if ultimately completed, may create uncertainty in the marketplace and could lead customers and prospective customers to purchase products from other vendors or delay purchasing products from the Company;

• the amount of cash to be paid under the agreement governing the Merger is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;

• the possibility of disruption to our business, including increased costs and diversion of management time and resources;

• difficulties maintaining and renewing business and operational relationships, including relationships with vendors and other business partners;

• the fact that under the terms of the Merger Agreement, we are unable, subject to certain exceptions, to solicit or enter into discussions concerning other acquisition proposals during the pendency of the Merger;

• the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger;

• the possibility that our employees could lose productivity as a result of uncertainty regarding their employment post-Merger;

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• developments beyond our control including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger;

• relationships with customers, vendors and other business partners may be adversely impacted;

• the risk that the Merger is not completed by August 17, 2016 when our obligations under the loan and security agreement with White Oak will become due, and if such amounts were to become due on such date, we would not have sufficient cash to repay such indebtedness, as further described below; and

• financial results may be adversely impacted due to costs incurred in connection with the proposed Merger.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Auris and these costs could require us to use cash that we are otherwise required to retain under our arrangement with White Oak or may have been available for general corporate purposes.

If the Merger Agreement is terminated, in certain circumstances, we would be required to pay Auris a termination fee of $3,325,000. If the Merger Agreement is terminated, the termination fee we may be required to pay, if any, under the Merger Agreement may require us to use cash that we are otherwise required to retain under our arrangement with White Oak or may have been available for general corporate purposes. For these and other reasons, a failed Merger could materially and adversely affect our business, results of operations or financial condition, which in turn would materially and adversely affect our business or financial condition, the price per share of our common stock or our perceived acquisition value.

The Company is in default under the loan and security agreement with White Oak and White Oak may exercise its rights and remedies thereunder if the Merger is not completed by August 17, 2016.

The Company has entered into the Forbearance Agreement with White Oak, whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 or the date that the Forbearance Agreement is terminated in exchange for a $150,000 non-refundable transaction fee and a prepayment of $5.0 million of the Company’s obligations under the loan and security agreement with White Oak. Under the Merger Agreement, Auris has agreed, promptly following the effectiveness of the Merger, to pay or cause to be paid in full all of the Company’s obligations under the loan and security agreement with White Oak. However, if the Merger is not completed before August 17, 2016, we would experience an event of default under the Forbearance Agreement. In the event of a default under the Forbearance Agreement, the Forbearance Agreement will automatically terminate and White Oak is entitled to exercise its rights and remedies under the Forbearance Agreement and loan and security agreement with White Oak, including acceleration of the loan payment and foreclosing on our assets. Failure to comply with the terms of the indebtedness under the loan and security agreement with White Oak or the Forbearance Agreement could result in a material adverse effect to our business, including our financial condition and liquidity.

While the Merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our operations and the future of our business or result in a loss of customers and employees.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our businesses and operations in the ordinary course and in accordance with past practices and to refrain from engaging in certain kinds of transactions, and subjecting us to a variety of specified limitations absent Auris’ prior written consent. We may find that these and other contractual arrangements in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. The pendency of the Merger may also divert management’s attention and our resources from ongoing business and operations. Our employees, customers or potential customers, and vendors may have uncertainties about the effects of the Merger. In connection with the pending Merger, it is possible that some customers, vendors and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the Merger. Similarly, current and prospective employees may experience uncertainty about their future roles with us following completion of the Merger, which may harm our ability to attract and retain key employees. If any of these effects were to occur, it could materially and adversely impact our business results and financial condition, as well as the market price of our common stock and our perceived acquisition value, regardless of whether the Merger is completed. In addition, whether or not the Merger is completed, while it is pending we will continue to incur costs, fees, expenses and charges related to the proposed Merger, which may materially and adversely affect our business results and financial condition.

Our efforts to continue to scale the manufacturing, assembling, testing, marketing and selling of our Sensei System and Magellan System may encounter obstacles and delays which could significantly harm our ability to generate revenue.

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Our ability to generate revenues depends upon the successful scaling of the manufacturing, assembling, testing, marketing and selling of our Sensei System and Magellan System. These commercialization efforts may not succeed for a number of reasons, including those set forth in this Item 1A and the following:

• our systems may not be accepted by physicians or hospitals;

• we may not be able to sell our systems and associated catheters in volumes and at prices that allow us to meet the revenue targets necessary to generate revenue necessary to achieve profitability;

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

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

• the availability and perceived advantages of alternative treatments may hinder acceptance of our systems in sufficient volume;

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

• any rapid technological changes may make our products obsolete;

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

• we may not have adequate financial or other resources to complete the manufacture, assembly, testing, marketing and sale of our systems on a commercial scale or the development of new products; and

• we may not obtain regulatory clearance for the applications for which many physicians wish to use our systems and, accordingly, our label may hinder our ability to successfully market and sell our EP products in the United States to a broader group of potential customers.

If we are not successful in the commercialization of our Sensei System for uses other than for mapping in EP procedures in the United States or our continued efforts to scale the manufacturing, assembling, testing, marketing and selling of our Magellan System, we may never achieve sustained profitability and may be forced to cease operations.

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

We may encounter unexpected manufacturing problems when scaling up the production of our Magellan System, Magellan Robotic Catheters and related accessories in commercial quantities. While we have experience marketing and selling the Sensei System following its initial regulatory approvals in 2007 and the Magellan System following its regulatory approvals in July 2012, the marketing and sales effort to sell our systems on a larger scale involves different customers, value propositions and purchasing processes, and we are only beginning to gain experience in marketing and selling our Magellan System on a larger scale. Our Magellan System is a novel device, and hospitals are traditionally slow to adopt new products and treatment practices. Our Magellan System is an expensive capital equipment purchase which slows the sales process. We are also still growing our Magellan System's product and brand recognition. Furthermore, we do not believe hospitals will purchase our products unless the physicians at those hospitals express a strong desire to use our products and we cannot predict whether or not they will do so in sufficient numbers for us to achieve profitability and realize long-term success. The ability to obtain market acceptance of a new product such as the Magellan System is highly variable and subject to many risks. As a result, our commercialization plans may be delayed, incomplete or unsuccessful. In addition, larger-scale commercial introduction of products sometimes results in the identification of latent or new product defects or quality issues that were not evident in the testing of the products. Similarly, as greater numbers of physicians gain experience with our Magellan System, we may identify areas where new or further training is required. If we encounter any of these issues as we endeavor to continue to commercialize our Magellan System on a larger scale, our financial condition and results of operations and business could be adversely impacted, and we may never achieve sustained profitability or realize long-term success.

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

We intend to further develop our Magellan System, including our Magellan Robotic Catheters and related accessories. Due to the advanced electrical, mechanical, and software capabilities of this new robotic platform, we may encounter challenges in designing, engineering and manufacturing future enhancements to the platform, which may lead to compatibility obstacles with operating room and catheter laboratory layouts, equipment quality or performance issues, unmet customer expectations regarding features or functionality or other defects in future versions of the platform. Any such difficulties could

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result in delays in our submissions to regulatory agencies, delays in achieving or the failure to achieve additional regulatory approvals or clearances for enhancements to the system, lack of physician adoption of our system, higher than expected service claims, litigation and negative press coverage which may damage our business.

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

We may encounter unexpected problems in manufacturing, assembling or testing our current products on a commercial scale. Our products contain expensive materials and are expensive to manufacture, particularly in limited quantities. In addition to increasing sales to increase manufacturing overhead absorption, we need to reduce the variable manufacturing costs of our catheters in order to achieve our operational and financial goals. We face challenges in order to produce disposable catheters effectively, to appropriately phase in new products and designs, to efficiently utilize our manufacturing facility and to achieve planned manufacturing cost reductions. If we are unable to effectively manage these issues, our costs of producing our products will negatively affect our gross margins which will negatively impact our business.

We have a debt facility with White Oak Global Advisors, LLC that requires us to meet certain restrictive covenants that may limit our operating flexibility.

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

The loan and security agreement contains customary events of default, including if we fail to make a payment on its due date, fail to perform specified obligations, fail to comply with certain covenants in the loan and security agreement, experience a material adverse change, or become insolvent. We have granted the lenders a first priority security interest in substantially all of our assets, excluding any of our intellectual property, now owned or hereafter acquired, and all proceeds and products thereof. Two of our wholly-owned subsidiaries, AorTx, Inc. and Hansen Medical International, Inc., have guaranteed our obligations under the loan and 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 we nor AorTx, Inc. and Hansen Medical International, Inc. may grant a lien on any intellectual property to third parties. We have also pledged to the lenders shares of each of our direct and indirect subsidiaries as collateral for the loan. We are also 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 $13.0 million in cash, cash equivalents and investments of which $5.0 million of which shall be funds subject to lenders’ control, and the lesser of $2.0 million or 65% of eligible accounts receivable. Additionally, we are required to obtain an audit opinion from our independent certified public accountants on the annual financial statements that does not include an explanatory uncertainty paragraph raising substantial doubt about its ability to continue as a going concern or any qualification or exception as to the scope of such audit. We are subject to limitations on our ability to: undergo certain change of control events; convey, sell, lease, transfer, assign or otherwise dispose of our assets; create, incur, assume, or be liable with respect to certain indebtedness not including, among other items, subordinated debt; grant liens; pay dividends and make certain other restricted payments; make loans, acquisitions, or certain investments; create subsidiaries or enter into joint ventures; repurchase certain equity interest; make payments on any subordinated debt; make material changes to our core business of any of our subsidiaries; enter into transactions with any of our affiliates outside of the ordinary course of business; or permit our subsidiaries to do the same. We are also required to make mandatory prepayments upon certain events of loss and certain dispositions of our assets described in the loan and security agreement.

