10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED

June 30, 2014

o 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 0-19711

The Spectranetics Corporation

(Exact name of Registrant as specified in its charter)

Delaware	84-0997049
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9965 Federal Drive

Colorado Springs, Colorado 80921

(719) 633-8333

(Address of principal executive offices and telephone number)

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 o

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 o

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. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(Do not check if a 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 o No x

As of July 31, 2014, there were 41,838,125 outstanding shares of Common Stock. 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2014 and June 30, 2013	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and June 30, 2013	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	41
ITEM 4.	Controls and Procedures	41
PART II — OTHER INFORMATION
ITEM 1.	Legal Proceedings	42
ITEM 1A.	Risk Factors	42
ITEM 6.	Exhibits	52
	Signatures	54

ii

Part I—FINANCIAL INFORMATION

Item 1.       Financial Statements

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands, Except Share Amounts)

(Unaudited)

	June 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	107,027		$	128,395
Trade accounts receivable, less allowance for doubtful accounts and sales returns of $1,094 and $782, respectively	38,045			26,766
Inventories, net	25,979			9,476
Deferred income taxes, net	445			445
Prepaid expenses and other current assets	4,193			2,748
Total current assets	175,689			167,830
Property and equipment, net	30,534			28,281
Debt issuance costs, net	7,421			—
Goodwill	148,495			14,846
Other intangible assets, net	112,816			5,609
Other assets	1,351			591
Total assets	$	476,306		$	217,157
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,639		$	2,587
Accrued liabilities	26,558			18,819
Deferred revenue	1,951			1,819
Total current liabilities	33,148			23,225
Convertible senior notes	230,000			—
Accrued liabilities, net of current portion	1,195			1,215
Contingent consideration, net of current portion	27,316			1,352
Deferred income taxes	1,534			1,365
Total liabilities	293,193			27,157
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued	—			—
Common stock, $.001 par value; authorized 120,000,000 and 60,000,000 shares, respectively; issued and outstanding 41,695,290 and 41,230,286 shares, respectively	41			41
Additional paid-in capital	289,895			284,494
Accumulated other comprehensive loss	(367		)	(305		)
Accumulated deficit	(106,456		)	(94,230		)
Total stockholders’ equity	183,113			190,000
Total liabilities and stockholders’ equity	$	476,306		$	217,157

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

1

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Revenue	$	43,555		$	39,453		$	83,169		$	77,128
Cost of products sold	10,506			10,625			20,840			20,944
Gross profit	33,049			28,828			62,329			56,184
Operating expenses:
Selling, general and administrative	28,452			23,065			56,192			45,866
Research, development and other technology	5,704			5,484			11,791			10,656
Due diligence, transaction, and integration costs	3,958			—			4,229			—
Medical device excise tax	588			509			1,113			1,031
Intangible asset amortization	136			246			273			410
Contingent consideration expense	40			202			78			404
Total operating expenses	38,878			29,506			73,676			58,367
Operating loss	(5,829		)	(678		)	(11,347		)	(2,183		)
Other income (expense):
Interest (expense) income, net	(489		)	6			(488		)	2
Foreign currency transaction (loss) gain	(1		)	—			2			(25		)
Other income, net	—			8			—			8
Total other (expense) income	(490		)	14			(486		)	(15		)
Loss before income taxes	(6,319		)	(664		)	(11,833		)	(2,198		)
Income tax expense (benefit)	246			64			393			(511		)
Net loss	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Net loss per share —
Basic and diluted	$	(0.16	)	$	(0.02	)	$	(0.29	)	$	(0.05	)
Other comprehensive loss, net of tax
Foreign currency translation adjustments	(75		)	126			(62		)	(57		)
Comprehensive loss, net of tax	$	(6,640	)	$	(602	)	$	(12,288	)	$	(1,744	)
Weighted average common shares outstanding —
Basic and diluted	41,603,343			38,768,969			41,479,326			36,874,780

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

2

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Six Months Ended   June 30,
	2014			2013
Cash flows from operating activities:
Net loss	$	(12,226	)	$	(1,687	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,205			5,234
Stock-based compensation expense	2,628			1,645
Provision for excess and obsolete inventories	350			138
Deferred income taxes	194			(605		)
Net change in operating assets and liabilities	(5,621		)	(9,054		)
Net cash used in operating activities	(9,470		)	(4,329		)
Cash flows from investing activities:
Capital expenditures	(2,914		)	(1,665		)
Acquisition-related payments	(234,306		)	(6,500		)
Net cash used in investing activities	(237,220		)	(8,165		)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes	230,000			—
Debt issuance costs, convertible senior notes	(7,452		)	—
Net proceeds from stock offering	—			92,037
Proceeds from the exercise of stock options and employee stock purchase plan	2,774			2,042
Net cash provided by financing activities	225,322			94,079
Effect of exchange rate changes on cash	—			(4		)
Net (decrease) increase in cash and cash equivalents	(21,368		)	81,581
Cash and cash equivalents at beginning of period	128,395			37,775
Cash and cash equivalents at end of period	$	107,027		$	119,356
Supplemental disclosures of cash flow information:
Cash paid for interest	$	23		$	22
Cash paid for income taxes	$	276		$	283

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

3

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — GENERAL

The accompanying condensed consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly-owned Dutch subsidiary, Spectranetics International, B.V., including the accounts of the wholly-owned subsidiaries of Spectranetics International, B.V.: Spectranetics II B.V., Spectranetics Deutschland GmbH, Spectranetics Austria GmbH, Spectranetics France SARL, Spectranetics Switzerland GmbH, and Spectranetics Denmark ApS. The condensed consolidated balance sheet as of June 30, 2014 also includes the accounts of The Spectranetics Corporation’s wholly-owned subsidiary, AngioScore Inc. (“AngioScore”), which was acquired on that date. The aforementioned entities are collectively referred to as the “Company.” All intercompany balances and transactions have been eliminated in consolidation.

The Company develops, manufactures, markets, and distributes single-use medical devices used in minimally invasive procedures within the cardiovascular system. The Company’s Vascular Intervention products include a range of laser catheters to ablate blockages in arteries above and below the knee (peripheral atherectomy); support catheters to facilitate crossing of peripheral and coronary arterial blockages, retrograde access and guidewire retrieval devices used in the treatment of peripheral arterial blockages, including chronic total occlusions (crossing solutions); aspiration and cardiac laser catheters to treat blockages in the heart (coronary atherectomy and thrombectomy); and effective June 30, 2014, AngioSculpt^® scoring balloons used in both peripheral and coronary procedures. The Company’s Lead Management products include excimer laser sheaths, dilator sheaths, and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads. The Company also sells, rents, and services its CVX-300^® laser systems.

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management must make certain estimates, judgments, and assumptions based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets and goodwill, valuation allowances and reserves for receivables, inventories, and deferred income tax assets, contingent consideration liabilities for acquisitions, stock-based compensation expense, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current period presentation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU 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. The ASU will be effective for the Company beginning January 1, 2017, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its results of operations, financial position, and consolidated financial statements.

4

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 — BUSINESS COMBINATION

On June 30, 2014 (the “Acquisition Date”), the Company completed its acquisition of AngioScore, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of May 27, 2014. AngioScore develops, manufactures and markets the AngioSculpt Scoring Balloon Catheter for the treatment of coronary artery disease and peripheral artery disease. The primary reasons for the AngioScore acquisition are to extend the Company’s existing product lines, leverage its current customer call points, expand its markets and sales coverage, increase revenue, and drive operating efficiencies.

Under the terms of the Merger Agreement, the Company paid the former AngioScore stockholders merger consideration of $230 million in cash, plus certain adjustments relating to working capital set forth in the Merger Agreement, on the Acquisition Date. The Company also has agreed to pay additional contingent merger consideration as follows:

(a) annual cash payments for net sales of AngioScore products occurring in calendar years 2015, 2016 and 2017 equal to a multiple of 2.0 times each year’s annual increase in net sales in excess of 10% over the highest preceding year net sales, provided that the year-over-year change in net sales is positive and that such payments in the aggregate will not exceed $50 million (“Revenue Payments”);

(b) the following payments related to AngioScore’s Drug-Coated AngioSculpt product:

(i) a cash payment of $5 million if the product receives European CE mark approval for use in the coronary arteries by December 31, 2016;

(ii) a cash payment of $5 million if the product receives European CE mark approval for use in the peripheral arteries by December 31, 2016; and

(iii) a cash payment of $15 million if the product receives U.S. investigational device exemption approval for use in the coronary or peripheral arteries by December 31, 2016.

The cash consideration was financed in part using the net proceeds from the Company’s public offering of $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (see Note 3).

The Company accounted for the acquisition as a business combination and recorded the assets acquired, liabilities assumed, and the estimated future consideration obligations at their respective fair values as of the Acquisition Date. The components of the aggregate preliminary purchase price for the acquisition were as follows (in thousands):

Cash, including working capital adjustment	$	234,306
Fair value of contingent consideration	25,886
Total purchase price	$	260,192

The Company recorded total contingent consideration liabilities at their fair value of $25.9 million. The Company used a probability-weighted approach to estimate the achievement of the future revenue and regulatory approval milestones, and discount rates ranging from 9% to 19%. The selection of the discount rates reflects the inherent risks of achieving the respective milestones. The working capital adjustment represents the difference between actual working capital acquired as of June 30, 2014 and historical average working capital as defined in the Merger Agreement.

Net Assets Acquired

The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary allocation of assets acquired and liabilities assumed as of the Acquisition Date (in thousands):

5

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Allocation of purchase price		Amortization period (in years)
Accounts receivable	$	8,461
Inventories	14,884
Prepaids and other current assets	411
Property and equipment, net	712
Other long term assets	30
Total tangible assets acquired	24,498
Less: liabilities assumed	5,435
Net tangible assets less liabilities	$	19,063
Intangible assets:
Technology	73,510		10
In-process research and development (“IPR&D”)	3,750
Customer relationships	23,320		10
Distributor relationships	1,940		2
Trademark and trade names	4,380		6
Non-compete agreements	580		2
Goodwill	133,649
Total purchase price	$	260,192

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the Acquisition Date. The accounting for the acquisition is preliminary due to the ongoing analysis of the tangible and intangible assets acquired. Upon completion of this analysis, the Company may record adjustments to the estimated amounts recorded as further information about conditions existing at the Acquisition Date becomes available. The final fair value determinations may be different than those reflected in our condensed consolidated financial statements at June 30, 2014.

We determined the fair value of the inventory based on its estimated selling price less cost to sell and normal profit margin.

The fair value of the technology intangible assets was determined based upon the present value of expected future cash flows, utilizing a risk-adjusted discount rate. The customer and distributor relationships and the non-compete agreements were valued based on a “with and without” approach. The “with and without” method measures an asset value by estimating the difference in cash flows generated by the business with the asset in-use versus without the asset. The difference in cash flows is attributable to incremental earnings or cost savings associated with the asset. The trademark and trade names were valued based on a “relief from royalty” approach. The “relief from royalty” method is based on the premise that a third party would be willing to pay a royalty to use the trade name/trademark asset owned by the subject company.  The projected royalties are converted into their present value equivalents through the application of a risk adjusted discount rate. These fair value measurements are based on significant unobservable inputs, based on management’s estimates and assumptions.

The IPR&D asset, which is accounted for as an indefinite-lived intangible asset until completion of the project, represents an estimate of the fair value of in-process technology related to AngioScore’s Drug-Coated AngioSculpt product line. The estimated fair value was determined using the multi-period excess earnings method, a variation of the income approach.

The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the benefits the

6

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Company expects to realize by expanding its product offerings and addressable markets, thereby contributing to an expanded revenue base. The Company will also substantially increase the size of its direct sales organization, while realizing cost synergies associated with eliminating redundant positions, primarily in selling, general and administrative functions. Goodwill was allocated to the Company’s operating segments based on the relative expected benefits as disclosed in Note 5, “Goodwill and Intangible Assets.”

The assets and liabilities assumed in the acquisition have been included in the Company’s condensed consolidated balance sheet as of June 30, 2014. The results of AngioScore operations will be included in the Company’s condensed consolidated financial statements for periods beginning on and after July 1, 2014. The Company is currently evaluating the impact of the AngioScore acquisition on its reportable operating segments.

Acquisition Costs

Acquisition-related expenses were $4.0 million and $4.2 million for the three and six months ended June 30, 2014, respectively, and primarily included investment banking, accounting, consulting, and legal fees. These costs are included within the “Due diligence, transaction, and integration costs” line of the condensed consolidated statements of operations.

Taxes

As part of the AngioScore acquisition, the Company acquired AngioScore’s net deferred tax assets and liabilities, including net operating loss carryforwards estimated at $87 million for federal purposes at June 30, 2014. The Company is currently evaluating the realizability of the net deferred tax assets acquired, net of the deferred tax liabilities that arise from the recording of intangible assets as part of the purchase price allocation. Based on its preliminary purchase price allocation, the Company does not expect the net deferred tax asset/liability resulting from the acquisition to be significant.

Unaudited Supplemental Pro Forma Financial Information

The unaudited pro forma results presented below include the combined results of both entities as if the acquisition had been consummated as of January 1, 2013. Certain pro forma adjustments have been made to reflect the impact of the purchase transaction, primarily consisting of amortization of intangible assets with determinable lives and interest expense on long-term debt. In addition, certain historical expenses, such as warrant expense and interest expense associated with debt that was immediately repaid, were eliminated from these pro-forma results. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it indicative of future operating results. The pro forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2014			2013			2014			2013
Revenue	$	60,089		$	53,143		$	113,573		$	103,928
Net loss	$	(8,995	)	$	(10,593	)	$	(22,164	)	$	(17,523	)

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 — CONVERTIBLE SENIOR NOTES

On June 3, 2014, the Company closed the sale of $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (the “Notes”) pursuant to an underwriting agreement dated May 28, 2014. Interest will be paid semi-annually in arrears on December 1 and June 1 of each year, commencing December 1, 2014. The Notes will mature on June 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Notes. The initial conversion rate of the Notes is 31.9020 shares of the Company’s common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $31.35 per share). The conversion rate will be subject to adjustment upon the occurrence of certain events specified in the indenture governing the Notes. Holders may surrender their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date. On or after June 5, 2018 and prior to June 5, 2021, the Company may redeem any or all of the Notes in cash if the closing price of the Company’s common stock exceeds 130% of the conversion price then in effect for a specified number of days, and on or after June 5, 2021, the Company may redeem the Notes without any such condition.