As of March 31, 2016, we were not in compliance with certain covenants and events of default listed in Sections 6.1(c), 6.2(a)(i), 6.2(a)(iv), 6.10, 8.2(a) and 8.2(b) of the loan and security agreement with White Oak (the “Specified Events of Default”). On April 19, 2016, we entered into a Forbearance Agreement with White Oak (“Forbearance Agreement”) whereby White Oak granted forbearance of the Specified Events of Default until August 17, 2016 in exchange for a $150,000 non-refundable transaction fee. Pursuant to the Forbearance Agreement, on April 21, 2016, we made a prepayment to White Oak, with respect to our obligations under the loan and security agreement with White Oak, in the amount of $5.0 million from our restricted account. Additionally, the outstanding obligations under the White Oak loan will become due on or before August 17, 2016. As of March 31, 2016, the debt was classified as a short-term liability.

In the event we were to further violate any covenants or if White Oak believes that we have violated any covenants, and such violations are not cured pursuant to the terms of the loan and security agreement, we would be in default under the loan

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and security agreement, which would entitle the 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. Complying with these covenants may make it more difficult for us to successfully execute our business strategy.

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

The realization of the full potential benefits of our agreements with Philips, including the receipt of any of the up to $78.0 million in future payments associated with the successful commercialization by Philips or its collaborators of products containing the FOSSL technology, requires the development of new products and applications of technology that are subject to design, engineering and manufacturing challenges, and potential safety and regulatory issues that could delay, suspend or terminate clinical studies, regulatory approvals or sales, and our reliance on third parties to develop, obtain regulatory approval for, manufacture, market and sell products containing FOSSL technology. Approximately two-thirds of the potential future payments could arise from Philips’ sublicensing the FOSSL technology, but Philips has no obligations to do so. Under the amended terms of our agreements with Philips, we no longer have the right to reacquire certain of the rights licensed to Philips. In addition, Philips’ sales of products containing the FOSSL technology could be too low to result in any royalty payments to us. If any of these events occurred, we would be unable to realize the full financial benefits of our agreements with Philips and may be unable to monetize the FOSSL technology in other areas, harming our research and development efforts and adversely affecting our business.

We have completed enrollment in the initial reportable cohort of the ongoing IDE clinical trial, are working closely with FDA and have submitted the initial shell (outline) of the PMA. It is possible that we may need to enroll additional patients in the clinical trial to meet the statistical requirements and as such we may be unable to complete the trial for the treatment of atrial fibrillation or other future trials, or we may experience significant delays in completing the clinical trials, which could prevent or delay regulatory approval of our Sensei System for expanded uses and impair our financial position.

We have received Investigational Device Exemption, or IDE, approval to investigate the use of our Sensei System and Artisan Extend catheters in the treatment of atrial fibrillation in a clinical study designed to support the expansion of our current labeling in the U.S. beyond mapping. Initially the study was designed to enroll 300 patients, and the first patient was enrolled in May 2010. In January 2013, we proposed a modification to the study protocol to change the study design and reduce the required sample size. The modified Bayesian design study which requires a minimum enrollment of 125 subjects, was approved by the FDA in August 2013. The study has enrolled 150 patients to date. The study enrollment is now paused and the necessary patient follow up is ongoing. The study includes a seven-day follow-up for safety and a one-year follow-up for efficacy at intervals of 90, 180 and 365 days.

In addition, the completion of the trial, and any future clinical trials, could be delayed, suspended or terminated for several reasons, including:

• ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental information with respect to our preclinical results or clinical trial results;

• our failure or inability to conduct the clinical trials in accordance with regulatory requirements;

• sites participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number of sites that are permitted to be involved in the trial;

• patients may not remain in or complete the clinical trial at the rates we expect;

• patients may experience serious adverse events or side effects during the trial, which, whether or not related to our products, could cause the FDA or other regulatory authorities to place the clinical trial on hold; and

• clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices.

If our clinical trials are delayed it will take us longer to commercialize a product for the treatment of atrial fibrillation and generate revenues from such product. Moreover, our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned.

Even if we complete our trial for the treatment of atrial fibrillation or other clinical trials, these trials may not produce results that are sufficient to support approval of a PMA or 510(k) application.

We will consider our Sensei System to be effective if the trial for the treatment of atrial fibrillation meets target performance goals based upon the manual control of specified ablation catheters, but there is a risk that, even if we achieve our trial endpoints, the FDA may not approve our Sensei System for use in the treatment of atrial fibrillation. In addition, there is a

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risk that the FDA may require us to conduct a larger or longer clinical trial, submit additional follow-up data, or engage in other costly and time consuming activities that may delay the FDA’s clearance or approval of the Sensei System for use in atrial fibrillation. We plan to file a premarket approval, or PMA, based on data from our trial for the use of Sensei System in the treatment of atrial fibrillation, which is time-consuming and costly. If our clinical trial fails to produce sufficient data to support a PMA, it will take us longer to ultimately commercialize a product for the treatment of atrial fibrillation, or any other intended treatment, and generate revenue or the delay could result in our being unable to do so. Moreover, our development costs will increase if we need to perform more or larger clinical trials than planned.

We have incurred substantial management and employee turnover and we may lose additional key personnel or fail to attract and retain additional personnel needed for us to operate our business effectively.

Our management team includes several members hired since January 2014, including our Chief Executive Officer who joined us in May 2014. In addition, the position of Chief Financial Officer is currently held on an interim basis. If we are unable to recruit and retain qualified individuals, including retaining our Chief Executive Officer and/or hiring a permanent Chief Financial Officer, our product development and commercialization efforts could be materially delayed or be unsuccessful. We have periodically reduced our work force and we may undertake additional actions to reduce our work force in the future. These reductions in force may make it more difficult to retain and attract the qualified personnel required, placing a significant strain on our management. Retaining such personnel and recruiting necessary new employees in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled management and other personnel, we may be unable to continue our development and commercialization activities and our business will be harmed.

On April 18, 2016, we entered into a Retention Agreement with Christopher P. Lowe, our Interim Chief Financial Officer (the "Retention Agreement"). Pursuant to the terms of the Retention Agreement, provided that Mr. Lowe signs and does not revoke a waiver and release of claims against us and, if requested by our Board of Directors, resigns immediately as a member of the Board of Directors of the Company and each of our subsidiaries, if at any time Mr. Lowe’s employment with us is terminated due to a Covered Termination (as defined in the Retention Agreement and which includes (i) an Involuntary Termination Without Cause (as defined in the Retention Agreement) or (ii) a voluntary termination by Mr. Lowe of his employment for Good Reason (as defined in the Retention Agreement)), which occurs within three months prior to, or 12 months following, a change in control of the Company, then 100% of the unvested portion of any options, restricted stock, restricted stock units or other equity awards held by Mr. Lowe with regard to our capital stock shall become immediately vested.

We are highly dependent on the principal members of our management and scientific staff. We do not carry “key person” insurance covering any members of our senior management. Each of our officers and key employees may terminate his or her employment at any time without notice and without cause or good reason. The loss of any of these persons could prevent the implementation and completion of our objectives, including the development and introduction of our products, and could require the remaining management members to direct immediate and substantial attention to seeking a replacement.

Credit, financial market and general economic conditions could delay or prevent potential customers from purchasing our products, which would adversely affect our sales, financial condition and results of operation.

The sale of our systems often represents a significant capital purchase for our customers and some customers finance their purchase of our systems through a credit facility or other financing. If prospective customers that need to finance their capital purchases are not able to access the credit or capital markets on terms that they consider acceptable, they may decide to postpone or cancel a potential purchase of our system. Potential customers with limited capital budgets may decide to spend those dollars on other technologies rather than on our products. Also, even customers with sufficient financial resources to make such purchases without resorting to the credit and capital markets may be less likely to make capital purchases during periods when they view the overall economic conditions unfavorably or with uncertainty. Many potential customers have delayed making a decision to purchase a Sensei or Magellan System, which has significantly impacted our sales, financial condition and results of operations. If we are unable to obtain market acceptance for our products’ value proposition, potential customers may not make these significant capital purchases and our sales, financial condition and results of operations would be harmed.

We are continuing to develop our capabilities and experience with the sales, marketing and distribution of our products on a commercial scale, which could impair our ability to achieve sustained profitability.

While we have experience marketing and selling the Sensei System following its initial regulatory approvals in 2007 and the Magellan System following its regulatory approvals in July 2012 in the United States, we are still continuing to develop our

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capabilities and experience with the sales, marketing and distribution of our products on a larger commercial scale. We market our systems and catheters through a direct sales force of regional sales employees, supported by clinical sales representatives who provide training, clinical support and other services to our customers. Our direct sales force competes against the experienced and well-funded sales organizations of our competitors, some of which have more experience and greater capabilities with the sales, marketing and distribution of their products on large, commercial scales. Our revenues depend largely on the effectiveness of our sales force and, if we fail to effectively manage any of the risks identified in this Item 1A, we may never achieve sustained profitability. We face significant challenges and risks related to our direct sales force and the marketing of our current and future products, including, among others:

• the ability of sales personnel to obtain access to or persuade hospitals to purchase our system and catheters and physicians to use our system and catheters in sufficient volume;

• our ability to retain, properly motivate, recruit and train adequate numbers of qualified sales and marketing personnel in sufficient volume;

• our ability to successfully integrate new management, including our future Chief Financial Officer;

• the costs associated with an independent sales and marketing organization;

• hiring, maintaining and expanding an independent sales and marketing organization; and

• our ability to promote our products effectively while maintaining compliance with government regulations and labeling restrictions with respect to the healthcare industry.

Outside the United States, primarily in the EU, we are establishing a combination of a direct sales force and distributors to market, sell and support our current and future products. If we fail to select and maintain appropriate distributors, appropriately disengage from unsuccessful distributors or effectively use our distributors or sales personnel and coordinate our efforts for distribution of our systems and catheters in the EU or if their and our sales and marketing strategies are not effective in generating sales of our system, our revenues would be adversely affected and we may never become profitable on a sustained basis.

We are continuing to develop our experience in manufacturing and assembling our products on a commercial scale and may encounter problems at our manufacturing facilities or otherwise experience manufacturing delays that could result in lost revenue or diminishing margins.

We may encounter unexpected problems in manufacturing, assembling or testing our current products on a commercial scale. In addition, for our Sensei System and Magellan System, we subcontract the manufacturing of major components and complete the final assembly and testing of those components in-house. We face challenges in order to produce our products effectively, to appropriately phase in new products and product designs, to efficiently utilize our manufacturing facility and to achieve manufacturing cost reductions. These challenges include equipment design and automation, material procurement, low or variable production yields on catheters and quality control and assurance. The costs resulting from these challenges have had and will continue to have a significant impact on our gross margins and may result in significant fluctuations of gross margins from quarter to quarter. As we continue to scale our operations, these risks increase. Additionally, we may not successfully complete required manufacturing changes or planned improvements in manufacturing efficiency on a timely basis or at all. The Company has in the past experienced recalls associated with its manufacturing processes and such recalls may occur again. Any future manufacturing issues may result in our being unable to meet the expected demand for our products, maintain control over our expenses or otherwise successfully manage our manufacturing capabilities. If we are unable to satisfy demand for our systems or catheters, our ability to generate revenue could be impaired and hospitals may instead purchase, or physicians may use, our competitors’ products. Since our Sensei System and Magellan System require the use of disposable Artisan Extend catheters and Magellan Robotic Catheters, respectively, our failure to meet demand for catheters from hospitals that have purchased our systems could adversely affect the market acceptance of our products and damage our commercial reputation.

In addition, all of our manufacturing operations are conducted at our facilities leased in Mountain View, California. We could encounter problems at these facilities, which could delay or prevent us from manufacturing, assembling or testing our products or maintaining our manufacturing capabilities or otherwise conducting operations.

Our reliance on third-party manufacturers and on suppliers, and in certain cases, a single-source supplier, could harm our ability to meet demand for our products in a timely manner or within budget, and could cause harm to our business and financial condition.

We depend on third-party manufacturers to produce most of the components of our systems and other current products, and have not entered into formal agreements with several of these third parties. We also depend on various third-party suppliers for various components we use in our systems and for our catheters and we generally do not maintain large volumes of inventory.

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Our reliance on third parties involves a number of risks, including, among other things, the risk that:

• suppliers may fail to comply with regulatory requirements or make errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in or prevent shipments of our products;

• we may not be able to respond to unanticipated changes and increases in customer orders;

• we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;

• we may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems and other products;

• our suppliers manufacture products for a range of customers, and fluctuations in demand for products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner;

• our suppliers may wish to discontinue supplying goods or services to us;

• if the components necessary for our system become unavailable we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner; and

• our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.

If any of these risks materialize, it could significantly increase our costs and impact our ability to meet demand for our products.

In addition, if these manufacturers or suppliers stop providing us with the components or services necessary for the operation of our business, we may not be able to identify alternative sources in a timely fashion. Any transition to alternative manufacturers or suppliers or a decision to discontinue our relationship with a current manufacturer or supplier could result in operational problems, increased expenses or write-down of capitalized assets that would adversely affect operating results and could delay the shipment of, or limit our ability to provide, our products. We cannot assure you that we would be able to enter into agreements with new manufacturers or suppliers on commercially reasonable terms on a timely basis or at all. Additionally, obtaining components from a new supplier may require qualification of a new supplier in the form of a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume purchasing components for inclusion in our products. Any disruptions in product supply may harm our ability to generate revenues, lead to customer dissatisfaction, damage our reputation and result in additional costs or cancellation of orders by our customers. We currently purchase a number of the components for our systems in foreign jurisdictions. Any event causing a disruption of imports, including the imposition of import restrictions, could adversely affect our business and our financial condition.

If we fail to maintain necessary FDA clearances/approvals and the CE Certificates of Conformity for our medical device products or are seen to violate any FDA or European Economic Area ("EEA") regulations or guidance, or if future clearances, approvals or the delivery of CE Certificates of Conformity are delayed, we will be unable to commercially distribute and market our products.

The process of seeking regulatory clearance, or approval (in the United States) or CE Certificates of Conformity (in the EEA) to market a medical device is expensive and time-consuming and clearance, approval and grant of CE Certificates of Conformity is never guaranteed and, even if granted or obtained, clearance, approval or CE Certificates of Conformity may be suspended, withdrawn or revoked. Staying in compliance with all of the complex FDA and EEA regulations and guidance is a time-consuming and difficult endeavor, and the government may disagree with our compliance efforts or interpretations of FDA regulations and guidance. If the FDA or the competent authorities of the EEA countries determine that our promotional materials or training constitutes promotion of a use which has not been cleared or approved or does not fall within the scope of the current CE mark, they could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties.

In May 2007, we received FDA clearance in the United States to commercialize our Sensei System and Artisan Extend catheters only to facilitate manipulation, positioning and control, for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems using two specified mapping catheters. Because the FDA has determined that there is a reasonable likelihood that our Sensei System and Artisan Extend catheters could be used by physicians for uses not encompassed by the scope of the present label and that such uses may cause harm, we are required to label these products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. Accordingly, the scope of the current label may hinder our ability to successfully market and sell our EP products in the United States to a broader group of potential customers.

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We received FDA clearance for marketing our Magellan System, including the Magellan 9Fr Robotic Catheter and accessories in June 2012, the Magellan 6Fr Robotic Catheter in February 2014, and the Magellan 10Fr Robotic Catheter in July 2015. Our FDA cleared labeling does not further specify the scope of the targets within the peripheral vasculature that are encompassed in the 510(k) clearance. The FDA could disagree with our interpretation of the scope of this clearance. If the FDA concludes that our promotional materials exceed the scope of this clearance, the agency may retroactively require us to seek 510(k) clearance or PMA approval and such uses could be subject to the same restrictions as the use of the Sensei System in cardiac ablation procedures.

Our promotional materials and training methods regarding physicians must comply with FDA requirements and other applicable laws and regulations. Both our Magellan and Sensei Systems are cleared by the FDA and CE marked in the EEA for defined uses. We believe that the specific procedures for which our products are marketed fall within the scope of the FDA clearances in the United States and CE Marks in the EEA. The FDA and other competent authorities and agencies actively enforce regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance, approval or CE Certificates of Conformity has not been obtained. Moreover, scrutiny of such practices by the FDA, the U.S. Department of Justice, and other competent authorities and agencies has recently increased. In the United States, promotional activities for FDA regulated products of other companies have been the subject of enforcement action brought under healthcare reimbursement laws and consumer protection statutes. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and administrative remedies under the Federal False Claims Act and various other federal and state laws, as well as criminal sanctions. Administrative, civil and criminal sanctions can also be imposed in foreign countries.

We will be required to seek a separate 510(k) clearance or PMA approval to market our Sensei System for uses other than those in the current label. We cannot assure that FDA would not impose a more burdensome level of premarket review on other intended uses or modifications to approved products. We plan to seek future approval of our Sensei System for other indications, including atrial fibrillation and other cardiac ablation procedures. We cannot assure the timing or potential for success of those efforts. We cannot assure the study will be completed at all or in a timely manner, nor that the study will be executed in a manner consistent with FDA requirements or yield sufficient data to support approval. Clinical studies are subject to FDA audits under the Bioresearch Monitoring program, and if our study execution or that of our participating sites and investigators is found to be deficient, this may result in delays in approval or could prevent approval from being obtained. Any significant violations can also result in further enforcement action, as outlined above.

With regard to our Sensei System, our Magellan System, or other products, the FDA can delay, limit or deny clearance of a 510(k), or PMA approval, for many reasons, including:

• our inability to demonstrate safety or effectiveness to the FDA’s satisfaction;

• the data from our preclinical studies and clinical trials may be insufficient to support approval;

• the facilities of our third-party manufacturers or suppliers may not meet applicable requirements;

• our failure to comply with preclinical, clinical or other regulations;

• our inability to meet the FDA’s statistical requirements or changes in statistical tests or significance levels the FDA requires for approval of a medical device, including ours; and

• changes in the FDA approval policies, expectations with regard to the type or amount of scientific data required or adoption of new regulations that may require additional data or additional clinical studies.