Holders of the Notes may require the Company to repurchase all or a portion of their Notes on each of June 5, 2021, June 5, 2024 and June 5, 2029, or following a fundamental change (as defined in the indenture governing the Notes), in each case, at a repurchase price in cash equal to 100% of the principal amount of the Notes being repurchased plus accrued and unpaid interest to, but excluding, the date of repurchase.

The Notes are subject to customary events of default, which may result in the acceleration of the maturity of the Notes.

The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with any of the Company’s unsecured indebtedness that is not so subordinated, are effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.

The Company received $222.5 million from the issuance of the Notes, net of $7.5 million of debt issuance costs incurred. The debt issuance costs are being amortized over a seven year period using the effective interest method. The Company used all of the net proceeds to fund the acquisition of AngioScore (see Note 2).

NOTE 4 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

Inventories

Inventories, net, consisted of the following (in thousands): 

	June 30, 2014		December 31, 2013
Raw materials	$	7,893	$	4,132
Work in process	4,481		1,696
Finished goods	13,605		3,648
	$	25,979	$	9,476

Inventories at June 30, 2014 included $14.9 million of inventories acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

8

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Property and Equipment

Property and equipment, net, consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Equipment held for rental or loan	$	44,342		$	42,949
Manufacturing equipment and computers	29,845			24,827
Leasehold improvements	6,536			5,697
Furniture and fixtures	3,257			2,446
Building and improvements	1,276			1,276
Land	270			270
Less: accumulated depreciation and amortization	(54,992		)	(49,184		)
	$	30,534		$	28,281

Property and equipment at June 30, 2014 included $0.7 million of property and equipment acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Accrued payroll and employee-related expenses	$	12,709		$	11,007
Accrued transaction costs	2,050			—
Accrued sales, income, and excise taxes	1,522			1,659
Accrued clinical study expense	1,239			872
Deferred rent	1,172			1,204
Accrued legal costs	1,056			134
Employee stock purchase plan liability	900			801
Accrued royalties	669			571
Contingent consideration, current portion	500			500
Accrued interest on convertible notes	453			—
Other accrued expenses	5,483			3,286
Less: long-term portion	(1,195		)	(1,215		)
Accrued liabilities: current portion	$	26,558		$	18,819

Accrued liabilities at June 30, 2014 included $3.3 million of accrued liabilities acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2014 was as follows (in thousands):

	U.S. Medical		International Medical		Total
Balance as of December 31, 2013	$	8,165	$	6,681	$	14,846
Additional goodwill related to AngioScore acquisition (Note 2)	118,948		14,701		133,649
Balance as of June 30, 2014	$	127,113	$	21,382	$	148,495

Acquired intangible assets consisted of the following (in thousands):

	June 30, 2014			December 31, 2013
Acquired as part of AngioScore acquisition (Note 2):
Technology	$	73,510		$	—
IPR&D	3,750			—
Customer relationships	23,320			—
Distributor relationships	1,940			—
Trademark and trade names	4,380			—
Non-compete agreements	580			—
Acquired as part of Upstream acquisition (1)
Technology	6,310			6,310
Non-compete agreement	200			200
Patents	530			530
Less: accumulated amortization	(1,704		)	(1,431		)
	$	112,816		$	5,609

___________________

(1) In January 2013, the Company acquired certain product lines from Upstream Peripheral Technologies, Ltd. As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements.

See further discussion of the additional goodwill and intangible assets acquired as part of the AngioScore acquisition during the three months ended June 30, 2014 in Note 2, “Business Combination.”

The Company evaluates goodwill and other intangible assets for impairment at least annually and whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. There have been no events or circumstances since the last analysis as of December 31, 2013 to indicate that the amount of goodwill or other intangible assets may not be recoverable.

NOTE 6 — STOCK-BASED COMPENSATION

The Company maintains stock option plans that provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, and stock appreciation rights. The plans provide that stock options may be granted with exercise prices not less than the fair value at the date of grant. Options granted through June 30, 2014 generally vest over four years and expire ten years from the date of grant. Restricted stock awards granted to non-employee members of

10

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the Board of Directors vest over one year. Restricted stock units granted to certain officers of the Company vest over four years. At June 30, 2014, there were 3.5 million shares available for future issuance under these plans. 

In June 2014, the Compensation Committee of the Board of Directors approved a grant of performance stock units (“PSUs”) to certain of the Company’s officers. PSUs vest based on achieving specified performance measurements over a three-year “cliff” performance period plus an additional year “cliff” time vesting. The PSUs have target payout opportunities of between 0% and 250%. The performance measurements include a compounded annual growth rate for revenue over a three-year period and Adjusted EBITDA for the year ended December 31, 2016.

Valuation and Expense Information

The Company recognized stock-based compensation expense of $1.3 million and $0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $2.6 million and $1.6 million for the six months ended June 30, 2014 and 2013, respectively.  This expense consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards, (2) restricted stock awards issued to the Company’s directors, (3) restricted stock units and performance stock units issued to certain of the Company’s officers, and (4) the estimated fair value of shares expected to be issued under the Company’s employee stock purchase plan. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for these awards on a straight-line basis over the service period.

With respect to the PSUs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against the specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee that performance targets will be achieved, the Company estimates the fair value of the PSUs based on its closing stock price at the time of grant at target performance. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted based upon the Company’s estimate of achieving such performance targets. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement.

For all options not subject to a market condition, the fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions, including vesting provisions and restrictions on transfers, hedging and pledging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant. The following is a summary of the assumptions used for the stock options granted during the three and six months ended June 30, 2014 and 2013, respectively, using the Black-Scholes pricing model:

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Expected life (years)	5.76		5.85		5.76		5.86
Risk-free interest rate	1.62	%	1.38	%	1.63	%	0.89	%
Expected volatility	63.68	%	65.73	%	63.70	%	65.67	%
Expected dividend yield	—		—		—		—

The weighted average grant date fair value of options granted during the three months ended June 30, 2014 and 2013 was $13.42 and $11.04, respectively, and during the the six months ended June 30, 2014 and 2013 was $13.64 and $10.21, respectively.

11

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes stock option activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2014	3,153,234		$	9.72
Granted	230,685		23.67
Exercised	(373,022	)	5.87
Canceled	(44,245	)	12.36
Options outstanding at June 30, 2014	2,966,652		$	11.25	7.09	$	34,716,127
Options exercisable at June 30, 2014	1,540,103		$	7.15	5.61	$	24,219,975

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $22.88 as of June 30, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. In-the-money options exercisable as of June 30, 2014 totaled approximately 1.5 million, as all options exercisable were in the money as of that date.  The total intrinsic value of options exercised was $8.2 million and $3.6 million during the six months ended June 30, 2014 and 2013, respectively.

The following table summarizes restricted stock award activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2014	22,190		$	18.93
Awarded	26,802		22.39
Vested/Released	(22,190	)	18.93
Restricted stock awards outstanding at June 30, 2014	26,802		$	22.39

The following table summarizes restricted stock unit activity during the six months ended June 30, 2014: 

	Shares		Weighted  Average  Purchase Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Restricted stock units outstanding at January 1, 2014	158,622		$	—
Awarded	89,458		—
Vested/Released	(25,450	)	—
Forfeited	(11,113	)	—
Restricted stock units outstanding at June 30, 2014	211,517		$	—	1.69	$	4,839,509

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes PSU activity during the six months ended June 30, 2014: 

	Shares	Weighted Average Grant Date Fair Value
Performance stock units outstanding at January 1, 2014	—	$	—
Awarded (at target performance)	500,985	23.43
Vested/Released	—	—
Performance stock units outstanding at June 30, 2014	500,985	$	23.43

As of June 30, 2014, there was $23.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans, assuming at-target performance for the PSUs. Assuming the minimum of 0% and maximum of 250% payout opportunities for the PSUs, the range of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans was between $11.9 million and $41.2 million as of June 30, 2014. This expense is based on an assumed future forfeiture rate of approximately 12.50% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 3.3 years.

Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (“ESPP”).  The ESPP, as amended in 2012, provides for the sale of up to 700,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP is restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period. The purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period.  This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes. At June 30, 2014, there were approximately 300,000 shares available for future issuance under this plan. 

The fair value of the offerings under the ESPP is determined on the first day of the semi-annual purchase period using the Black-Scholes option-pricing model. The expected term of six months was based upon the offering period of the ESPP. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate was based on the six-month U.S. Treasury daily yield rate. The expected dividend yield was based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the three months ended June 30, 2014 and 2013, the Company recognized $144,000 and $107,000, respectively, and for the six months ended June 30, 2014 and 2013, the Company recognized $266,000 and $196,000, respectively, of compensation expense related to the ESPP.

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THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 — NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding (excluding restricted shares). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted net loss per share is computed in a manner consistent with that of basic net loss per share while giving effect to all potentially dilutive common shares outstanding during the period, which include the assumed exercise of stock options and the assumed vesting of restricted stock using the treasury stock method, and the assumed conversion of shares under the Notes using the “if-converted” method.

Options to purchase common stock, the vesting of restricted stock, and shares issuable upon conversion of the Notes are considered to be potentially dilutive common shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive for all periods presented as a result of the net losses incurred for each period. Therefore, diluted net loss per share was the same as basic net loss per share for the three and six months ended June 30, 2014 and June 30, 2013.  As a result, stock options and restricted stock outstanding representing 2.3 million and 1.9 million shares as of June 30, 2014 and June 30, 2013, respectively, were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. In addition, 7.3 million shares issuable upon the conversion of the Notes were excluded from the computation of diluted net loss per share as of June 30, 2014 because their inclusion would have been anti-dilutive also.

A summary of the net loss per share calculation is shown below for the periods indicated (in thousands, except share and per share amounts):

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Net loss	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Common shares outstanding:
Historical common shares outstanding at beginning of period	41,535,010			35,053,311			41,208,096			34,839,131
Weighted average common shares issued	68,333			3,715,658			271,230			2,035,649
Weighted average common shares outstanding — basic	41,603,343			38,768,969			41,479,326			36,874,780
Effect of dilution — stock options	—			—			—			—
Weighted average common shares outstanding — diluted	41,603,343			38,768,969			41,479,326			36,874,780
Net loss per share — basic and diluted	$	(0.16	)	$	(0.02	)	$	(0.29	)	$	(0.05	)

14

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 — SEGMENT REPORTING

The Company operates in one line of business consisting of developing, manufacturing, marketing, and distributing fiber-optic and non-fiber-optic disposable products and a proprietary excimer laser system to treat certain vascular and coronary conditions.

Within this line of business, the Company has identified two geographic operating segments: (1) U.S. Medical and (2) International Medical. U.S. Medical and International Medical offer the same products and services but operate in different geographic regions, have different distribution networks, and different regulatory environments. The Company aggregates its two product lines, Vascular Intervention and Lead Management, based on their similar economic, operational, and regulatory characteristics.

The Company is currently evaluating the impact of the AngioScore acquisition on its reportable operating segments.

Additional information regarding each operating segment is discussed below.

U. S. Medical

This segment includes customers in the United States and Canada. Products offered by this segment include single-use medical devices used in minimally invasive procedures within the cardiovascular system, including fiber-optic devices and non-fiber-optic products (disposables), an excimer laser system (equipment), and the service of the excimer laser system (service). The Company is subject to product approvals from the U.S. Food and Drug Administration (“FDA”) and Health Canada. The Company’s products are used in multiple vascular procedures, including peripheral atherectomy, crossing arterial blockages, coronary atherectomy and thrombectomy, and the removal of cardiac lead wires from patients with pacemakers and cardiac defibrillators.

U.S. Medical is also corporate headquarters for the Company. All manufacturing, research and development, and corporate administrative functions are performed within this operating segment. For the six months ended June 30, 2014 and 2013, a portion of research, development and other technology expenses, and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.

Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $2.4 million and $2.2 million for the three months ended June 30, 2014 and 2013, respectively, and $4.1 million and $3.8 million for the six months ended June 30, 2014 and 2013, respectively. Revenue is based upon transfer prices, which provide for intersegment profit eliminated upon consolidation.

International Medical

The International Medical segment has its headquarters in the Netherlands, and serves Europe, the Middle East, Asia Pacific, Latin America, and Puerto Rico. Products offered by this segment are substantially the same as those offered by U.S. Medical. The Company is subject to product approvals from various international regulatory bodies. The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions. Certain U.S.-incurred research, development and other technology expenses, and general and administrative expenses have been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.

15

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summary financial information relating to operating segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Revenue:
Disposable products	$	31,744	$	28,239	$	60,326	$	55,188
Service and other, net of allowance for sales returns	2,331		2,524		4,567		5,032
Equipment sales and rentals	779		1,547		1,733		2,881
Subtotal	34,854		32,310		66,626		63,101
International Medical:
Disposable products	6,866		5,736		12,775		11,059
Service and other, net of allowance for sales returns	541		364		1,074		734
Equipment sales and rentals	1,294		1,043		2,694		2,234
Subtotal	8,701		7,143		16,543		14,027
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Segment operating (loss) income:
U.S. Medical	$	(6,205	)	$	(625	)	$	(11,587	)	$	(2,546	)
International Medical	376			(53		)	240			363
Total operating loss	$	(5,829	)	$	(678	)	$	(11,347	)	$	(2,183	)

	As of June 30, 2014		As of December 31, 2013
Segment assets:
U.S. Medical	$	441,813	$	198,639
International Medical	34,493		18,518
Total assets	$	476,306	$	217,157

For the six months ended June 30, 2014 and 2013, no individual customer represented 10% or more of consolidated revenue.  No individual countries, other than the United States, represented at least 10% of consolidated revenue for the six months ended June 30, 2014 or 2013.

16

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenue by Product Line

	Three Months Ended   June 30,				Six Months Ended   June 30,
(in thousands)	2014		2013		2014		2013
Revenue
Disposable products revenue:
Vascular intervention	$	22,496	$	18,897	$	42,517	$	36,090
Lead management	16,114		15,078		30,584		30,157
Total disposable products revenue	38,610		33,975		73,101		66,247
Service and other, net of allowance for sales returns	2,872		2,888		5,641		5,766
Equipment sales and rentals	2,073		2,590		4,427		5,115
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

NOTE 9 — INCOME TAXES

The Company maintains a valuation allowance for substantially all of its deferred tax assets, including its U.S. net operating losses, and therefore does not expect to incur a current U.S. federal tax expense or benefit against its pretax income during the year ending December 31, 2014. The Company does, however, expect to incur current state and foreign tax expense during 2014. In addition, the Company expects to incur deferred U.S. federal and state tax expense in 2014, representing a deferred tax liability related to the difference between tax and book accounting for its goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

The Company’s ability to realize the benefit of its deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to the Company’s history of losses and its planned near-term investments in its growth, the Company has recorded a full valuation allowance against substantially all of its deferred tax assets. The Company does not expect to reduce the valuation allowance against its deferred tax assets to below 100% of its gross amount until it has a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Litigation

The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below. The costs associated with such proceedings or other legal proceedings that may be commenced could have a material adverse effect on the Company’s future consolidated results of operations, financial position, or cash flows.

Trireme

In July 2012, AngioScore sued Trireme Medical, Inc. (“Trireme”), Eitan Konstantino, Quattro Vascular Pte, Ltd., and QT Vascular Ltd., in the U.S. District Court for the Northern District of California, alleging patent infringement. In this action, AngioScore seeks injunctive relief and damages. The defendants have filed counterclaims against AngioScore for unfair competition, interference with business relationships, false advertising, and defamation. In June 2014, AngioScore moved to

17

THE SPECTRANETICS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

amend its complaint (i) to allege that Trireme’s Chief Executive Officer, Eitan Konstantino, who is a former founder, officer, and member of the board of directors of AngioScore, breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while he served as a member of the AngioScore board of directors, and (ii) to add claims against the other defendants for aiding and abetting that breach. The case is scheduled for trial in April 2015.

On June 25, 2014, Trireme sued AngioScore in the U.S. District Court for the Northern District of California seeking to change the inventorship of three patents owned by AngioScore. Trireme alleges that an Israeli physician, Chaim Lotan, should be named as an inventor on three patents owned by AngioScore. Dr. Lotan allegedly assigned the rights he may have had in the three patents to Trireme. The Company intends to vigorously defend against Trireme’s claims.

Konstantino

On May 15, 2014, AngioScore sued Eitan Konstantino in state court in California seeking a declaratory judgment that AngioScore owes no indemnification obligations to Mr. Konstantino under his indemnification agreement with AngioScore resulting from AngioScore’s claim that Mr. Konstantino breached his fiduciary duties to AngioScore while serving as a member of the AngioScore board of directors. The parties are in the early pleading stages and discovery has not begun.

In response to AngioScore’s suit in California state court, Mr. Konstantino sued AngioScore on May 21, 2014 in the Delaware Court of Chancery seeking a ruling that, under the indemnification agreement between Mr. Konstantino and AngioScore, AngioScore must advance Mr. Konstantino’s attorneys fees related to the breach of fiduciary duty claims asserted by AngioScore and indemnify Mr. Konstantino in the event he is found liable for breaching his fiduciary duties. AngioScore filed a crossclaim adding Trireme and QT Vascular to the case, asserting that the defendant companies must contribute to any fees that AngioScore must pay to Mr. Konstantino due to his service on the board of directors of the defendant companies. The parties have undertaken limited discovery and the Chancery Court heard arguments on August 6, 2014. The Company intends to vigorously defend against Mr. Konstantino’s claims.

Other

The Company is involved in other legal proceedings in the normal course of business and does not expect them to have a material adverse effect on its business.

18

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by those sections. Forward-looking statements include statements about our future plans, estimates, beliefs, and anticipated, expected or projected performance. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “will,” “estimate,” “seek,” “expect,” “project,” “intend,” “should,” “plan,” “believe,” “hope,” “enable,” “potential,” and other words and terms of similar meaning in connection with any discussion of, among other things, future operating or financial performance, acquisitions, strategic initiatives and business strategies, clinical trials and FDA submissions, regulatory or competitive environments, our intellectual property, and product development. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Such statements are based on current assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially.  For a description of such risks and uncertainties, which could cause our actual results, performance, or achievements to materially differ from any anticipated results, performance, or achievements, please see the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2013 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.  Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission (“SEC”) that disclose certain risks and factors that may affect our business.  This analysis should be read with our consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2013.  We disclaim any intention or obligation to update or revise any financial projections or forward-looking statements due to new information or other events. To assist the reader in understanding certain terms relating to our business used in this quarterly report, we refer you to the glossary included following Part III of our Annual Report on Form 10-K for the year ended December 31, 2013.

Corporate Overview

We develop, manufacture, market and distribute single-use medical devices used in minimally invasive procedures within the cardiovascular system. Our products are sold in over 65 countries and are used to access and treat arterial blockages in the legs and heart and to remove pacemaker and defibrillator cardiac leads. We recently acquired AngioScore, a leading developer, manufacturer and marketer of cardiovascular, specialty balloons. During the six months ended June 30, 2014, approximately 70% of our disposable product revenue was from products used with our proprietary CVX-300^® excimer laser system. Our single-use laser catheters contain up to 250 small diameter, flexible optical fibers that can access difficult to reach peripheral and coronary anatomy and produce evenly distributed laser energy at the tip of the catheter. Our excimer laser system is the only laser system approved in the United States, Europe, Japan, and Canada for use in multiple minimally invasive cardiovascular procedures.

Our Vascular Intervention (“VI”) products include a range of laser catheters to ablate blockages in arteries above and below the knee (peripheral atherectomy); support catheters to facilitate crossing of peripheral and coronary arterial blockages, and retrograde access and guidewire retrieval devices used to treat peripheral arterial blockages, including chronic total occlusions (crossing solutions); and aspiration and cardiac laser catheters to treat blockages in the heart (coronary atherectomy and thrombectomy). In addition, through the AngioScore acquisition, we have recently added AngioSculpt^® scoring balloons used in both peripheral and coronary procedures to our portfolio of VI products. Our Lead Management (“LM”) products include excimer laser sheaths, dilator sheaths, mechanical sheaths, and accessories for the removal of pacemaker and defibrillator cardiac leads. We also sell, rent, and service our CVX-300 laser systems.

For the six months ended June 30, 2014, our disposable products generated 88% of our revenue, of which VI products accounted for 58% and LM products accounted for 42%. The remainder of our revenue is derived from sales and rental of our laser system and related services. 

19

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Recent Developments

FDA Clearance of Peripheral Laser Atherectomy Devices for Peripheral In-Stent Restenosis

On July 23, 2014, we announced FDA 510(k) clearance of our peripheral atherectomy products, Turbo-Tandem^® and Turbo Elite^®, for the treatment of peripheral in-stent restenosis (“ISR”). The clearance gives us the only on-label products for peripheral ISR in the industry. ISR occurs when a previously placed stent becomes occluded, or blocked, and is considered to be a challenging condition to treat.

Acquisition of Angioscore

On June 30, 2014 (the “Acquisition Date”), we completed our acquisition of AngioScore, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of May 27, 2014. Under the terms of the Merger Agreement, we paid the former AngioScore stockholders $230 million in cash, plus certain adjustments relating to working capital set forth in the Merger Agreement, on the Acquisition Date. We have also agreed to pay additional contingent merger consideration as follows:

(a) annual cash payments for net sales of AngioScore products occurring in calendar years 2015, 2016 and 2017 equal to a multiple of 2.0 times each year’s annual increase in net sales in excess of 10% over the highest preceding year net sales, provided that the year-over-year change in net sales is positive and that such payments in the aggregate will not exceed $50 million;

(b) the following payments related to AngioScore’s Drug-Coated AngioSculpt product:

(i) a cash payment of $5 million if the product receives European CE mark approval for use in the coronary arteries by December 31, 2016;

(ii) a cash payment of $5 million if the product receives European CE mark approval for use in the peripheral arteries by December 31, 2016; and

(iii) a cash payment of $15 million if the product receives U.S. investigational device exemption approval for use in the coronary or peripheral arteries by December 31, 2016.

Business of AngioScore

AngioScore develops, manufactures and markets the AngioSculpt Scoring Balloon Catheter for the treatment of coronary artery disease and peripheral artery disease (“PAD”). The AngioSculpt catheter combines a semi-compliant balloon with a nitinol scoring element to address specific limitations of conventional balloon angioplasty catheters and rotational atherectomy. The AngioSculpt technology platform includes three models of coronary catheters and one model of peripheral catheters of various sizes and lengths. AngioScore is also developing a Drug-Coated AngioSculpt, the world’s first drug-coated scoring balloon, and a product called CardioSculpt for the treatment of critical aortic valve stenosis.

In July 2014, AngioScore launched its new 200 mm length AngioSculpt catheters. The new AngioSculpt catheters received FDA 510(k) clearance to be marketed for the dilatation of lesions in the iliac, femoral, iliofemoral, popliteal, infra-popliteal, and renal arteries, and to treat obstructive lesions of native or synthetic arteriovenous dialysis fistulae. They are not approved for use in the coronary or neuro-vasculature. The catheters incorporate 200 mm balloons in diameters of 4.0, 5.0 and 6.0 mm with a novel scoring element specifically designed for these longer balloons. The devices are expected to be particularly useful in treating the typical complex and long lesions found above-the-knee.

For the year ended December 31, 2013 and the six months ended June 30, 2014, AngioScore recognized revenue of $54.7 million and $30.4 million, respectively, and net losses of $7.5 million and $5.0 million, respectively. Sales of devices for coronary and peripheral use each comprise approximately 50% of AngioScore’s revenue.

20

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Approximately 88% of AngioScore’s revenue for 2013 was from the U.S., 3% was from Japan, and 9% was from the rest of the world. AngioSculpt catheters are sold in the U.S. through a direct sales force to more than 1,200 hospitals and outside the U.S. through a network of international distributors. AngioScore has received regulatory approvals for the AngioSculpt for both coronary and peripheral indications including a Premarket Approval, or PMA, and 510(k) clearance from the FDA in the U.S., CE marks in Europe and Pharmaceuticals and Medical Devices Agency, or PMDA, approvals in Japan.

Convertible Notes Offering

On June 3, 2014, we completed the sale of $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (the “notes”). The notes bear interest at a rate of 2.625% per year, payable semi-annually on December 1 and June 1 of each year, commencing December 1, 2014. The notes will mature on June 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the notes. The initial conversion rate of the notes is 31.9020 shares of our common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $31.35 per share). The conversion rate is subject to adjustment upon the occurrence of certain specified events. Holders may surrender their notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date. On or after June 5, 2018 and prior to June 5, 2021, we may redeem any or all of the notes in cash if the closing price of our common stock exceeds 130% of the conversion price then in effect for a specified number of days, and on or after June 5, 2021, we may redeem the notes without any such condition.

We received $222.5 million from the issuance of the notes, net of $7.5 million of debt issuance costs incurred. We used all of the net proceeds to fund the acquisition of AngioScore. For additional information about the notes, see “Liquidity and Capital Resources” below.

FDA Clearance of Lead Management Mechanical Tools

In April 2014, we announced FDA clearance of two new mechanical lead extraction platforms, the TightRail™ Rotating Mechanical Dilator Sheath and the SightRail™ Manual Mechanical Dilator Sheath Set, that expand physicians’ options for removing cardiac leads. These new platforms represent our entry into the mechanical extraction device market and complement the laser-based technology that established our leading position in lead extraction. Both product platforms have also received CE mark approval for use in Europe. The first live cases using the products occurred in May 2014. A limited launch of the TightRail products and a full launch of the SightRail products began in early May 2014.

PHOTOPAC Pilot Study

We are supporting a multi-center, physician-sponsored pilot study in Europe evaluating the use of laser ablation followed by a paclitaxel-coated angioplasty balloon (“PTX PTA”) compared with using PTX PTA alone in the treatment of ISR in above-the-knee arteries. This pilot study, Photoablation Followed by a Paclitaxel-Coated Balloon to Inhibit Restenosis in Instent Femoro-popliteal Obstructions, or PHOTOPAC, is not intended to be used to gain an indication in the U.S. for using PTX PTA with laser, but to determine whether using PTX PTA with laser potentially provides a benefit over PTX PTA alone. In April 2013, we announced that the planned enrollment for the PHOTOPAC trial would be expanded. The physician sponsors now plan to expand the study from 50 to 145 subjects, at several new European sites, who will be followed at one, six, 12 and 24 months after the procedure. Our support of the PHOTOPAC trial is in the form of an unrestricted research grant. As of July 31, 2014, eight sites are approved to enroll in the study and 58 subjects have been enrolled.

21

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Results of Operations

Financial Results by Operating Segment

Our two operating segments consist of U.S. Medical, which includes the U.S. and Canada, and International Medical, which includes Europe, the Middle East, Asia Pacific, Latin America, and Puerto Rico. U.S. Medical also includes all expenses for our corporate headquarters, research and development, and corporate administrative functions. The International Medical segment is engaged primarily in distribution activities, with no local manufacturing or product development functions. For the three and six months ended June 30, 2014 and 2013, a portion of research, development and other technology expenses, and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue because these expenses support our ability to generate revenue in the International Medical segment.