Furthermore, in order to market our products outside of the United States, we will need to establish and comply with the numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy. We received a CE Certificate of Conformity in the EEA for our Sensei System in September 2006, for our Artisan Extend catheters in May 2007, for our Magellan System in July 2011, for our Magellan 9Fr Robotic Catheter and related accessories designed for use with the Magellan System in October 2011, for our Artisan Extend catheters in February 2013, for our Magellan 6Fr Robotic Catheter in October 2014, and for our Magellan 10Fr Robotic Catheter in April 2015. However, we may be required to go through new conformity assessment procedures with our Notified Body in the EEA in order to market our products for any additional uses. Regulatory approvals or CE Certificates of Conformity may be difficult and costly to obtain, or may not be granted or obtained at all.

If we are unable to maintain our regulatory clearances and CE Certificates of Conformity and obtain future clearances and CE Certificates of Conformity for our products and be seen to be in full compliance with the relevant FDA regulations and guidance, our financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.

If the FDA or U.S. Department of Justice takes the position that we are not marketing or training physicians in a manner consistent with FDA regulations, the FDA and the competent authorities in the EEA countries could require us to stop

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promoting our products for certain procedures until we obtain FDA clearance or approval or a specific CE Certificate of Conformity for them and/or could require us to initiate corrective actions that could include issuing corrective advertising. In addition, the FDA and the competent authorities in the EEA countries could require us to generate and submit significant quality, safety and efficacy data to support use in those procedures for which the agency or the competent authorities of the EEA countries require clearance, approval or a specific CE Certificate of Conformity. If we are perceived not to be in compliance with all of the governmental restrictions, we could be subject to various enforcement measures, including investigations, administrative proceedings and country, federal and state court litigation, which would likely be costly to defend and harmful to our business. If the FDA, the U.S. Department of Justice, or another competent authority ultimately concludes we are not in compliance with such restrictions, we could be subject to significant liability, including civil and administrative remedies, exclusion, injunctions, significant monetary and punitive penalties and criminal sanctions, any or all of which would be harmful to our business and in certain instances may cause us to have to cease operations.

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

We believe that physicians will not use, and hospitals will not purchase, our systems unless they determine that they provide a safe and effective alternative to existing treatments. Since we have received FDA clearance to market our Sensei System and disposable Artisan Extend catheters only for guiding catheters to map the heart anatomy, we will not be able to label or promote these products, or train physicians, for use in guiding catheters for cardiac ablation until such clearance or approval is obtained. Currently, there is only limited clinical data on our Sensei System with which to assess its safety and efficacy in any procedure, including atrial fibrillation and other cardiac ablation procedures. A number of studies have been published since the commercial launch of our Sensei System in 2007 on the efficacy, safety and efficiency of our products, especially by comparison to manual techniques. While we believe many of those studies have demonstrated the benefits of our products, some of these studies have been cited by our competitors to portray our products in an unfavorable light. A number of additional studies are underway both in the United States and Europe assessing the clinical experience with our products and continuing to compare usability and success of treatment between procedures performed with our Sensei System and manual technique. If these studies, or other clinical studies performed by us or others, or clinical experience indicate that procedures with our Sensei System or the type of procedures that can be performed with the Sensei System are not effective or safe for such uses, physicians may choose not to use our Sensei System. Reluctance by physicians to use our Sensei System or to perform procedures enabled by the Sensei System would harm sales. Furthermore, we commenced the commercialization of our Magellan System and Magellan Robotic Catheters for use during the treatment of peripheral vascular diseases, but there is very little clinical data for the system’s safety and efficacy. Reluctance by physicians to use our Magellan System or to perform procedures enabled by the Magellan System would harm these sales. Further, unsatisfactory patient outcomes or patient injury in either of our major products could cause negative publicity for our products, particularly in the early phases of product introduction. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from the use of these new products. It is also possible that as our products become more widely used, latent or other defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If physicians do not adopt the use of our products in their practices, we likely will not become profitable on a sustained basis and our business will be harmed.

In addition, our research and development efforts and our marketing strategy depend heavily on obtaining support and collaboration from highly regarded physicians at leading hospitals. If we are unable to gain or maintain such support and collaboration, our ability to market our Sensei System and Magellan System and, as a result, our business and results of operations, could be harmed.

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

We continue our focus on our Magellan products. We received the CE Mark in Europe for our Magellan System in July 2011 and for the Magellan Robotic Catheter and related accessories designed for use with the Magellan System in October 2011, for our Magellan 6Fr Robotic Catheter in October 2014, and for our Magellan 10Fr Robotic Catheter in April 2015. We received FDA clearance to commercialize our Magellan System including the Magellan 9Fr Robotic Catheter and accessories in June 2012, we received FDA clearance for the marketing of our Magellan 6Fr Robotic Catheter in February 2014 and our Magellan 10Fr Robotic Catheter in July 2015 and Magellan eKit in February 2016. If hospitals do not widely adopt our Sensei or Magellan products, or if they decide that our systems are too expensive to purchase or operate, we may never achieve significant revenue, become profitable or sustain profitability.

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The training required for physicians to use our Sensei System and Magellan System could reduce the market acceptance of our system and reduce our revenue.

It is critical to the success of our sales efforts to ensure that there are a sufficient number of physicians familiar with, trained on and proficient in the use of our Sensei System and Magellan System. Convincing physicians to dedicate the time and energy necessary for adequate training in the use of our systems is challenging, and we cannot assure you that we will be successful in these efforts.

It is our policy to train U.S. physicians to only insert, navigate, map and remove catheters using our Sensei System. Physicians must obtain training elsewhere to learn how to ablate cardiac tissue to treat atrial fibrillation, which is an off-label procedure with our Sensei System. This training may be provided in the U.S. by third parties, such as hospitals and universities and through independent peer-to-peer training among doctors. We cannot assure you that a sufficient number of U.S. physicians will become aware of training programs or that physicians will dedicate the time, funds and energy necessary for adequate training in the use of our system for these off-label procedures. Additionally, we will have no control over the quality of these training programs. If physicians are not properly trained, they may misuse or ineffectively use our products. This may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which could negatively affect our reputation and sales of our products. Furthermore, our inability to educate and train U.S. physicians to use our Sensei System for cardiac ablation procedures may lead to inadequate demand for our products and have a material adverse impact on our business, financial condition and results of operation.

We monitor our training to ensure that off-label use is not promoted or enabled. However, from time to time, we may sponsor third party training. There is a risk that independent peer-to-peer interaction between physicians and other third party training may include discussion or observation of off-label procedures because most procedures performed to date using the Sensei System involve both mapping and cardiac ablation. If any such activities are attributed to us, the FDA or other governmental entities could conclude that we have engaged in off-label promotion of our products, which could subject us to significant liability.

We expect to continue to experience extended and variable sales cycles, which could cause significant variability in our results of operations for any given quarter.

Our systems have a lengthy sales cycle because they involve a relatively expensive capital equipment purchase, which generally requires the approval of senior management at hospitals, inclusion in the hospitals’ budget process for capital expenditures and, in some instances, a certificate of need from the state or other regulatory clearance. We continue to estimate that this sales cycle may take between six and 18 months, though we have seen sales cycles trend towards the longer end of this range as many potential customers have postponed purchase decisions. Additionally, the majority of our revenue is often shipped in the last weeks of a given quarter. Any disruption in our supply chain during those critical weeks or an inability to fulfill our deliverables during that compressed time frame could significantly impact the timing of our ability to recognize revenue on those items. These factors have contributed in the past and may contribute in the future to substantial fluctuations in our quarterly operating results, particularly in the near term and during any other periods in which our sales volume is relatively low. As a result, in future quarters our operating results could differ from our announcements of guidance regarding future operating or financial results or may fail to meet the expectations of securities analysts or investors, in which event our stock price would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance. In addition, the introduction of new products such as our Magellan System and Magellan Robotic Catheters could adversely impact our sales cycle, as customers take additional time to assess the benefits of new investments in capital products.

The use of our products could result in product liability claims that could be expensive, divert management’s attention and harm our reputation and business.

Our business exposes us to significant risks of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. Moreover, the FDA has expressed concerns regarding the safety and efficacy of our Sensei System for ablation and other therapeutic indications, including for the treatment of atrial fibrillation and has specifically instructed that our products be labeled to inform our customers that the safety and effectiveness of our technology for use with cardiac ablation catheters in the treatment of cardiac arrhythmias, including for atrial fibrillation, have not been established. We presently believe that to date, all of the procedures in which our Sensei System has been used in the United States have included off-label uses such as cardiac ablation, for which our Sensei System and Artisan Extend catheters have not been cleared by the FDA and which therefore could increase the risk of product liability claims. The medical device industry has historically been subject to extensive litigation over product liability claims. We may be subject to claims by consumers, healthcare providers, third-party payers or others selling our products if the use of our products were to cause, or merely appear to cause, injury or death. Any weakness in training and services associated with our products may also result in product liability lawsuits. Although we maintain clinical trial liability and product liability insurance, the coverage is subject to deductibles and

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limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts. A product liability claim, regardless of its merit or eventual outcome could result in:

• decreased demand for our products;

• injury to our reputation;

• diversion of management’s attention;

• withdrawal of clinical trial participants;

• significant costs of related litigation;

• payment of substantial monetary awards to patients;

• product recalls or market withdrawals;

• loss of revenue; and

• the inability to commercialize our products under development.