Summary financial information relating to operating segments is shown below. Intersegment transfers are excluded from the information provided (in thousands):

	Three Months Ended   June 30,								Six Months Ended   June 30,
	2014				2013				2014				2013
Revenue
United States	$	34,854	80	%	$	32,310	82	%	$	66,626	80	%	$	63,101	82	%
International	8,701		20		7,143		18		16,543		20		14,027		18
Total revenue	$	43,555	100	%	$	39,453	100	%	$	83,169	100	%	$	77,128	100	%

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Operating income (loss)
United States	$	(6,205	)	$	(625	)	$	(11,587	)	$	(2,546	)
International	376			(53		)	240			363
Total operating loss	$	(5,829	)	$	(678	)	$	(11,347	)	$	(2,183	)

22

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Selected Consolidated Statements of Operations Data

The following table presents selected Consolidated Statements of Operations data for the three months ended June 30, 2014 and 2013 based on the percentage of revenue for each line item, and the dollar and percentage change of each of the items.

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

	Three Months Ended   June 30,
(Dollars in thousands)	2014			% of revenue (1)		2013			% of revenue (1)		change			% change
Revenue
Disposable products revenue:
Vascular Intervention	$	22,496		52	%	$	18,897		48	%	$	3,599		19	%
Lead Management	16,114			37		15,078			38		1,036			7
Total disposable products revenue	38,610			89		33,975			86		4,635			14
Service and other revenue	2,872			7		2,888			7		(16		)	(1	)
Laser equipment revenue:
Equipment sales	1,191			3		1,395			4		(204		)	(15	)
Rental fees	882			2		1,195			3		(313		)	(26	)
Total laser equipment revenue	2,073			5		2,590			7		(517		)	(20	)
Total revenue	43,555			100		39,453			100		4,102			10
Gross profit	33,049			76		28,828			73		4,221			15
Operating expenses
Selling, general and administrative	28,452			65		23,065			58		5,387			23
Research, development and other technology	5,704			13		5,484			14		220			4
Due diligence, transaction and integration costs	3,958			9		—			—		3,958			nm
Medical device excise tax	588			1		509			1		79			16
Intangible asset amortization	136			—		246			1		(110		)	(45	)
Contingent consideration expense	40			—		202			1		(162		)	(80	)
Total operating expenses	38,878			89		29,506			75		9,372			32
Operating loss	(5,829		)	(13	)	(678		)	(2	)	(5,151		)	760
Other income (expense)
Interest (expense) income, net	(489		)	(1	)	6			—		(495		)	nm
Foreign currency transaction loss	(1		)	—		—			—		(1		)	nm
Other income, net	—			—		8			—		(8		)	nm
Loss before income taxes	(6,319		)	(15	)	(664		)	(2	)	(5,655		)	852
Income tax expense	246			1		64			—		182			284
Net loss	$	(6,565	)	(15	)%	$	(728	)	(2	)%	$	(5,837	)	802	%
Worldwide installed base of laser systems	1,195					1,105					90

___________________________________

(1)     Percentage amounts may not add due to rounding.

nm= not meaningful

23

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Revenue and gross margin

Revenue increased 10% to $43.6 million for the three months ended June 30, 2014 as compared with $39.5 million for the three months ended June 30, 2013. The increase was due to increased disposables revenue, partially offset by a small decrease in laser and related service revenue.

VI revenue, which includes products used in both the peripheral and coronary vascular systems, increased 19%, or 18% on a constant currency basis (see “Non-GAAP Financial Measures” below for a discussion of how we use the constant currency financial measure), to $22.5 million in the second quarter of 2014 as compared with $18.9 million in the second quarter of 2013. VI revenue includes three product categories: peripheral atherectomy, which increased 21%, crossing solutions, which increased 9%, and coronary atherectomy and thrombus management, which increased 33%, all compared with the three months ended June 30, 2013. Increased peripheral atherectomy product sales were primarily related to unit volume increases, due both to higher sales to hospitals and to office-based physician clinics in the U.S., which contributed to a 22% increase in U.S. peripheral atherectomy sales during the second quarter of 2014 as compared with the second quarter of 2013. The increase in crossing solutions product sales was due primarily to unit volume increases of our Quick-Cross™ products. The increase in coronary atherectomy and thrombus management revenue was primarily due to increased sales of our ELCA^® coronary atherectomy catheter in both Japan and the U.S.

LM revenue increased 7%, or 6% on a constant currency basis, to $16.1 million for the three months ended June 30, 2014 as compared with $15.1 million for the three months ended June 30, 2013. The growth was primarily due to unit volume increases in the SLS™ and GlideLight™ laser sheaths, LLD™ lead locking device, and a small contribution from the limited launch of our new TightRail and SightRail mechanical tools. These results represented a return to growth as compared to the prior quarter, which we believe was the result of improved sales execution as compared with the first quarter of 2014. We are taking continued actions we believe will further improve LM growth in the second half of 2014. In addition to our sales force expansion and improved commercial execution, we expect these actions to include the full launch of mechanical lead extraction tools in the second half of the year.

Service and other revenue decreased 1%, at $2.9 million for the three months ended June 30, 2014 and June 30, 2013, primarily due to an increase in our provision for sales returns.

Laser equipment revenue decreased 20% to $2.1 million for the three months ended June 30, 2014 compared with $2.6 million for the three months ended June 30, 2013. Equipment sales revenue, which is included in laser equipment revenue, decreased 15% in the three months ended June 30, 2014 as compared with the three months ended June 30, 2013, due to a decrease in laser sales in the three months ended June 30, 2014. Rental revenue decreased 26% in the three months ended June 30, 2014 as compared with the three months ended June 30, 2013, primarily because higher disposables purchases by certain customers under volume-based rental agreements led to lower rent paid by these customers.

We placed 46 laser systems with new customers during the three months ended June 30, 2014 compared with 48 laser systems during the three months ended June 30, 2013. The placements were primarily due to demand in the U.S., and to a lesser extent, in Japan and Europe. Of these laser placements, 15 were direct transfers from the existing installed base or were deployments of remanufactured lasers from our factory in the second quarter of 2014, compared with 23 transfers or deployments of remanufactured systems in the second quarter of 2013. The new placements this quarter brought our worldwide installed base of laser systems to 1,195 (864 in the U.S.) as of June 30, 2014, compared to 1,105 (816 in the U.S.) as of June 30, 2013. 

Geographically, revenue in the U.S. was $34.9 million for the three months ended June 30, 2014, an increase of 8% from the three months ended June 30, 2013, primarily due to an increase in VI revenue and, to a lesser extent, an increase in LM revenue.  International revenue totaled $8.7 million for the three months ended June 30, 2014, an increase of 22% from the second quarter of 2013, and an increase of 17% on a constant currency basis.  The increase in international revenue was primarily due to an increase in VI revenue in Europe and Japan, and to a lesser extent, an increase in LM revenue, primarily in Japan.

24

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Gross margin percentage for the second quarter of 2014 was 76% as compared with 73% for the second quarter of 2013. The increase was primarily due to higher production volumes and improved manufacturing efficiencies in the second quarter of 2014 as compared with the second quarter of 2013, which resulted in lower unit costs for our disposable products, and product mix, with a higher percentage of higher margin disposables products than laser systems revenue in the second quarter of 2014 as compared with the second quarter of 2013.

Operating expenses

Operating expenses increased 32% to $38.9 million for the three months ended June 30, 2014 compared with $29.5 million for the three months ended June 30, 2013. Operating expenses represented 89% of total revenue for the second quarter of 2014 as compared with 75% of total revenue for the second quarter of 2013.  The operating expense changes are described below.

Selling, general and administrative. Selling, general and administrative (“SG&A”) expenses increased 23% to $28.5 million for the three months ended June 30, 2014 compared with $23.1 million for the three months ended June 30, 2013.  SG&A expenses represented 65% of revenue in the second quarter of 2014 compared with 58% of revenue in the second quarter of 2013.

Within SG&A, marketing and selling expenses increased nearly $4.0 million for the three months ended June 30, 2014, or 22%, compared with the three months ended June 30, 2013, primarily due to the planned expansion of our field sales teams, both in the U.S. and Europe.

Also within SG&A, general and administrative expenses increased $1.4 million for the three months ended June 30, 2014, or 30%, compared with the three months ended June 30, 2013, with increased personnel expenses, an increase in stock-based compensation expense due to our organizational growth, and an increase in the provision for bad debt expense, professional fees, and insurance expenses.

Research, development and other technology. Research, development and other technology expenses of $5.7 million for the three months ended June 30, 2014 increased $0.2 million, or 4%, compared with the three months ended June 30, 2013. As a percentage of revenue, research, development and other technology expenses decreased to 13% in the second quarter of 2014 from 14% in the second quarter of 2013. Costs included within research, development and other technology expenses are product development costs, clinical studies costs and royalty costs associated with various license agreements with third-party licensors. Increases in these costs resulted from:

• Product development costs increased by approximately $0.2 million for the second quarter of 2014 compared with the second quarter of 2013 due to increased new product development headcount and an increase in regulatory costs, partially offset by a decrease in project spending due to the timing of projects;

• Clinical studies costs decreased by approximately $0.1 million for the second quarter of 2014 compared with the second quarter of 2013, primarily due to a decrease in costs related to the EXCITE ISR trial; and

• Royalty costs increased by approximately $0.1 million for the second quarter of 2014 compared with the second quarter of 2013, due to increased revenue.

Due diligence, transaction and integration costs. The second quarter of 2014 included $4.0 million of costs related to the AngioScore acquisition, consisting primarily of investment banking, accounting, consulting, and legal fees. These costs are expensed as incurred. We expect integration costs to continue for at least the next 18 months as we integrate the operations of AngioScore.

Medical device excise tax. The second quarter of 2014 included $0.6 million of expense attributed to the medical device excise tax, compared with $0.5 million for the second quarter of 2013. The increase in the medical device excise tax was due to increased revenue in the second quarter of 2014.

25

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Intangible asset amortization. As part of the product acquisition from Upstream Peripheral Technologies Ltd. (“Upstream”) in the first quarter of 2013, we acquired certain core technology intangible assets, which are being amortized over periods from four to 12 years. We recorded $0.1 million of amortization expense related to these intangibles for the three months ended June 30, 2014, compared with $0.2 million for the three months ended June 30, 2013. The decrease was due to the impairment of certain intangible assets at the end of 2013. We estimate that we will record intangible asset amortization of approximately $12 million annually related to the AngioScore acquisition, beginning in the third quarter of 2014, based on our preliminary intangible asset valuations as discussed in Note 2 to the condensed consolidated financial statements included in Part I, Item 1 of this report.

Contingent consideration expense. As part of the product acquisition from Upstream in the first quarter of 2013, we recorded a contingent consideration liability, representing the estimated fair value of the future contingent payments we expect to make. For the three months ended June 30, 2014 and June 30, 2013, we recorded $40,000 and $0.2 million of contingent consideration expense, respectively, related to the increase in that liability due to the passage of time (i.e., accretion) and made no changes to the underlying estimates in the contingent consideration liability. The decrease in this expense was due to an adjustment to the contingent consideration liability at the end of 2013. We estimate that we will record contingent consideration expense of approximately $4 million annually related to the AngioScore acquisition, beginning in the third quarter of 2014, based on our preliminary valuation as discussed in Note 2 to the condensed consolidated financial statements included in Part I, Item 1 of this report.

Other income (expense)

Interest expense. Interest expense increased by $0.5 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily related to the notes issued in June 2014, including amortization of underwriting commission and other debt issuance costs. As a result of the issuance of the notes, we expect interest expense to be higher in future quarters as the expense will accrue over the full quarter as opposed to accruing for only a portion of the second quarter of 2014. We expect interest expense to be approximately $6 million annually.

Adjusted EBITDA

Adjusted EBITDAwas $0.8 million for the three months ended June 30, 2014 compared with $2.1 million for the three months ended June 30, 2013. Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure for the respective periods and a discussion of how we use the Adjusted EBITDA financial measure.

Loss before income taxes

Pre-tax loss for the three months ended June 30, 2014 was $6.3 million, compared with a pre-tax loss of $0.7 million for the three months ended June 30, 2013.

Income taxes

We maintain a valuation allowance for substantially all of our deferred tax assets, including our U.S. net operating losses and those of our newly-acquired subsidiary, AngioScore, and therefore we do not expect to incur a current U.S. federal tax expense or benefit against our pretax income during the year ending December 31, 2014. We do, however, expect to incur current state and foreign tax expense during 2014. In addition, we expect to incur deferred U.S. federal and state tax expense in 2014, representing a deferred tax liability related to the difference between book and tax accounting for our goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

We recorded income tax expense of $0.2 million for the three months ended June 30, 2014, consisting of current foreign and state income tax expense and deferred federal income tax expense.

26

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Our ability to realize the benefit of our deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to our history of losses and our planned near-term investments in our growth, we have recorded a full valuation allowance against substantially all of our deferred tax assets. We do not expect to reduce the valuation allowance against our U.S. deferred tax assets to below 100% of its gross amount until we have a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

Net loss

As a result of the items discussed above, we recorded a net loss for the three months ended June 30, 2014 of $6.6 million, or $0.16 per share, compared with a net loss of $0.7 million, or $0.02 per share, for the three months ended June 30, 2013.

Non-GAAP net loss

Non-GAAP net loss for the three months ended June 30, 2014 was $2.4 million, or $0.06 per share, compared with non-GAAP net loss of $0.3 million, or $0.01 per share, for the three months ended June 30, 2013. Non-GAAP net loss is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure for the respective periods and a discussion of how we use the non-GAAP net loss financial measure.

Functional currency

The functional currency of Spectranetics International B.V., Spectranetics Deutschland GmbH, Spectranetics Austria GmbH and Spectranetics France SARL is the euro. Spectranetics Switzerland GmbH and Spectranetics Denmark ApS use their respective local currencies as the functional currency. All revenue and expenses are translated to U.S. dollars in the condensed consolidated statements of operations using weighted average exchange rates during the period.  The fluctuation in currency rates during the three months ended June 30, 2014 as compared with the three months ended June 30, 2013 caused an increase in consolidated revenue of approximately $0.3 million and an increase in consolidated net income of approximately $0.1 million.

27

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Selected Consolidated Statements of Operations Data

The following table presents selected Consolidated Statements of Operations data for the six months ended June 30, 2014 and 2013 based on the percentage of revenue for each line item, and the dollar and percentage change of each of the items.

Six Months EndedJune 30, 2014 Compared with Six Months EndedJune 30, 2013

	Six Months Ended   June 30,
(Dollars in thousands)	2014			% of revenue (1)		2013			% of revenue (1)		change			% change
Revenue
Disposable products revenue:
Vascular Intervention	$	42,517		51	%	$	36,090		47	%	$	6,427		18	%
Lead Management	30,584			37		30,157			39		427			1
Total disposable products revenue	73,101			88		66,247			86		6,854			10
Service and other revenue	5,641			7		5,766			7		(125		)	(2	)
Laser equipment revenue:
Equipment sales	2,721			3		2,776			4		(55		)	(2	)
Rental fees	1,706			2		2,339			3		(633		)	(27	)
Total laser equipment revenue	4,427			5		5,115			7		(688		)	(13	)
Total revenue	83,169			100		77,128			100		6,041			8
Gross profit	62,329			75		56,184			73		6,145			11
Operating expenses
Selling, general and administrative	56,192			68		45,866			59		10,326			23
Research, development and other technology	11,791			14		10,656			14		1,135			11
Due diligence, transaction and integration costs	4,229			5		—			—		4,229			nm
Medical device excise tax	1,113			1		1,031			1		82			8
Intangible asset amortization	273			—		410			1		(137		)	(33	)
Contingent consideration expense	78			—		404			1		(326		)	(81	)
Total operating expenses	73,676			89		58,367			76		15,309			26
Operating loss	(11,347		)	(14	)	(2,183		)	(3	)	(9,164		)	420
Other income (expense)
Interest (expense) income, net	(488		)	(0.01	)	2			—		(490		)	nm
Foreign currency transaction gain (loss)	2			—		(25		)	—		27			(108	)
Other income, net	—			—		8			—		(8		)	nm
Loss before income taxes	(11,833		)	(14	)	(2,198		)	(3	)	(9,635		)	438
Income tax expense (benefit)	393			—		(511		)	(1	)	904			(177	)
Net loss	$	(12,226	)	(15	)%	$	(1,687	)	(2	)%	$	(10,539	)	625	%
Worldwide installed base of laser systems	1,195					1,105					90

___________________________________

(1) Percentage amounts may not add due to rounding.

nm = not meaningful

28

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Revenue and gross margin

Revenue increased 8% (7% on a constant currency basis) to $83.2 million for the six months ended June 30, 2014 as compared with $77.1 million for the six months ended June 30, 2013. The increase was due to increased disposables revenue, partially offset by a small decrease in service and other revenue and laser equipment sales and rentals.

VI revenue increased 18% (17% on a constant currency basis) to $42.5 million for the first six months of 2014 as compared with $36.1 million for the first six months of 2013. Peripheral atherectomy increased 24%, crossing solutions increased 2%, and coronary atherectomy and thrombus management increased 27%, all compared with the six months ended June 30, 2013. Increased peripheral atherectomy product sales were primarily related to unit volume increases, due both to higher sales to hospitals and to office-based physician clinics in the U.S., which contributed to a 25% increase in U.S. peripheral atherectomy sales during the six months ended June 30, 2014 as compared with the six months ended June 30, 2013. The increase in crossing solutions product sales was due primarily to unit volume increases of our Quick-Cross™ products, in spite of continued competitive pressures. The increase in coronary atherectomy and thrombus management revenue was primarily due to increased sales of our coronary atherectomy products in both Japan and the U.S.

LM revenue grew 1% (both as reported and on a constant currency basis) to $30.6 million for the six months ended June 30, 2014 as compared with $30.2 million for the six months ended June 30, 2013.

Service and other revenue decreased 2%, to $5.6 million for the six months ended June 30, 2014 compared with $5.8 million for the six months ended June 30, 2013, primarily due to an increase in our provision for sales returns.

Laser equipment revenue decreased 13%, to $4.4 million in the six months ended June 30, 2014 compared with $5.1 million in the six months ended June 30, 2013. Equipment sales revenue, which is included in laser equipment revenue, decreased 2% in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013, due to a decrease in the number of laser sales. Rental revenue decreased 27% in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013, primarily because higher disposables purchases by certain customers under volume-based rental agreements led to lower rent paid by those customers.

We placed 83 laser systems with new customers during the six months ended June 30, 2014 compared with 87 during the six months ended June 30, 2013.  Of these laser placements, 32 were direct transfers from the existing installed base or were deployments of remanufactured lasers from our factory, compared with 48 transfers or deployments of remanufactured systems in the first six months of 2013. The new placements during the six months ended June 30, 2014 brought our worldwide installed base of laser systems to 1,195 (864 in the U.S.) as of June 30, 2014, compared to 1,105 (816 in the U.S.) as of June 30, 2013. 

Geographically, revenue in the U.S. was $66.6 million for the six months ended June 30, 2014, an increase of 6% from the prior year period, primarily due to an increase in VI revenue.  International revenue totaled $16.5 million, an increase of 18% from the first six months of 2013, or 14% on a constant currency basis.  The increase in international revenue was primarily due to an increase in VI revenue in Japan and LM and laser equipment revenue in Europe in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013.

Gross margin percentage was 75% for the six months ended June 30, 2014 and 73% for the six months ended June 30, 2013. The additional margin was generated by higher production volumes and manufacturing efficiencies, in addition to favorable product mix, with a higher percentage of higher margin disposables revenue in the six months ended June 30, 2014 as compared with the six months ended June 30, 2013.

Operating expenses

Operating expenses increased 26% to $73.7 million for the six months ended June 30, 2014 compared with $58.4 million for the six months ended June 30, 2013. Operating expenses represented 89% of total revenue for the first six months of 2014 as compared with 76% of total revenue for the first six months of 2013. The operating expense changes are described below.

29

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Selling, general and administrative. SG&A expenses increased 23% to $56.2 million for the six months ended June 30, 2014 compared with $45.9 million for the six months ended June 30, 2013.  SG&A expenses represented 68% of revenue for the first six months of 2014 compared with 59% of revenue for the first six months of 2013.

Within SG&A, marketing and selling expenses increased $7.3 million, or 20%, compared with the six months ended June 30, 2013, primarily due to the planned expansion of our field sales teams, both in the U.S. and Europe.

Also within SG&A, general and administrative expenses increased $3.0 million, or 31%, compared with the six months ended June 30, 2013, with increased personnel expenses, an increase in stock-based compensation expense due to our organizational growth, and an increase in the provision for bad debt expense, insurance expense, and professional fees.

Research, development and other technology. Research, development and other technology expenses of $11.8 million for the six months ended June 30, 2014 increased $1.1 million, or 11%, compared with the six months ended June 30, 2013. As a percentage of revenue, research, development and other technology expenses were stable at 14% in the first six months of 2014 and 2013. Increases in these costs resulted from:

• Product development costs increased by approximately $0.7 million compared with the first six months of 2013 due to increased headcount and regulatory submissions;

• Clinical studies costs increased by approximately $0.2 million compared with the first six months of 2013, primarily due to costs associated with the EXCITE ISR clinical trial; and

• Royalty costs increased by approximately $0.2 million compared with the first six months of 2013 due to increased revenue.

Due diligence, transaction and integration costs. The six months ended June 30, 2014 included $4.2 million of costs related to the AngioScore acquisition, consisting primarily of investment banking, accounting, consulting, and legal fees. These costs are expensed as incurred.

Medical device excise tax. The six months ended June 30, 2014 included $1.1 million of expense attributed to the medical device excise tax, as compared with $1.0 million for the six months ended June 30, 2013. The increase in the medical device excise tax was due to increased revenue in the six months ended June 30, 2014.

Acquisition-related intangible asset amortization. We recorded $0.3 million of amortization expense related to the intangible assets acquired as part of the Upstream product acquisition for the six months ended June 30, 2014, compared with $0.4 million for the six months ended June 30, 2013. The decrease was due to the impairment of certain intangible assets at the end of 2013.

Contingent consideration expense. For the six months ended June 30, 2014 and June 30, 2013, we recorded $0.1 million and $0.4 million of contingent consideration expense, respectively, related to the increase in that liability due to the passage of time (i.e., accretion) and made no changes to the underlying estimates in the contingent consideration liability. The decrease in this expense for the six months ended June 30, 2014 was due to an adjustment to the contingent consideration liability at the end of 2013.

Other income (expense)

Interest expense. Interest expense increased by $0.5 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily related to the notes, including amortization of underwriting commission and other debt issuance costs.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Adjusted EBITDA

Adjusted EBITDAwas a loss of $1.8 million for the six months ended June 30, 2014 compared with Adjusted EBITDA of $3.4 million for the six months ended June 30, 2013. Adjusted EBITDA is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure for the respective periods and a discussion of how we use the Adjusted EBITDA financial measure.

Loss before income taxes

The pre-tax loss for the six months ended June 30, 2014 was $11.8 million, compared with a pre-tax loss of $2.2 million for the six months ended June 30, 2013.

Income taxes

We maintain a valuation allowance for substantially all of our deferred tax assets, including our U.S. net operating losses and the newly acquired AngioScore net operating losses, and therefore we do not expect to incur a current U.S. federal tax expense or benefit against our pretax income during the year ending December 31, 2014. We do, however, expect to incur current state and foreign tax expense during 2014. In addition, we expect to incur deferred U.S. federal and state tax expense in 2014, representing a deferred tax liability related to the difference between book and tax accounting for our goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

We recorded income tax expense of $0.4 million for the six months ended June 30, 2014, consisting of current foreign and state income tax expense and deferred federal income tax expense.

Our ability to realize the benefit of our deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to our history of losses and our planned near-term investments in our growth, we have recorded a full valuation allowance against substantially all of our deferred tax assets. We do not expect to reduce the valuation allowance against our U.S. deferred tax assets to below 100% of its gross amount until we have a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

Net loss

As a result of the items discussed above, we recorded a net loss for the six months ended June 30, 2014 of $12.2 million, or $0.29 per share, compared with a net loss of $1.7 million, or $0.05 per share, in the six months ended June 30, 2013.

Non-GAAP net loss

Non-GAAP net loss for the six months ended June 30, 2014 was $7.6 million, or $0.18 per share, compared with non-GAAP net loss of $0.9 million, or $0.02 per share, for the six months ended June 30, 2013. Non-GAAP net loss is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure for the respective periods and a discussion of how we use the non-GAAP net loss financial measure.

Functional currency

The functional currency of Spectranetics International B.V., Spectranetics Deutschland GmbH, Spectranetics Austria GmbH and Spectranetics France SARL is the euro. Spectranetics Switzerland GmbH and Spectranetics Denmark ApS use their respective local currencies as the functional currency. All revenue and expenses are translated to U.S. dollars in the condensed consolidated statements of operations using weighted average exchange rates during the period.  The fluctuation in currency rates during the six months ended June 30, 2014 as compared with the six months ended June 30, 2013 caused an increase of approximately $0.5 million in consolidated revenue and an increase of approximately $0.2 million in consolidated net income.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Liquidity and Capital Resources

As of June 30, 2014, we had cash and cash equivalents of $107.0 million, a decrease of $21.4 million from $128.4 million at December 31, 2013.

As discussed above under “Recent Developments,” on June 3, 2014, we closed the sale of $230 million aggregate principal amount of convertible senior notes. We received $222.5 million from the issuance of the notes, net of $7.5 million of debt issuance costs incurred. We used all of the net proceeds to fund the acquisition of AngioScore.

We believe that our cash and cash equivalents, anticipated funds from operations, and other sources of liquidity will be sufficient to meet our liquidity requirements for the foreseeable future based on our expected level of operations. However, we may need or seek additional funding, particularly to fund acquisitions. If we require additional working capital to fund future operations and any future acquisitions, we may access available borrowings under our revolving line of credit with Wells Fargo Bank described below. We also may sell additional shares of our common stock or other equity or debt securities or enter into credit and financing arrangements with one or more independent institutional lenders. A financing transaction may not be available on terms acceptable to us, or at all, and a financing transaction may be dilutive to our current stockholders.

Operating Activities. For the six months ended June 30, 2014, cash used in operating activities totaled $9.5 million.  The primary sources and uses of cash were:

(1) Our net loss of $12.2 million included approximately $8.4 million of non-cash expenses. Non-cash expenses included $5.2 million of depreciation and amortization, $2.6 million of stock-based compensation, $0.4 million of provision for excess and obsolete inventories and $0.2 million of deferred income taxes.

(2) Cash used as a result of the net change in operating assets and liabilities of approximately $5.6 million was primarily due to:

• A decrease in accounts payable and accrued liabilities of $4.5 million, primarily due to the payment of liabilities accrued in 2013 for annual bonuses and commissions;

• An increase in equipment held for rental or loan of $3.6 million as a result of placement activity of our laser systems through our rental and evaluation programs;

• An increase in accounts receivable of approximately $2.9 million, primarily due to higher sales in the latter half of the quarter;

• An increase in inventory of approximately $2.0 million, primarily due to increased sales demand and higher disposables production, due to an increase in our days-on-hand inventory;

• An increase in prepaid expenses and other current assets of $1.8 million, primarily due to prepayments for bulk inventory purchases and the payment of annual insurance premiums; and

• A decrease in deferred revenue of approximately $0.1 million, due primarily to the timing of collections of deferred service contract revenue.

The table below presents the change in receivables and inventory in relative terms, through the presentation of financial ratios.  Days sales outstanding are calculated by dividing the ending accounts receivable balance, net of reserves for sales returns and doubtful accounts, by the average daily sales for the quarter.  Inventory turns are calculated by dividing annualized cost of sales for the quarter by ending inventory. The increase in days sales outstanding was primarily due to an increase in the percentage of revenue recorded in the latter half of the quarter and the increase in sales to our office-based physician clinics, which is the fastest growing segment of the VI business. In some cases, we have granted extended terms,

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

generally no more than 90 days, to these physician-owned facilities, which are greater than our typical 30 day terms. Additionally, we have increased sales to our distributor in Japan, which under our contract is granted 75 day terms.