Our products and related technologies can be applied in different applications, and we may fail to focus on the most profitable areas or we may be unable to address successfully financial and technology risks associated with new applications, including applications for the vascular market.

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

We are dedicating significant resources to the development and commercialization of our Magellan System, Magellan Robotic Catheters and associated accessories. These efforts may not produce viable commercial products and may divert our limited resources from more profitable market opportunities. Moreover, we may devote resources to developing products in additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products we develop in these areas, if any. In that case, the return on investment in these additional areas may be limited, which could negatively affect our results of operations.

If we fail to maintain collaborative relationships with providers of imaging and visualization technology on terms favorable to us, or at all, our Sensei System may not be able to gain market acceptance and our business may be harmed.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. We believe that integrating our Sensei System with key imaging and visualization technologies using an open architecture approach is a key element in establishing our Sensei System as important for complex interventional procedures. Our Sensei System currently utilizes a variety of imaging means to visualize and assist in navigating our catheters. These imaging systems include fluoroscopy, intravascular ultrasound and electro-anatomic mapping systems, as well as pre-operatively acquired three-dimensional computed tomography and magnetic resonance imaging. We believe that in the future, as imaging companies develop increasingly sophisticated three-dimensional imaging systems, we will need to integrate advanced imaging into our Sensei System in order to compete effectively. There can be no assurance that we can timely and effectively integrate these systems or components into our Sensei System in order to remain competitive. We expect to face competition from companies that are developing new approaches and products for use in interventional procedures and that have an established presence in the field of interventional cardiology, including the major imaging, capital equipment and disposables companies that are currently selling products in the electrophysiology laboratory. We may not be able to acquire or develop three- dimensional imaging and visualization technology for use with our Sensei System. In addition, developing or acquiring key imaging and visualization technologies could be expensive and time-consuming and may not integrate well with our Sensei System. If we are unable to timely acquire, develop or integrate imaging and visualization technologies, or any other changing technologies, effectively, our revenue may decline and our business will suffer.

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

Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers, employees and directors under certain circumstances. In addition, we have contractual indemnification obligations to the underwriters and placement agents in our prior public and private offerings, as applicable, of our equity securities. Some of these advancement and indemnification obligations may not be covered by our directors’ and officers’ insurance policies or may exceed the coverage limits of those policies. If we incur significant uninsured advancement or indemnity obligations, it could have a material adverse effect on our ability to defend claims for which we may be liable, our results of operations, our financial condition and our cash flows.

Future acquisitions could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our offerings and markets and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, solutions or technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of the company that we acquired, particularly if key personnel of an acquired company decide not to work for us. In addition, we may issue equity securities to complete an acquisition, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock. Acquisitions may also involve the entry into geographic or business markets in which we have little or no prior experience. Consequently, we may not achieve anticipated benefits of the acquisitions which could harm our operating results.

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

Our systems incorporate sophisticated computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex interventional procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software and other defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:

• loss of revenue;

• an increase in reportable adverse events to applicable authorities such as the FDA;

• delay in market acceptance of our products;

• damage to our reputation;

• additional regulatory filings;

• product recalls;

• increased service or warranty costs; and/or

• product liability claims relating to the software defects.

Our costs could substantially increase if we receive a significant number of service claims which would harm our results of operations, financial condition and cash flows.

We typically provide post-contract customer service for each of our products against defects in materials and workmanship for a period of approximately 12 months from the delivery or acceptance of our product by a customer which is normally when the system is shipped. The associated expenses are charged to cost of revenues as incurred. We have a limited history of commercial placements of our Sensei Systems and a very limited history of commercial placements of our Magellan Systems from which to judge our rate of claims against our service contracts. Our obligation under these service contracts may be impacted by product failure rates, material usage and service costs. Unforeseen exposure under these post-contract customer service contracts could negatively impact our business, financial condition and results of operations.

Hospitals or physicians may be unable to obtain coverage or reimbursement from third-party payors for procedures using our Sensei System and Magellan System, which could affect the adoption or use of our systems and may cause our revenues to decline.

While we anticipate that third-party payors will continue to reimburse hospitals and physicians under existing billing codes for the vast majority of the procedures involving our products, there is increased pressure for our customers to reduce

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costs for their services and operations; similarly, the federal healthcare programs are under increasing pressure to reduce overall costs for items and services. While we expect that healthcare facilities and physicians in the United States will continue to bill various third-party payors, such as Medicare, Medicaid, other governmental programs and private insurers, for services performed using our products, we are unable to predict how government healthcare programs or private insurers will cover or reimburse these procedures in the future. We believe that procedures associated for use with our products are generally already reimbursable under government programs and most private plans. Accordingly, while we believe providers in the United States will generally not be required to obtain new billing authorizations or codes in order to be compensated for performing medically necessary procedures using our products on insured patients, we are unable to predict how future statutes or regulatory guidance will impact coverage reimbursement or the use of specific codes.

There can be no assurance, however, that coverage, coding and reimbursement policies of third-party payors will not change in the future with respect to some or all of the procedures that would use our systems. Additionally, in the event that a physician uses our Sensei System or Magellan System for indications not approved by the FDA, there can be no assurance that the coverage or reimbursement policies of third-party payors will be comparable to FDA-approved uses. Future legislation, regulation or coverage, coding and reimbursement policies of third-party payors may adversely affect the demand for our products currently under development and limit our ability to profitably sell our products. For example, in prior years, certain regulatory changes were made to the methodology for calculating payments for inpatient procedures in certain hospitals, resulting in a decrease to Medicare payment rates for surgical and cardiac procedures, including those procedures for which our products are targeted. The majority of the procedures performed with our Sensei System and Artisan Extend catheter are done on an in-patient basis and thus are paid under the Medicare severity diagnosis related group, or MS-DRG system.

We believe that the majority of procedures performed using our Sensei technology fall under MS-DRG 251, percutaneous cardiovascular procedures without coronary artery stent or acute myocardial infarction without major cardiovascular complication. The Centers for Medicare & Medicaid Services update the MS-DRG payment rates annually effective October 1 through September 30 of the following year. Because hospital inpatient reimbursement is largely dependent on geographical location and other hospital-specific factors, an individual hospital’s revenues from using our technology can vary significantly. At this time, although payments for these cardiac procedures have not undergone further reductions, we cannot predict the full impact any future rate changes, including rate reductions, will have on our revenues or business. We do not currently know the spread and proportion of MS-DRGs that apply to the range of procedures performed with our Magellan System and whether reimbursement amounts for each will be considered favorable by hospitals.

Our success in international markets also depends upon the eligibility of our products for coverage and reimbursement by government-sponsored healthcare payment systems and third-party payors. Recent legislative initiatives in the United States to reform healthcare and government insurance programs have included a focus on healthcare costs which could limit the coverage and reimbursement for procedures utilizing our products. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue and may increase. The failure of our customers to obtain sufficient reimbursement could have a material adverse impact on our financial condition and harm our business.

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

From time to time, legislative reform measures are proposed or adopted that would impact healthcare expenditures for medical services, including the medical devices used to provide those services. For example, in March 2010, U.S. President Barack Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act. The Affordable Care Act made a number of substantial changes in the way health care is financed by both governmental and private insurers and the way that Medicare providers are reimbursed. Among other things, the Affordable Care Act requires certain medical device manufacturers and importers to pay an excise tax equal to 2.3% of the price for which such medical devices are sold, beginning January 1, 2013. As of December 2015, the medical device tax has been suspended for two years.

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

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government to recover overpayments to providers from three to five years. In December 2014, Congress passed an omnibus funding bill and a tax extenders bill, both of which may negatively impact coverage and reimbursement of healthcare items and services. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.

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

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo (DRC) and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements required due diligence efforts in 2013 and 2014, with initial disclosure requirements beginning in May 2014. In May 2014 and June 2015, we filed a Specialized Disclosure Report on Form SD with the SEC disclosing our on-going diligence efforts and our determination that our products were conflict undeterminable at that time. We expect to file our next specialized Disclosure Report on Form SD with SEC in May 2016.

There have been and will be costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

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

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

Category 8 includes medical devices and applies to our products. Compliance with this revised directive for category 8 was required by July 22, 2014. All new products held for commerce in the EU must be in compliance with RoHS 2 as of that date. Any remaining inventory that is not in compliance with RoHS2 will be used in products sold in non-EU countries. RoHS2 compliant products may be sold in both EU and non-EU countries. However, only RoHS2 compliant products may be sold in EU countries. In order to minimize duplicate inventory, we plan to produce all future products in compliance with RoHS2 in order to sell them in both EU and non-EU countries. We recently undertook the lengthy process of changing the materials and processes used, where necessary, to bring our products into compliance with RoHS2. As of the date of filing of this Quarterly Report on Form10-Q, all of our products sold in the EU are RoHS2 compliant. There can be no assurance that similar programs

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will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.

We sell our systems internationally and are subject to various risks relating to such international activities which could adversely affect our international sales and operating performance.

A portion of our current and future revenues will come from international sales. To expand internationally, we will need to hire, train and retain additional qualified personnel. Engaging in international business inherently involves a number of difficulties and risks, including:

• required compliance with existing and changing foreign regulatory requirements and laws;

• export or import restrictions and controls relating to technology;

• pricing pressure;

• laws and business practices favoring local companies;

• longer payment cycles;

• shipping delays;

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

• political and economic instability;

• potentially adverse tax consequences, tariffs and other trade barriers;

• international terrorism and anti-American sentiment;

• difficulties in penetrating markets in which our competitors’ products are more established;

• difficulties and costs of staffing and managing foreign operations; and

• difficulties in enforcing intellectual property rights.