	June 30, 2014	December 31, 2013
Days Sales Outstanding	61	57
Inventory Turns	3.8	4.4

Investing Activities. For the six months ended June 30, 2014, cash used by investing activities was $237.2 million, consisting of the payment for the AngioScore acquisition of $234.3 million, which includes the base purchase price of $230 million and a working capital adjustment of $4.3 million, and capital expenditures of $2.9 million. This compared with cash used by investing activities of $8.2 million in the six months ended June 30, 2013, consisting of capital expenditures of $1.7 million and acquisition payments of $6.5 million related to the Upstream product acquisition.  The capital expenditures for the six months ended June 30, 2014 and June 30, 2013 included manufacturing equipment upgrades and replacements, additional capital items for research and development projects, and additional computer equipment and software purchases.

We may be required to make future payments related to the AngioScore acquisition. The merger agreement with AngioScore provides for additional payments for revenue-based earn-outs and regulatory approval milestones. The total contingent revenue-based payments cannot exceed $50 million. The total contingent regulatory approval milestones cannot exceed $25 million.

We may be required to make future payments related to the Upstream product acquisition that occurred in the first quarter of 2013. The purchase agreement with Upstream provides for additional payments for manufacturing and intellectual property milestones and revenue-based earn-outs. We believe the next milestone payment of $0.5 million will be payable in 2015. The total purchase price, including the contingent milestone and revenue-based payments, is subject to an overall cap of $35.5 million. As of June 30, 2014, we have paid $6.5 million under the Upstream purchase agreement.

Financing Activities. Cash provided by financing activities for the six months ended June 30, 2014 was $225.3 million, consisting of $230.0 million of proceeds from our issuance of the notes, less $7.5 million of debt issuance costs, and $2.8 million from the exercise of stock options and sales of common stock under our employee stock purchase plan. This compared with $94.1 million in the six months ended June 30, 2013, consisting of $92.0 million of net proceeds from a common stock offering and $2.0 million from the exercise of stock options and sales of common stock under our employee stock purchase plan.

At June 30, 2014, we had no significant capital lease obligations.

Convertible Senior Notes

On June 3, 2014, we closed the sale of $230 million aggregate principal amount of the notes. The notes will bear interest at a rate of 2.625% per annum. We will pay interest on the notes on June 1 and December 1 of each year, beginning December 1, 2014. The notes will mature on June 1, 2034 (the “maturity date”), unless earlier repurchased, redeemed or converted.

Holders may convert their notes into shares of our common stock at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

The conversion rate will initially be 31.9020 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $31.35 per share of our common stock). The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make‑whole fundamental change occurs or we deliver a redemption notice, in certain circumstances we will increase the conversion rate for a holder that elects to convert its notes in connection with such make‑whole fundamental change or redemption notice, as the case may be.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Holders may require us to repurchase some or all of their notes for cash on each of June 5, 2021, June 5, 2024 and June 5, 2029 and upon a fundamental change at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date.

We may not redeem the notes prior to June 5, 2018. On or after June 5, 2018 and prior to June 5, 2021, we may redeem for cash all or part of the notes, except for the notes that we are required to repurchase in connection with a fundamental change or on a specified purchase date, if the closing sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the trading day immediately prior to the date we provide the notice of redemption exceeds 130% of the applicable conversion price for the notes on each applicable trading day. On or after June 5, 2021, we may redeem any or all of the notes in cash except for any notes that we are required to repurchase in connection with a fundamental change or on a specified purchase date.

The notes are our senior unsecured obligations and rank equal in right of payment with any of our other senior unsecured indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the notes. The notes are effectively subordinated to all of our future secured indebtedness to the extent of the value of the collateral securing such indebtedness and structurally subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Further information regarding the notes can be found in our Current Report on Form 8-K filed with the SEC on June 3, 2014.

Line of Credit

In February 2011, we entered into a Credit and Security Agreement (“Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), acting through its Wells Fargo Business Credit operating division, for a three-year $15.0 million revolving line of credit. In February 2014, we renewed the line of credit for an additional three-year term under substantially the same terms. In May 2014, we amended the Credit Agreement to permit us to consummate the AngioScore acquisition, issue the notes, and amend our certificate of incorporation to increase our authorized shares of common stock. Under the Credit Agreement, we may borrow under the revolving line of credit subject to borrowing base limitations.  These limitations allow us to borrow, subject to specified reserves, up to 85% of eligible domestic accounts receivable, defined as receivables aged less than 90 days from the invoice date with specific exclusions for contra-accounts, concentrations, and other accounts otherwise deemed ineligible by Wells Fargo Business Credit.  Borrowings under the revolving line bear interest at a variable rate equal to the lesser of the Wells Fargo prime rate plus 0.25% or the daily three month LIBOR plus 3.25%.  The margins on the base interest rates are subject to reduction if we achieve certain annual net income levels. Accrued interest on any outstanding balance under the revolving line is payable monthly in arrears. Our borrowing base, which represents the amount we can borrow under the revolving line of credit, was $12.9 million as of June 30, 2014.

The revolving line of credit is secured by a first priority security interest in substantially all of our assets. The Credit Agreement requires us to maintain a minimum of $10.0 million cash and investments at Wells Fargo and requires a lockbox arrangement. We must pay customary fees under the facility, including a 0.25% fee on the average unused portion of the revolving line. If there are borrowings under the revolving line of credit, we will be subject to certain financial covenants including rolling 12-month adjusted EBITDA and minimum book net worth covenants. 

The Credit Agreement contains customary events of default, including the failure to make required payments, the failure to comply with certain covenants or other agreements, the occurrence of a material adverse change, failure to pay certain other indebtedness and certain events of bankruptcy or insolvency. Upon the occurrence and continuation of an event of default, amounts due under the Credit Agreement may be accelerated.

As of the date of this report, we have had no events of default and no borrowings under the revolving line of credit, and there were no borrowings under the revolving line of credit during the three and six months ended June 30, 2014.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Contractual Obligations

We have a contractual obligation to pay interest on the notes, totaling approximately $6.0 million per year. We will make the first semi-annual payment on December 1, 2014. We also have a contractual obligation to make lease payments on AngioScore’s Fremont, California facility of approximately $0.3 million annually through May 2016.

Off-Balance Sheet Arrangements

We maintain no off-balance sheet arrangements that have, or that are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We maintain operating leases for our offices in Colorado Springs, Colorado; Fremont, California; the Netherlands and Germany.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we use certain non-GAAP financial measures in this report. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures for the respective periods can be found in the tables below. An explanation of the manner in which our management uses these non-GAAP measures to conduct and evaluate our business and the reasons management believes these non-GAAP measures provide useful information to investors are provided following the reconciliation tables.

Reconciliation of revenue by geography to non-GAAP revenue by geography on a constant currency basis (in thousands, except percentages) (unaudited)
	Three Months Ended
	June 30, 2014							June 30, 2013		Change
	Revenue, as reported		Foreign exchange impact as compared to prior period			Revenue on a constant currency basis		Revenue, as reported		As reported		Constant currency basis
United States	$	34,854	$	—		$	34,854	$	32,310	8	%	8	%
International	8,701		(329		)	8,372		7,143		22	%	17	%
Total revenue	$	43,555	$	(329	)	$	43,226	$	39,453	10	%	10	%
	Six Months Ended
	June 30, 2014							June 30, 2013		Change
	Revenue, as reported		Foreign exchange impact as compared to prior period			Revenue on a constant currency basis		Revenue, as reported		As reported		Constant currency basis
United States	$	66,626	$	—		$	66,626	$	63,101	6	%	6	%
International	16,543		(508		)	16,035		14,027		18	%	14	%
Total revenue	$	83,169	$	(508	)	$	82,661	$	77,128	8	%	7	%

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Reconciliation of revenue by product line to non-GAAP revenue by product line on a constant currency basis (in thousands, except percentages) (unaudited)
	Three Months Ended
	June 30, 2014							June 30, 2013		Change
	Revenue, as reported		Foreign exchange impact as compared to prior period			Revenue on a constant currency basis		Revenue, as reported		As reported		Constant currency basis
Vascular Intervention	$	22,496	$	(108	)	$	22,388	$	18,897	19	%	18	%
Lead Management	16,114		(164		)	15,950		15,078		7	%	6	%
Laser Equipment, Service & Other	4,945		(57		)	4,888		5,478		(10	)%	(11	)%
Total revenue	$	43,555	$	(329	)	$	43,226	$	39,453	10	%	10	%
	Six Months Ended
	June 30, 2014							June 30, 2013		Change
	Revenue, as reported		Foreign exchange impact as compared to prior period			Revenue on a constant currency basis		Revenue, as reported		As reported		Constant currency basis
Vascular Intervention	$	42,517	$	(162	)	$	42,355	$	36,090	18	%	17	%
Lead Management	30,584		(249		)	30,335		30,157		1	%	1	%
Laser Equipment, Service & Other	10,068		(97		)	9,971		10,881		(7	)%	(8	)%
Total revenue	$	83,169	$	(508	)	$	82,661	$	77,128	8	%	7	%

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA (in thousands) (unaudited)
	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Net loss, as reported	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Income tax expense (benefit)	246			64			393			(511		)
Interest expense (income), net	489			(6		)	488			(2		)
Depreciation and amortization	2,473			2,369			4,932			4,823
Acquisition-related intangible asset amortization (1)	136			246			273			410
EBITDA	(3,221		)	1,945			(6,140		)	3,033
Contingent consideration expense (1)	40			202			78			404
Due diligence, transaction, and integration costs (2)	3,958			—			4,229			—
Adjusted EBITDA	$	777		$	2,147		$	(1,833	)	$	3,437

Reconciliation of Net Loss to Non-GAAP Net Loss (in thousands) (unaudited)
	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Net loss, as reported	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Due diligence, transaction, and integration costs (2)	3,958			—			4,229			—
Acquisition-related intangible asset amortization (1)	136			246			273			410
Contingent consideration expense (1)	40			202			78			404
Non-GAAP net loss	$	(2,431	)	$	(280	)	$	(7,646	)	$	(873	)

Reconciliation of Net Loss Per Share to Non-GAAP Net Loss Per Share (unaudited)
	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Net loss per share, as reported	$	(0.16	)	$	(0.02	)	$	(0.29	)	$	(0.05	)
Due diligence, transaction, and integration costs (2)	0.10			—			0.10			—
Acquisition-related intangible asset amortization (1)	—			0.01			0.01			0.01
Contingent consideration expense (1)	—			0.01			—			0.01
Non-GAAP net loss per share (3)	$	(0.06	)	$	(0.01	)	$	(0.18	)	$	(0.02	)

_______________________

1) Acquisition-related intangible asset amortization relates to intangible assets acquired from Upstream in January 2013. Contingent consideration expense represents the accretion of the estimated contingent consideration liability related to amounts payable to Upstream in 2014, 2015 and 2016, primarily based on sales of the products acquired.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

2) Due diligence, transaction, and integration costs are related to the Angioscore acquisition, and primarily included investment banking, accounting, consulting, and legal fees.

3) Per share amounts may not add due to rounding.

Management uses the non-GAAP financial measures as supplemental measures to analyze the underlying trends in our business, assess the performance of our core operations, establish operational goals and forecasts that are used in allocating resources and evaluate our performance period over period and in relation to our competitors’ operating results.

The impact of foreign exchange rates is highly variable and difficult to predict. We use a constant currency basis to show the impact from foreign exchange rates on current period revenue compared to prior period revenue using the prior period’s foreign exchange rates. In order to properly understand the underlying business trends and performance of our ongoing operations, we believe that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our revenue.

We believe presenting the non-GAAP financial measures used in this report provides investors greater transparency to the information used by our management for financial and operational decision-making and allows investors to see our results “through the eyes” of management. We also believe providing this information better enables our investors to understand our operating performance and evaluate the methodology used by management to evaluate and measure such performance.

Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with U.S. GAAP. Some limitations associated with using these non-GAAP financial measures are provided below:

• Management exercises judgment in determining which types of charges or other items should be excluded from the non-GAAP financial measures used.

• Depreciation and amortization expense, while not requiring cash settlement, are ongoing and recurring expenses and have a material impact on GAAP net income and reflect economic costs to us not reflected in Adjusted EBITDA.

• Items such as the due diligence, transaction and integration costs and contingent consideration expense excluded from Adjusted EBITDA and Non-GAAP Net Loss can have a material impact on cash flows and GAAP net income and reflect economic costs to us not reflected in Adjusted EBITDA and Non-GAAP Net Loss.

• Revenue growth rates stated on a constant currency basis, by their nature, exclude the impact of changes in foreign currency exchange rates, which may have a material impact on GAAP revenue.

• Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and therefore other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations (Cont’d)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. We must make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.  Significant items subject to estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances and reserves for receivables, inventories and deferred income tax assets, stock-based compensation expense, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, contingent consideration liabilities, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

Our critical accounting policies and estimates are included in our 2013 Annual Report on Form 10-K.  During the first six months of 2014, there were no significant changes to our critical accounting policies and estimates.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to foreign currency fluctuations, which are primarily related to sales of our products in Europe that are denominated primarily in the euro.  Changes in the exchange rate between the euro and the U.S. dollar could adversely affect our revenue and net income.  Exposure to foreign currency exchange rate risk may increase over time as our business evolves and our products continue to be introduced into international markets.  Currently, we do not hedge against any foreign currencies and, as a result, we could incur gains or losses due to these fluctuations.  Fluctuation in currency rates during the six months ended June 30, 2014 as compared with the six months ended June 30, 2013 caused an increase of approximately $0.5 million in consolidated revenue and an increase of approximately $0.2 million in consolidated net income.

Based on our overall foreign currency exchange rate exposure as of June 30, 2014, a 10% appreciation or depreciation of the U.S. dollar would have a positive or negative impact on our consolidated revenue for the six months ended June 30, 2014 of approximately $1.0 million.