If one or more of these risks are realized, it could require us to dedicate significant resources to remedy the situation, and if we are unsuccessful at finding a solution, our revenue may decline.

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

In the first quarter of 2016, approximately 48% of our total revenues were generated outside the United States. While some of these revenues were denominated in U.S. dollars, approximately 9% of our total revenues for the first quarter of 2016 were generated in other currencies. We translate results of transactions denominated in local currencies into U.S. dollars using market conversion rates applicable to the period in which the transaction is reported. As a result, changes in exchange rates during a period can unpredictably and adversely affect our consolidated operating financial results and our asset and liability balances, even if the underlying value of the item in its original currency has not changed. A hypothetical 10% increase in the United States dollar exchange rate used would have resulted in an immaterial decrease in revenues for the first quarter of 2016.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our research and development, manufacturing and clinical processes involve the handling of potentially harmful biological materials as well as other hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

If we are unable to protect the intellectual property contained in our products from use by third parties, our ability to compete in the market will be harmed.

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Our commercial success will depend in part on obtaining patent and other intellectual property protection for the technologies contained in our products, and on successfully defending our patents and other intellectual property against third party challenges. We expect to incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will be able to obtain the patent protection we seek, or whether the protection we do obtain will be found valid and enforceable if challenged or that such patent protection will confer any significant commercial advantage. We also do not know whether we will be able to develop additional patentable proprietary technologies. If we fail to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to voluntarily challenge a third party’s products or patents in litigation or administrative proceedings, including patent interferences or reexaminations. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.

United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination proceedings and, starting in 2012, post grant and inter partes review in the United States Patent and Trademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, reexamination, post grant review, inter partes review, and opposition proceedings may be costly. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.

Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures.

Our trade secrets, nondisclosure agreements and other contractual provisions to protect unpatented technology provide only limited and possibly inadequate protection of our rights. As a result, third parties may be able to use our unpatented technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in developing our products or in commercial relationships with us may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach.

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

Successfully commercializing our Sensei System, our Magellan System and any other products we may develop, will depend in part on our not infringing patents held by third parties. It is possible that one or more of our products, including those that we have developed in conjunction with third parties, infringes existing patents. From time to time, we have received, and likely will continue to receive, communications from third parties inviting us to license their patents or accusing us of infringement. There can be no assurance that a third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the manufacture and sale of our Sensei System in the United States or elsewhere or the sale of our Magellan System in the United States or elsewhere. We may also choose to defend ourselves by initiating litigation or administrative proceedings to clarify or seek a declaration of our rights. As competition in our market grows, the possibility of a patent infringement claim against us or litigation we will initiate increases.

There may be existing patents which may be broad enough to cover aspects of our future technology. In addition, because patent applications in many countries such as the United States are maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware and which may later result in issued patents that our products infringe. We do not know whether any of these patents, if challenged, would be upheld as valid,

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enforceable and infringed by our products or technology. We may be sued by, or become involved in an administrative proceeding with, one or more of these or other third parties. We cannot assure you that a court or administrative body would agree with any arguments or defenses we may present concerning the invalidity, unenforceability or non-infringement of any third-party patent. In addition to the issued patents of which we are aware, other parties may have filed, and in the future are likely to file, patent applications covering products that are similar or identical to ours. We cannot assure you that any patents issuing from applications will not cover our products or will not have priority over our own products and patent applications.

We may not be able to maintain or obtain all the licenses from third parties necessary or advisable for promoting, manufacturing and selling our Sensei System and our Magellan System, which may cause harm to our business, operations and financial condition.

We rely on technology that we license from others, including technology that is integral to our Sensei System and our Magellan System, such as patents and other intellectual property that we have co-exclusively licensed from Intuitive. Under our agreement with Intuitive, we received the right to apply Intuitive’s patent portfolio in the field of intravascular approaches for the diagnosis or treatment of cardiovascular, neurovascular and peripheral vascular diseases. To the extent that we develop or commercialize robotic capability outside the field of use covered by our license with Intuitive, which we may choose to do at some time in the future, we may not have the patent protection and the freedom to operate outside the field which is afforded by the license inside the field. Although we believe that there are opportunities for us to operate outside the licensed field of use without using Intuitive’s intellectual property, Intuitive from time to time has told us that it believes certain of our past activities that have fallen outside the licensed field have infringed its intellectual property rights. Although we disagree with Intuitive’s position, we presently remain focused within our licensed field and so have agreed to inform Intuitive before commencing any further outside clinical investigations for endoluminal applications or engaging in external technology exhibitions at non-intravascular conferences. There can be no assurance that Intuitive will not challenge any activities we engage in outside the intravascular space, and we cannot assure you that in the event of such a challenge we would be able to reach agreement with Intuitive on whether activities outside our licensed field may be conducted without the use of the Intuitive’s intellectual property. If Intuitive asserts that any of our activities outside the licensed field are infringing their patent or other intellectual property rights or commences litigation against us, we will incur significant costs defending against such claims or seeking an additional license from Intuitive, and we may be required to limit use of our systems or future products and technologies within our licensed intravascular field if any of our activities outside the licensed field are judged to infringe Intuitive’s intellectual property, any of which could cause substantial harm our business, operations and financial condition. Although Intuitive is restricted in how it can terminate our license, if Intuitive were ever to successfully do so, and if we are unable to obtain another license from Intuitive, we could be required to abandon use of our existing product technology completely and could have to undergo a substantial redesign and design-around effort, which we cannot assure you would be successful. In October 2012, we signed an updated license agreement with Intuitive. Under the terms of the agreement, Intuitive’s existing co-exclusive rights to our patent portfolio to certain non-vascular procedures were extended to include patents filed or conceived by us subsequent to the original 2005 agreement through October 26, 2015. We retain the right to use our intellectual property for all clinical applications, both vascular and non-vascular.

The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of management’s attention, require us to pay damages and discontinue selling our products.

The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the relevant court has entered final non-appealable judgement. Our competitors may assert, and have asserted in the past, that our products or the use of our products are covered by United States or foreign patents held by them. This risk is heightened due to the numerous issued and pending patents relating to the use of robotic and catheter-based procedures in the medical technology field. For example, we have received correspondence from a third party indicating it believes it holds a patent that our Sensei System may infringe. While we do not believe that the Sensei System infringes this patent, there can be no assurance that the third party will not take further action, such as filing a patent infringement lawsuit, including a request for injunctive relief, to bar the manufacture and sale of our Sensei System in the United States.

If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our system unless we can obtain a license to use technology or ideas covered by such patent or are able to redesign our products to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. In addition, our patents may be subject to various invalidity attacks, such as those

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based upon earlier filed patent applications, patents, publications, products or processes, which might invalidate or limit the scope of the protection that our patents afford.

Infringement actions, validity challenges and other intellectual property claims and proceedings, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. We have incurred, and expect to continue to incur, substantial costs in obtaining patents and expect to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.

We cannot be certain that we will successfully defend our patents from infringement or claims of invalidity or unenforceability, or that we will successfully defend against allegations of infringement of third-party patents. In addition, any public announcements related to litigation or administrative proceedings initiated or threatened by us, or initiated or threatened against us, could cause our stock price to decline.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.

Additional Risks Related to Regulatory Matters

If we fail to obtain regulatory clearances in other countries for existing products or products under development, we will not be able to commercialize these products in those countries.

In order to market our products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other countries regarding quality, safety and efficacy of our products. Approval and CE marking procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval or CE Certificate of Conformity in other countries might differ from that required to obtain FDA clearance. The regulatory approval or CE marking process in other countries may include all of the risks detailed above regarding FDA clearance in the United States. Regulatory approval or the CE marking of a product in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval or a CE Certificate of Conformity in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval or a CE Certificate of Conformity in other countries or any delay or setback in obtaining such approval could have the same adverse effects described above regarding FDA clearance in the United States.

For example, in the EEA, our devices are required to comply with the Essential Requirements laid down in Annex I to the Medical Devices Directive (applicable in the non-EU EEA member states via the Agreement on the EEA). We are also required to ensure compliance with the relevant quality system requirements laid down in the Annexes to the Medical Devices Directive. Companies compliant with ISO requirements such as “EN ISO 13485: 2003 Medical devices — Quality management systems — Requirements for regulatory purposes” benefit from a presumption of conformity with the relevant Essential Requirements or the quality system requirements laid down in the Annexes to the Medical Devices Directive. Following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements and quality system requirements, the Notified Body issues a CE Certificate of Conformity. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity. We received a CE Certificate of Conformity for our Sensei System in September 2006, our Artisan Extend catheters in May 2007, our Magellan System in July 2011, our Magellan Robotic Catheter and related accessories designed for use with the Magellan System in October 2011, our Artisan Extend catheters in February 2013, our Magellan 6Fr Robotic Catheter in October 2014 and our Magellan 10Fr Robotic Catheter in April 2015. We cannot be certain that we will be successful in meeting and continuing to meet the requirements of the Medical Devices Directive in the EEA.