Item 4.Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. Our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of June 30, 2014.

There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. On June 30, 2014, we completed our acquisition of AngioScore Inc., which is now our wholly-owned subsidiary and a “significant subsidiary” as defined by Rule 1-02 of Regulation S-X promulgated by the SEC.  We are in the process of integrating AngioScore’s operations with our operations, including integration of financial reporting processes and procedures and internal controls over financing reporting.  In the course of integrating AngioScore’s financial reporting processes and procedures with ours, we may implement changes to financial reporting processes and procedures and internal controls over financing reporting and will disclose any such changes, if material, as required by the rules of the SEC.

Management intends to complete its assessment of the effectiveness of internal controls over financial reporting for the acquired business within one year of the date of the acquisition.

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Part II—OTHER INFORMATION

Item 1.Legal Proceedings

For a discussion of our legal proceedings, please refer to Note 10, “Commitments and Contingencies” to the condensed consolidated financial statements included in Part I, Item 1 of this report.

Item 1A.   Risk Factors

The following are additional risk factors to be read in conjunction with those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2013.

Risks Related to Our Acquisition of AngioScore

Actual results may differ from any guidance issued by us concerning future revenue and revenue growth of AngioScore or the anticipated impact of the AngioScore acquisition on the operating results of the combined company, and these differences could be material.

We have made a number of forward‑looking statements within the meaning of the Private Securities Litigation Reform Act, including statements relating to the AngioScore acquisition, the prospects for the combined company, the market opportunity for our and the AngioScore products, our expectations for the development of AngioScore’s products and introduction of new products and the future growth of our business. These statements are based upon our management’s preliminary estimates based on forecasts prepared by AngioScore’s management. Although we believe that we have a reasonable basis for such forward‑looking statements, these statements are based on our projections of future events that are subject to known and unknown risks and uncertainties and other factors that may cause the combined company’s actual results, level of activity, performance or achievements expressed or implied by these forward‑looking statements to differ in a material way. Risks and uncertainties that could cause actual results to differ materially from currently anticipated results include, but are not limited to, risks relating to:

• our ability to successfully integrate AngioScore;

• our ability to obtain U.S. IDE approval for the clinical testing of, and European CE mark approval for the sale of, the AngioScore products;

• our ability to successfully launch new products and applications in AngioScore’s target markets;

• our sales, marketing and distribution capabilities and those of our competitors;

• our planned sales, marketing, and research and development activities;

• unanticipated increases in costs or expenses;

• risks associated with international operations; and

• the other risks identified in this report and in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2013.

Our actual financial condition and results of operations may not be consistent with, or evident from, the guidance we provide. Other unknown or unpredictable factors also could harm our results. Consequently, actual results or developments anticipated by us may not be realized or, even if substantially realized, may not have the expected consequences for, or effects on, us. Any failure to meet such guidance could have a material adverse effect on the trading price or volume of our stock.

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Any failure to successfully integrate AngioScore’s business and operations or fully realize potential synergies from the AngioScore acquisition in the expected time frame would adversely affect our business, operating results and financial condition.

We do not have a history of acquiring businesses of the size and complexity of AngioScore, and the success of the AngioScore acquisition will depend, in part, on our ability to successfully integrate AngioScore’s business and operations and fully realize the anticipated benefits and potential synergies from combining our business with AngioScore’s business. To realize these anticipated benefits and potential synergies, we must successfully combine these businesses. If we are unable to achieve these objectives, the anticipated benefits and potential synergies of the AngioScore acquisition may not be realized fully or at all, or may take longer to realize than expected. Any failure to timely realize these anticipated benefits would have a material adverse effect on our business, operating results and financial condition. The integration process could result in the loss of key employees, loss of key customers, decreases in revenue and increases in operating costs, as well as the disruption of each company’s ongoing businesses, any or all of which could limit our ability to achieve the anticipated benefits and synergies of the AngioScore acquisition and have a material adverse effect on our business, operating results and financial condition.

We have made certain assumptions relating to the AngioScore acquisition that may prove to be materially inaccurate.

We have made certain assumptions relating to the AngioScore acquisition that may prove to be inaccurate, including as the result of the failure to realize the expected benefits of the AngioScore acquisition, failure to realize expected revenue growth rates, higher than expected operating, transaction and integration costs, as well as general economic and business conditions that adversely affect us following the AngioScore acquisition. These assumptions relate to numerous matters, including:

• projections of AngioScore’s future revenue and revenue growth rates;

• the amount of goodwill and intangibles that result from the AngioScore acquisition;

• certain other purchase accounting adjustments that we expect will be recorded in our financial statements in connection with the AngioScore acquisition;

• acquisition costs, including transaction costs;

• our ability to maintain, develop and deepen relationships with customers of AngioScore; and

• other financial and strategic risks of the AngioScore acquisition.

We and AngioScore may have difficulty attracting, motivating and retaining executives and other key employees in light of the AngioScore acquisition.

Uncertainty about the effect of the AngioScore acquisition on our and AngioScore’s employees may have an adverse effect on us or AngioScore and, consequently, the combined business resulting from the AngioScore acquisition. This uncertainty may impair our and AngioScore’s ability to attract, retain and motivate key personnel. If key employees depart because of issues relating to the uncertainty and difficulty of integration, financial incentives or a desire not to become employees of the combined business, we may incur significant costs in identifying, hiring and retaining replacements for departing employees, which could substantially reduce or delay our ability to realize the anticipated benefits of the AngioScore acquisition.

Our and AngioScore’s business relationships, including customer relationships, may be subject to disruption due to uncertainty associated with the AngioScore acquisition.

Parties with which we or AngioScore do business may experience uncertainty associated with the AngioScore acquisition, including with respect to current or future business relationships with us, AngioScore or the combined business. These business relationships may be subject to disruption as customers and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us, AngioScore or the combined business,

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including our competitors or those of AngioScore. These disruptions could have a material adverse effect on the businesses, operating results and financial condition of the combined business.

We incurred significant transaction expenses and acquisition‑related integration costs in connection with the AngioScore acquisition.

We incurred significant transaction costs relating to the negotiation and completion of the AngioScore acquisition. Additionally, we are in the process of integrating the operations of AngioScore with our own. We anticipate that we will incur certain additional non‑recurring charges in connection with this integration; however, we cannot identify the timing, nature and amount of all such charges as of the date of this report. These transaction expenses and integration costs will be charged as an expense in the period incurred. The significant transaction costs and acquisition‑related integration costs could materially affect our results of operations in the period in which such charges are recorded. Although we believe that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the business, will offset incremental transaction and acquisition‑related costs over time, this net benefit may not be achieved in the near term, or at all.

The stated value of long‑lived and intangible assets may become impaired and result in an impairment charge.

As of June 30, 2014, based on the preliminary valuation of the AngioScore acquisition, we have approximately $261 million of intangible assets and goodwill on a combined basis, $241 million of which relates to the AngioScore acquisition. In addition, if in the future we acquire additional complementary businesses or technologies, a substantial portion of the value of such assets may be recorded as intangible assets or goodwill. The carrying amounts of intangible assets and goodwill are affected whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. Such events or changes might include a significant decline in market share, a significant decline in revenue, a significant increase in losses or decrease in profits, rapid changes in technology, failure to achieve the benefits of capacity increases and utilization, significant litigation arising out of an acquisition or other matters. Adverse events or changes in circumstances may affect the estimated undiscounted future operating cash flows expected to be derived from intangible assets and goodwill. If at any time we determine that an impairment has occurred, we will be required to reflect the impaired value as a charge, resulting in a reduction in earnings in the quarter such impairment is identified and a corresponding reduction in our net asset value. The potential recognition of impairment in the carrying value, if any, could have a material and adverse effect on our financial condition and results of operations.

AngioScore is subject to pending litigation that may materially harm its intellectual property and its and our business.

AngioScore is the plaintiff in a lawsuit filed against a competing business and a former director of AngioScore who formed the competing business that sells a balloon angioplasty device sold under the name “Chocolate.” The lawsuit alleges infringement of an AngioScore patent and seeks injunctive relief and damages. The defendants have filed counterclaims against AngioScore for, among other things, unfair competition and interference with business relationships. AngioScore has moved to amend its complaint against the former director to allege breach of his fiduciary obligations while serving as a director of AngioScore and against the other defendants to allege aiding and abetting of that breach. The former director has filed claims for indemnification by AngioScore against these claims. The judge or a jury could find that the Chocolate device does not infringe AngioScore’s patent or that the AngioScore patent is invalid, unenforceable, or otherwise subject to limitations. Even if AngioScore prevails in the litigation and the Chocolate device is found to infringe its patent, the court could deny injunctive relief, thereby allowing the former director’s company to continue to manufacture and sell the competing Chocolate device. Regardless of whether AngioScore prevails in the litigation, the former director’s company and other third parties may use the AngioScore discoveries or technologies without paying damages, licensing fees or royalties to AngioScore or us, which could significantly diminish the value of the AngioScore intellectual property. The judge or a jury also could find that AngioScore is liable for the defendants’ counterclaims and require AngioScore to pay damages, attorneys’ fees and costs or impose other relief. In the former director’s indemnification action, AngioScore could be required to advance and ultimately pay the former director’s legal fees and costs defending against the breach of fiduciary duty and other claims, and the fees and costs associated with the dispute regarding indemnification. The cost of this litigation may be material to AngioScore and us. Any of the foregoing could have a material adverse effect on AngioScore’s business and our business.

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Risks Related to Our Outstanding 2.625% Convertible Senior Notes due 2034

Our outstanding 2.625% convertible senior notes due 2034 are effectively subordinated to our secured debt and structurally subordinated to the liabilities of our subsidiaries.

Our outstanding 2.625% convertible senior notes due 2034, which we refer to as our “notes,” are our senior unsecured obligations and rank equal in right of payment with any of our other senior unsecured indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the notes. The notes, however, are effectively subordinated to all of our future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The provisions of the indenture governing the notes do not prohibit us from incurring additional secured indebtedness in the future. Consequently, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding with respect to us, the holders of any secured indebtedness will be entitled to proceed directly against the collateral securing such indebtedness. Therefore, such collateral is not available for satisfaction of any amounts owed under our unsecured indebtedness, including the notes, until such secured indebtedness is satisfied in full.

Our subsidiaries do not guarantee the notes. Accordingly, the notes are also structurally subordinated to all existing or future unsecured and secured liabilities and preferred equity of our subsidiaries. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding with respect to any such subsidiary, we, as a common equity owner of such subsidiary, and, therefore, holders of our debt, including holders of the notes, are subject to the prior claims of such subsidiary’s creditors, including trade creditors and preferred equity holders. As of June 30, 2014, the aggregate amount of liabilities of our subsidiaries was $3.3 million, including trade and other payables and excluding intercompany liabilities, and our subsidiaries had no outstanding preferred equity. The provisions of the indenture governing the notes do not prohibit our subsidiaries from incurring additional indebtedness or issuing preferred equity in the future.

We expect that the trading price of the notes will be significantly affected by changes in the market price of our common stock, the interest rate environment and our credit quality, each of which could change substantially at any time.

We expect that the trading price of the notes will depend on a variety of factors, including, without limitation, the market price of shares of our common stock, the interest rate environment and our credit quality. Each of these factors may be volatile, and may or may not be within our control.

For example, the trading price of the notes will increase with the market price and volatility of shares of our common stock. We cannot, however, predict whether the market price of shares of our common stock will rise or fall or whether the volatility of shares of our common stock will continue at its historical level. In addition, general market conditions, including the level of, and fluctuations in, the market price of stocks generally, may affect the market price and the volatility of shares of our common stock. Moreover, to the extent we can influence the market price or the volatility of shares of our common stock, we may or may not choose to take actions that will increase the market price or the volatility of shares of our common stock. For example, we might determine that it is in our best interest to divest a business segment with volatile earnings to repay a substantial amount of indebtedness, either of which would likely reduce the volatility of shares of our common stock and thereby adversely affect the trading price of the notes.

Likewise, if interest rates, or expected future interest rates, rise during the term of the notes, the yield of the notes will likely decrease, but the value of the convertibility option embedded in the notes will likely increase. The condition of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future, which could have an adverse effect on the trading price of the notes. In recent years, the Federal Reserve has undertaken a policy known as quantitative easing, which involves open market transactions by monetary authorities to stimulate economic activity through the purchase of assets with longer maturities than short‑term government bonds. The Federal Reserve has since articulated that it will take steps to begin a so‑called “tapering” of quantitative easing, depending upon its assessment of the performance of the U.S. economy. Expectations for near‑term tapering of quantitative easing have led to higher long‑term interest rates, and market interest rates may continue to rise if the Federal Reserve adopts, or accelerates the implementation of, a tapering policy. Because interest rates and interest rate expectations are influenced by a wide variety of factors, many of which are beyond our control, we cannot give assurances that changes in interest rates or interest rate expectations will not adversely affect the trading price of the notes.

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Furthermore, the trading price of the notes will likely be significantly affected by any change in our credit quality. Because our credit quality is influenced by a variety of factors, some of which are beyond our control, we cannot guarantee that we will maintain or improve our credit quality during the term of the notes. In addition, because we may choose to take actions that adversely affect our credit quality, such as incurring additional debt, there can be no guarantee that our credit quality will not decline during the term of the notes, which would likely negatively impact the trading price of the notes.

We may not have the cash necessary to satisfy our cash obligations under the notes, and our future debt may contain limitations on our ability to satisfy our cash obligations under the notes.

The notes bear cash interest payable semiannually at a rate of 2.625% per year. The notes mature on June 1, 2034. On each of June 5, 2021, June 5, 2024 and June 5, 2029 and upon a fundamental change, the holders may require us to repurchase some or all of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. We may not have sufficient funds to satisfy such cash obligations and, in such circumstances, may not be able to arrange the necessary financing on favorable terms or at all. In addition, our ability to satisfy such cash obligations may be limited by applicable law or the terms of other instruments governing our indebtedness. Our failure to pay such cash obligations would constitute an event of default under the indenture governing the notes, which in turn could constitute an event of default under any of our outstanding indebtedness, thereby resulting in the acceleration of such indebtedness and required prepayment and further restrict our ability to satisfy such cash obligations.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the notes, depends on our future performance, which is subject to prevailing economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Recent regulatory actions may adversely affect the trading price and liquidity of the notes.