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We may fail to comply with continuing postmarket regulatory requirements of the FDA and other authorities and become subject to substantial penalties, or marketing experience may show that our device is unsafe, forcing us to recall or withdraw it permanently from the market.

We must comply with continuing regulation by the FDA and other authorities, including the FDA’s Quality System Regulation ("QSR"), requirements, labeling and promotional requirements and medical device adverse event and other reporting requirements. If the adverse event reports we file with the FDA regarding death, serious injuries or malfunctions indicate or suggest that the device presents an unacceptable risk to patients, including when used off-label by physicians, we may be forced to recall the device and/or modify the device or its labeling, or withdraw it permanently from the market. The FDA has expressed concerns regarding the safety of the Sensei System when used with catheters and in procedures not specified in the current label, such as ablation catheters and ablation procedures, and we have already filed Medical Device Reports reporting adverse events during procedures utilizing our technology. Physicians may be using our device off-label with ablation catheters in ablation procedures, as well as in other EP procedures for which we have not collected safety data, and we therefore cannot assure you that clinical experience will demonstrate that the device is safe for these uses.

Any failure to comply, or any perception that we are not complying, with continuing regulation by the FDA or other authorities, including restrictions regarding off-label promotion, could result in enforcement action that may include suspension or withdrawal of regulatory clearances approvals, or CE Certificates of Conformity, recalling products, ceasing product marketing, seizure and detention of products, paying significant fines and penalties, criminal prosecution and similar actions that could limit product sales, delay product shipment and harm our profitability and reputation.

In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of the FDA. In addition, in many countries the national health or social security organizations require our products to be qualified before procedures performed using our products become eligible for coverage and reimbursement. Failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material adverse effect on our business, financial condition and results of operations. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory clearances and CE Certificates of Conformity, product recalls, seizure of products, operating restrictions and criminal prosecution.

If we or our contract manufacturers fail to comply with the FDA’s Quality System Regulations, California Department of Health Services requirements or EEA quality system requirements, our manufacturing operations could be interrupted and our product sales and operating results could suffer.

Our manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDA’s QSR which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces the QSR through periodic inspections of manufacturing facilities. We and our contract manufacturers are subject to such inspections. Similar quality system requirements also apply in the EEA. If our manufacturing facilities or those of any of our contract manufacturers fail to take satisfactory corrective action in response to an adverse quality system inspection, the FDA, the U.S. Department of Justice, the Notified Body or the competent authorities in the EEA could take enforcement action, including any of the following administrative or judicial sanctions, which could have a material impact on our operations:

• untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

• unanticipated expenditures to address or defend such actions;

• customer notifications or mandatory plan products for repair, replacement or refunds;

• recall, detention or seizure of our products;

• operating restrictions or partial suspension or total shutdown of production;

• refusing or delaying our requests for submissions seeking 510(k) clearance, IDE to perform clinical studies or premarket approval of new products or modified products;

• operating restrictions;

• withdrawing 510(k) clearances or IDE/PMA approvals that have already been granted;

• suspension or withdrawal of our CE Certificates of Conformity;

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

• import holds; or

• criminal prosecution.

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We underwent an FDA inspection, which employed the Quality System Inspection Technique, or QSIT, in 2014 and received one inspectional observation. We received the establishment inspection report (EIR) from the FDA on January 26, 2015 after the agency closed the inspection per CFT 20.64.We are subject to the licensing requirements of the California Department of Health Services, or CDHS. We have been inspected and licensed by the CDHS and remain subject to re-inspection at any time. Failure to maintain a license from the CDHS or to meet the inspection criteria of the CDHS would disrupt our manufacturing processes. If an inspection by the CDHS indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

If our products cause or contribute to a death or a serious injury, or malfunction in certain ways, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions. An increased frequency of filing Medical Device Reports, or MDRs, or Manufacturers’ Incident Reports in the EEA concerning adverse events occurring during procedures performed with our technology could result in increased regulatory scrutiny of our products and could delay or prevent the adoption of our products.

Under the FDA’s medical device reporting regulations, medical device manufacturers are required to report to the FDA when the manufacturer becomes aware of information from any source that alleges that a device marketed by the manufacturer has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. A manufacturer may determine that an event may not meet the FDA’s reporting criteria so that an MDR is not necessary. However, the FDA can review a manufacturer’s decision and may disagree. We have made decisions that certain types of events are not MDR reportable. In the EEA, similar reporting requirements are imposed on medical device manufacturers. When a medical device is suspected to be a contributory cause of an event that led or might have led to death of or the serious deterioration of the health of a patient, or user or of other person, its manufacturer or authorized representative in the EU must report the event to the competent authority of the EEA country where the incident occurred. There can be no assurance that the FDA or the competent authorities in the EEA country will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA or the competent authorities of the EEA countries disagree with any of our determinations that events are not reportable, the FDA or the competent authorities of the EEA countries could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as products withdrawals and recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

We have filed MDRs and Manufacturer’s Incident Reports reporting adverse events during procedures utilizing our technology and have developed internal systems and processes that are designed to evaluate future events that may require adverse event reporting to the FDA or the competent authorities in the EEA countries. As the frequency of use of our technology in EP and vascular procedures increases, we are experiencing, and anticipate continuing to experience, it being necessary to file an increased number of MDRs and Manufacturer’s Incident Reports resulting from the increased frequency of use of our technology. An increased frequency of filing MDRs and Manufacturer’s Incident Reports or a failure to timely file MDRs may result in requests for further information from the FDA or the competent authorities of the EEA countries, which could delay other matters that we may have pending before the FDA, the competent authorities of the EEA or our Notified Body or result in additional regulatory action. An increased frequency of MDRs and Manufacturer’s Incident Reports could also reduce confidence in the safety of our products and delay or prevent the acceptance of our products by physicians and hospitals, which would harm our business and cause our stock price to decline.

Our products may in the future be subject to product recalls that could harm our reputation, business and financial results. As a manufacturer we are sometimes required to make decisions about whether to take corrective action in the field and whether to report that activity to the FDA or the competent authorities of the EEA countries. If the FDA or the competent authorities of the EEA countries disagrees with those decisions, we may be subject to enforcement action and our product sales and operating results could suffer.

The FDA and similar foreign competent authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious injury or death. In addition, foreign competent authorities have the authority to require the recall of our products in the event of material deficiencies or defects in design, manufacture or performance of the products and inadequacy in the labeling or Instruction for Use. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. We have conducted voluntary recalls in the

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past. Recalls of any of our products would likely divert managerial and financial resources and could have an adverse effect on our financial condition and results of operations.

The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or other competent authorities. We have in the past initiated voluntary actions involving our products that we determined did not require notification of the FDA, and we may in the future initiate additional voluntary actions that we determine do not require notification of the FDA. If the FDA or the competent authorities of the EEA countries disagree with our determinations, they could require us to report those actions as recalls. Additionally, we have, and may again in the future, take actions in the field that we do not consider to be recalls. If the FDA or other competent authorities disagree with our determinations, they could require us to treat these actions as recalls, issue communications, or report those actions to FDA. The agency may also initiate other enforcement action if they disagree with our recall decisions, including but not limited to issuing warning letters, or more serious actions such as civil or criminal penalties. A future recall announcement or enforcement action could harm our reputation with customers and negatively affect our sales. In addition, the FDA or other competent authorities could take enforcement action for failing to treat certain actions as recalls and report the recalls when they were conducted.

Modifications to our products may, and in some instances, will, require new regulatory clearances, approvals or CE Certificates of Conformity and may require us to recall or cease marketing our products until clearances, approvals or CE Certificates of Conformity are obtained.

Modifications to our products may require new regulatory approvals or clearances, including 510(k) clearances or PMAs, and may require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and document a determination of whether or not modifications require a new approval, supplement or clearance. A manufacturer of a 510(k) cleared product is required to obtain 510(k) clearance for device modifications that could significantly affect the safety or effectiveness of the device, or constitute a major change in the intended use of the subject device. Accordingly, a manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required.

For those products sold in the EEA, we must notify and await completion of the review of our Notified Body before introducing substantial changes to the products or to our quality system. Following its review, our Notified Body will decide whether our existing CE Certificates of Conformity can be maintained or varied, or whether new certificate are required.

We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional review, clearances or approvals. There can be no assurance that the FDA, our Notified Body or the competent authorities of the EEA countries will agree with our approach in such matters or that, if required, subsequent requests for 510(k) clearance, PMA approval or CE Certificates of Conformity will be received in a timely fashion, if at all. The FDA, our Notified Body or the competent authorities of the EEA countries may require us to cease supply, recall and to stop marketing our products as modified or to disable features pending clearance or approval or the granting of a CE Certificate of Conformity which would significantly harm our ability to sell our products and cause harm to our existing customer relationships and business. Even if we are not required to take such action, delays in obtaining clearances, approvals or CE Certificate of Conformity for features would adversely affect our ability to introduce enhanced products in a timely manner and would harm our revenue and operating results. The FDA our Notified Body or the competent authorities of the EEA countries could also take other enforcement action, including but not limited to, issuing a warning letter relating to our decision to implement features and other product modifications without submission of a new 510(k) notice or PMA and suspension or withdrawal of our existing CE Certificates of Conformity.

Clinical trials and clinical investigations necessary to support any future 510(k), PMA application or CE marking of our products will be expensive and may require the enrollment of large numbers of clinical sites and patients, and suitable patients may be difficult to identify and recruit. Delays or failures in our clinical trials may prevent us from commercializing any modified or new products and will adversely affect our business, operating results and prospects.

Initiating and completing clinical trials and clinical investigations necessary to support a 510(k), PMA application or CE marking for expanded indications for use of our existing products, will be time consuming and expensive and the outcome uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product we advance into clinical trials may not have favorable results in later clinical trials and clinical investigations.

Conducting successful clinical studies and clinical investigations may require the enrollment of large numbers of clinical sites and patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and clinical

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investigations and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the clinical trial investigation/protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff, and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials/investigations if they choose to participate in contemporaneous clinical trials/investigations of competitive products or they can obtain the treatment without participating in our trial/investigations through physicians who use the product off-label. Development of sufficient and appropriate clinical protocols to demonstrate quality, safety and efficacy may be required and we may not adequately develop such protocols to support clearance or approval. Delays in patient enrollment or failure of patients to consent or continue to participate in a clinical trial/investigation may cause an increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical trial/investigation. In addition, despite considerable time and expense invested in our clinical trials, FDA, our Notified Body or the competent authorities of the EEA countries may not consider our data adequate to demonstrate quality, safety and efficacy. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.

If we fail to comply with healthcare laws and regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

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

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

• federal civil False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment of government funds that are false or fraudulent;

• the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain obligations relating to safeguarding the privacy, security and transmission of individually identifiable health information;

• the federal Foreign Corrupt Practices Act of 1997, which makes it illegal to offer or provide money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage; and

• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, state breach notification laws, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs and/or impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians.

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

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and marketing materials and practices to assure compliance with these federal and state laws, and inform employees and marketing. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. We cannot rule out the possibility that the government or other third parties could interpret these laws differently and challenge our practices under one or more of these laws.

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

If our past or present operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion of our products from reimbursement under federal healthcare programs like Medicare and Medicaid and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws or regulations is increased by the fact that many of these laws or regulations have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. Moreover, to achieve compliance with applicable federal and state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing these modifications may prove costly. At this time, we are not able to determine the full consequences to us, including the total cost of compliance, of these various federal and state laws.

Our international operations expose us to liability under global anticorruption laws.

We are also subject to the U.S. Foreign Corrupt Practices Act ("FCPA") and similar worldwide anti-bribery laws in non-U.S. jurisdictions, such as the U.K. Bribery Act 2010, which generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States involve governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite our training and compliance programs, our internal control policies and procedures may not protect us from negligent, reckless or criminal acts committed by our employees or agents. Moreover, even a perceived or alleged violation could result in costly investigations or proceedings that could harm our financial position and reputation.

The application of state certificate of need regulations and compliance by providers with federal and state licensing requirements, as well as accreditation requirements, could substantially limit our ability to sell our products and grow our business.

Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital items such as our Sensei and Magellan Systems. In many cases, a limited number of these certificates are available and, as a result, hospitals and other healthcare providers may be unable to obtain a certificate of need for the purchase of our Sensei and Magellan Systems. Further, our sales cycle for our system is typically longer in certificate of need states due to the time it takes our customers to obtain the required approvals. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive reimbursement from government-sponsored healthcare programs such as Medicare and Medicaid and other third-party payors. Any lapse by our customers in maintaining appropriate licensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under government-sponsored healthcare programs, could cause our sales to decline.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has been volatile and is likely to be volatile in the future.

The trading price of our common stock has been highly volatile. From October 1, 2012 through March 31, 2016, our closing stock price has fluctuated from a low of $1.30 to a high of $27.50 (adjusted to reflect the Reverse Split). The market price for our common stock may be affected by a number of factors, including those set forth in this Item 1A as well as:

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

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

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

• the success of any collaborations we may undertake with other companies;

• our ability to develop, introduce and market new or enhanced versions of our products on a timely basis;

• additions or departures of key scientific or management personnel;

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

• changes in policies affecting third-party coverage and reimbursement in the United States and other countries;

• ability of our products to achieve market success;

• the performance of third-party contract manufacturers and component suppliers;

• our ability to develop sales and marketing capabilities;

• our ability to manufacture our products to meet commercial and regulatory standards;

• our ability to manage costs and improve margins;

• actual or anticipated volatility in our results of operations or those of our competitors;

• announcements of new products, technological innovations or product advancements by us or our competitors;

• announcements of acquisitions or dispositions by us or our competitors;

• developments with respect to patents and other intellectual property rights;

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

• trading volume of our common stock;

• our announcements of guidance regarding future operating or financial results which fails to meet investor or analyst expectations or which differs from our previously-announced guidance;

• changes in earnings estimates or recommendations by securities analysts, failure to obtain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;

• public statements by analysts or clinicians regarding their perceptions of the effectiveness of our products;

• developments in our industry;

• general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors; and

• the impact of shareholder lawsuits and governmental investigations both on us and on our public perception.

The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Additional class action securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources, which could significantly harm our business.

If we fail to comply with the continued listing requirements of the NASDAQ Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is listed for trading on the NASDAQ Capital Market (“NASDAQ”). We must satisfy NASDAQ’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. If a company trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements. Thereafter, if such a company does not regain compliance with the bid price requirement, a second 180-day compliance period may be available.

A delisting of our common stock from NASDAQ could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

On April 13, 2015, we received a letter from the Listing Qualifications Staff of NASDAQ notifying us that because the closing bid price of our common stock had been below $1.00 for 30 consecutive business days, our stock no longer complied with the requirements for continued listing on the NASDAQ Capital Market. In accordance with NASDAQ rules, we were provided a period of 180 calendar days, or until October 12, 2015, in which to regain compliance. In order to regain compliance

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with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days during this 180 day period.

On September 22, 2015, we effected a reverse stock split of our common stock by a ratio of 1-for-10 (the “Reverse Split”). As a result of the Reverse Split every ten outstanding shares of our common stock became one share of common stock. During the 10 consecutive business days following the Reverse Split and through October 12, 2015, the closing bid price of our common stock was at least $1.00 per share. Therefore, we are as of the date hereof in compliance with the NASDAQ requirements for continued listing. However, there can be no assurance that we will continue to comply with the minimum bid price requirement or maintain compliance with other listing requirements.

Securities analysts may not continue, or additional securities analysts may not initiate, coverage for our common stock or may issue negative reports, and this may have a negative impact on the market price of our common stock.

Currently, several securities analysts provide research coverage of our common stock. Several analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the future. If we are unable to educate those who publicize such reports about the benefits we believe our technology provides, or if one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly.

If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about us or our business. If sufficient securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. It may be difficult for companies such as ours, with smaller market capitalizations, to attract and maintain sufficient independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

Our principal stockholders, directors and management own a large percentage of our voting stock, which allows them to exercise significant influence over matters subject to stockholder approval.

Based on our review of publicly available filings as of May 9, 2016, all those known by the Company to be beneficial owners of more than five percent of our common stock together with our executive officers and directors, beneficially own or control approximately 62.4 percent of our outstanding common stock. Accordingly, our principal stockholders and our executive officers and directors have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These stockholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock.

We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our Board of Directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. In addition, pursuant to our loan and security agreement, we must obtain the lenders’ prior written consent in order to pay any dividends on our common stock.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. These provisions:

• permit our Board of Directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;

• provide that the authorized number of directors may be changed only by resolution of the Board of Directors;

• provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

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• divide our Board of Directors into three classes;

• require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

• provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;

• do not provide for cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose;

• provide that special meetings of our stockholders may be called only by the chairman of the Board, our chief executive officer or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and

• provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 66 2/3 percent of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any stockholder who owns, or at any time in the last three years owned, 15 percent or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

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

Sales of our common stock or securities convertible into or exercisable for our common stock by us or by our stockholders, announcements of the proposed sales of our common stock or securities convertible into or exercisable for our common stock or the perception that sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock or securities convertible into or exercisable for our common stock in follow-on offerings to raise additional capital or in connection with acquisitions, corporate alliances or settlements with third parties and we plan to issue additional shares to our employees, directors or consultants in connection with their services to us. For example, in March 2015, we sold 53,846 shares of our Series A convertible preferred stock which converted into 5,509,492 shares of our common stock, as well as Series E Warrants to purchase an aggregate of 5,384,600 shares of our common stock in a private placement. The issuance of the shares of common stock resulted in immediate dilution to our stockholders and the on-going exercises of outstanding warrants has caused, and may continue to cause, further dilution to our stockholders in the future.

Our financial results may vary significantly from period to period, which may reduce our stock price.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control, which may cause the market price of our common stock to fall. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our financial results may be negatively affected by any of the risk factors listed in this “Risk Factors” section.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.

As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq Global Market, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

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

None

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibits

Exhibit Number	Description of Document
3.1	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K (File No. 001-33151) filed with the SEC on September 23, 2015.
31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1*	Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the Unites States Code (18 U.S.C. §1350).
32.2*	Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the Unites States Code (18 U.S.C. §1350).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

_________________________

* The certifications attached hereto as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Hansen Medical, Inc. under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

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SIGNATURES

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

Dated: May 16, 2016	By:	/s/ CARY G. VANCE
		Cary G. Vance
		President and Chief Executive Officer
		(Principal Executive Officer)
Dated: May 16, 2016	By:	/s/ CHRISTOPHER P. LOWE
		Christopher P. Lowe
		Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)

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