We expect that many investors in, and potential purchasers of, the notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors that employ a convertible arbitrage strategy with respect to convertible debt instruments typically implement that strategy by selling short the equity securities underlying the convertible notes and dynamically adjusting their short position while they hold the notes. Investors may also implement this strategy by entering into swaps on shares of our common stock in lieu of or in addition to short selling shares of our common stock. As a result, any specific rules regulating equity swaps or short selling of securities or other governmental action that interferes with the ability of market participants to effect short sales or equity swaps with respect to the shares of our common stock could adversely affect the ability of investors in, or potential purchasers of, the notes to conduct the convertible arbitrage strategy that we believe they will employ, or seek to employ, with respect to the notes. This could, in turn, adversely affect the trading price and liquidity of the notes.

The SEC and other regulatory and self‑regulatory authorities have implemented various rules and taken certain actions, and may in the future adopt additional rules and take other actions, that may impact those engaging in short selling activity involving equity securities (including shares of our common stock). These rules and actions include Rule 201 of SEC Regulation SHO, the adoption by the Financial Industry Regulatory Authority, Inc. and the national securities exchanges of a “Limit Up‑Limit Down” program, the imposition of market‑wide circuit breakers that halt trading of securities for certain periods following specific market declines, and the implementation of certain regulatory reforms required by the Dodd‑Frank Act. Any governmental or regulatory action that restricts the ability of investors in, or potential purchasers of, the notes to effect short sales of shares of our common stock or enter into swaps on shares of our common stock could adversely affect the trading price and the liquidity of the notes.

In addition, if investors and potential purchasers seeking to employ a convertible arbitrage strategy are unable to borrow or enter into swaps on shares of our common stock, in each case on commercially reasonable terms, the trading price and liquidity of the notes may be adversely affected.

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An active trading market may not develop or be maintained for the notes.

We do not intend to apply to list our outstanding convertible notes on any securities exchange or to arrange for quotation on any automated dealer quotation system. In addition, the liquidity of the trading market in the notes and the market price quoted for the notes may be adversely affected by changes in the overall market for this type of security and by changes in our financial performance or prospects or in the prospects for companies in our industry generally. As a result, an active trading market may not develop or be maintained for the notes. If an active trading market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected. In that case, investors may not be able to sell notes at a particular time or may not be able to sell notes at a favorable price. The liquidity of the trading market, if any, and future trading prices of the notes will depend on many factors, including, among other things, the market price of our common stock, prevailing interest rates, our financial condition, results of operations, business, prospects and credit quality relative to our competitors, the market for similar securities and the overall securities market, and may be adversely affected by unfavorable changes in any of these factors, some of which are beyond our control and others of which would not affect debt that is not convertible into capital stock. Historically, the market for convertible debt has been volatile. Market volatility could materially and adversely affect the notes, regardless of our financial condition, results of operations, business, prospects or credit quality.

The notes have a number of features that may adversely affect their value and trading price, including the lack of financial covenants. Furthermore, volatile or depressed market prices for our common stock are likely to have a similar effect on the trading prices of the notes. It is impossible to assure holders of the notes that the market price of our common stock in the future will not have an adverse effect on the trading prices of the notes.

The market price of our common stock may fluctuate significantly.

The market price of our common stock may be volatile in response to a number of factors, many of which are beyond our control, including our inability to acquire suitable acquisition candidates, actual or anticipated variations in our quarterly financial results, changes in financial estimates for us by securities analysts and announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments. In addition, our financial results may be below the expectations of securities analysts and investors. If this were to occur, the market price of our common stock could decrease, perhaps significantly. Any volatility of or a significant decrease in the market price of our common stock could also negatively affect our ability to make acquisitions using shares of our common stock as consideration.

In addition, the U.S. securities markets have experienced significant price and volume fluctuations. These fluctuations often have been unrelated to the operating performance of companies in these markets. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our operating performance. The holders may not be able to sell the shares of our common stock that they receive upon conversion or their notes at or above the applicable conversion price, or at all. Further, if we were to be the object of securities class action litigation as a result of volatility in our common stock price or for other reasons, it could result in substantial costs and diversion of our management’s attention and resources, which could negatively affect our financial results. In addition, if we decide to settle any class action litigation against us, our decision to settle may not necessarily be related to the merits of the claim.

Holders who receive shares of our common stock upon the conversion of their notes will be subject to the risk of volatile and depressed market prices of our common stock. It is impossible to assure converting holders that the market price of our common stock will not fall in the future.

The notes are not protected by restrictive covenants, which in turn may allow us to engage in a variety of transactions that may impair our ability to fulfill our obligations under the notes.

The indenture governing the notes does not contain any financial covenants and does not restrict us from paying dividends, incurring debt or issuing or repurchasing our other securities. Because the indenture does not contain any covenants or other provisions designed to afford holders of the notes protection in the event of a highly leveraged transaction involving us or in the event of a decline in our credit rating for any reason, including as a result of a takeover, recapitalization, highly leveraged transaction or similar restructuring involving us, except in limited circumstances, we may engage in transactions that may impair our ability to fulfill our obligations under the notes. Other than the repurchase right, the restrictions provided by the merger covenant and our obligation to increase the conversion rate with respect to the notes in certain circumstances upon the

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occurrence of certain events, we generally have no duty to consider the interests of holders of the notes in determining whether to engage in such transactions.

The adjustment to the conversion rate for notes converted in connection with certain make‑whole fundamental change transactions or certain notices of redemption may not adequately compensate holders for the lost option time value of their notes as a result of any such transaction or any such redemption.

If certain transactions that constitute a make‑whole fundamental change occur or upon a notice of redemption on a redemption date on or after June 5, 2018 and prior to June 5, 2021, under certain circumstances and subject to certain limitations, we will increase the conversion rate by a number of additional shares of our common stock. This increased conversion rate will apply only to holders who convert their notes in connection with any such transaction or redemption. The number of additional shares of our common stock will be determined based on the date on which the make‑whole fundamental change transaction becomes effective or the date of the redemption notice, as the case may be, and the price per share of our common stock paid or deemed to be paid in such transaction or on the date of the redemption notice, as the case may be. While the increase in the conversion rate is designed to compensate holders for the lost option time value of the notes as a result of such transaction, the increase in the conversion rate is only an approximation of such lost value and may not adequately compensate holders for such loss. In addition, notwithstanding the foregoing, if the price per share of our common stock paid or deemed to be paid in the transaction or on the date of the redemption notice, as the case may be, is less than $22.39 or in excess of $110.00, subject to adjustment under certain circumstances, the conversion rate will not be increased in connection with such make‑whole fundamental change or redemption. Moreover, in no event will the total number of shares of our common stock issuable upon the conversion of the notes exceed 44.6627 per $1,000 principal amount of notes, subject to adjustment under certain circumstances.

Our obligation to increase the conversion rate upon certain make‑whole fundamental change transactions could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness and equitable remedies.

Upon any redemption of the notes on or after June 5, 2018 and prior to June 5, 2021, or upon any conversion of the notes in connection with a redemption notice for a redemption on or after June 5, 2018 and prior to June 5, 2021, no cash will be added to the redemption price, in the case of a redemption, and while the applicable conversion rate will be increased by additional shares, in the case of a conversion in connection with a redemption notice that the holders receive, they may not be fully compensated for future interest payments or lost time value of their notes.

If the related redemption date would occur on or after June 5, 2018 and prior to June 5, 2021, and if the closing sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the trading day immediately prior to the date we provide the notice of redemption exceeds 130% of the applicable conversion price on each applicable trading day, subject to certain limited exceptions, we may redeem any or all of the notes. The redemption price for the notes to be redeemed on any such redemption date will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If we call any notes for redemption on or after June 5, 2018 and prior to June 5, 2021, the holders may convert their notes at any time until the close of business on the second business day immediately preceding the redemption date. Upon any such redemption or conversion, no cash will be added to the redemption price, in the case of a redemption, and while the applicable conversion rate will be increased by additional shares, in the case of a conversion in connection with a redemption notice that they receive, they may not be fully compensated for future interest payments or lost time value of their notes.

If we call the notes for redemption on or after June 5, 2021, no cash will be added to the applicable redemption price, in the case of a redemption, and no such additional shares will be added to the applicable conversion rate, in the case of a conversion in connection with such a redemption notice. As a result, the holders will not be compensated for any future interest payments that they would have otherwise received or any other lost time value of their notes.

The conversion rate of the notes may not be adjusted for all dilutive events.

The conversion rate of the notes is subject to adjustment for certain events, including, but not limited to, certain dividends on our common stock, the issuance of certain rights, options or warrants to holders of our common stock, subdivisions or

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combinations of our common stock, certain distributions of assets, debt securities, capital stock or cash to holders of our common stock and certain tender or exchange offers,. The conversion rate will not be adjusted for other events, such as a payment of certain dividends on our common stock or an issuance of our common stock for cash, which may adversely affect the trading price of the notes and the market price of our common stock. There can be no assurance that an event will not occur that is adverse to the interests of the holders of the notes and their value, but does not result in an adjustment to the conversion rate.

Holders of the notes are not entitled to any rights with respect to our common stock, but are subject to all changes made with respect to them.

Holders of the notes are not entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but holders of the notes are subject to all changes affecting our common stock. Holders of the notes will be entitled to the rights afforded holders of our common stock only if and when they become or are deemed to become the holder of record of the shares of our common stock delivered to them upon the conversion of their notes. For example, in the event that an amendment is proposed to our certificate of incorporation or bylaws requiring shareholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to a converting noteholder becoming the holder of record of the shares of our common stock deliverable upon the conversion of its notes, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stock.

Some significant restructuring transactions may not constitute fundamental changes, in which case we would not be obligated to offer to repurchase the notes.

Upon the occurrence of specified fundamental changes, the holders of the notes will have the option to require us to repurchase all or any portion of their notes. However, the definition of “fundamental change” is limited to specified corporate events and may not include other events that might adversely affect our financial condition or the value of the notes. For example, events such as leveraged recapitalizations, refinancings, restructurings, or acquisitions initiated by us may not constitute a fundamental change requiring us to repurchase the notes. In the event of any such events, the holders of the notes would not have the right to require us to repurchase the notes, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the trading price of the notes.

Upon conversion of the notes, the holders may receive less valuable consideration than expected because the value of shares of our common stock may decline after they exercise their conversion right.

Under the notes, a converting holder will be exposed to fluctuations in the value of shares of our common stock during the period from the date such holder surrenders notes for conversion until the date we settle our conversion obligation. We will be required to deliver shares of our common stock, together with cash for any fractional share, on the third business day immediately following the relevant conversion date. Accordingly, if the market price of shares of our common stock decreases during this period, the value of the shares that the holders receive will be adversely affected and will be less than the conversion value of the notes on the conversion date.

The issuance of additional shares of our common stock in connection with acquisitions or otherwise will dilute all other stockholdings and could affect the market price of our common stock and, therefore, the trading price of the notes.

As of July 31, 2014 we had 64 million shares of our common stock authorized but unissued and not reserved for issuance under our option and compensation plans or under other convertible or derivative instruments. We may issue all of these shares without any action or approval by our stockholders. We intend to continue to actively pursue acquisitions of other companies and may issue shares of our common stock in connection with these acquisitions. Any shares of our common stock issued in connection with our acquisitions, the exercise of stock options, restricted stock units or otherwise would dilute the notional percentage ownership of holders of the notes. In addition, we may issue a substantial number of shares of our common stock upon conversion of the notes.

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Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the market price of our common stock and the trading price of the notes and our ability to raise funds in new stock offerings.

Sales by us or our stockholders of a substantial number of shares of our common stock in the public markets, or the perception that these sales might occur, could cause the market price of our common stock and the trading price of the notes to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity or equity‑related securities. We may issue shares of our common stock or equity securities senior to our common stock in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of options or for other reasons. No prediction can be made as to the effect, if any, that future sales or issuances of shares of our common stock or other equity securities, or the availability of shares of our common stock or such other equity securities for future sale or issuance, will have on the market price of our common stock or the trading price of the notes.

Conversion of the notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their notes.

To the extent we issue any shares of our common stock upon conversion of the notes, the conversion of some or all of the notes will dilute the ownership interests of existing stockholders, including holders who have received shares of our common stock upon prior conversion of the notes. Any sales in the public market of shares of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.

Provisions of Delaware law, our charter documents and the indenture governing the notes may impede or discourage a takeover, which could cause the market price of our shares to decline.

We are a Delaware corporation, and the anti‑takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, our board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors to create and issue a new series of preferred stock, any stockholder rights plan that we may in the future implement, our staggered board of directors and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock and the trading price of the notes.

The repurchase rights in the notes triggered by the occurrence of a fundamental change could discourage a potential acquirer.

The notes may not be rated or may receive a lower rating than anticipated.

We do not intend to seek a rating on the notes. However, if one or more rating agencies rates the notes and assigns the notes a rating lower than the rating expected by investors, or reduces their rating in the future, the trading price of the notes and the market price of our common stock could be harmed.

In addition, the trading price of the notes is directly affected by market perceptions of our creditworthiness. Consequently, if a credit ratings agency downgrades or withdraws its rating of any of our debt, or puts us on credit watch, the trading price of the notes is likely to decline.

The holders of the notes may be subject to U.S. federal income or withholding taxes if we adjust or fail to adjust the conversion rate in certain circumstances, even if they do not receive any funds.

We will adjust the conversion rate of the notes for stock splits and combinations, stock dividends, cash dividends and certain other events that affect our capital structure. If we adjust the conversion rate, the holders may be treated as having received a constructive distribution from us, resulting in taxable income for U.S. federal income tax purposes, even though they would not

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receive any cash in connection with the conversion rate adjustment and even though they might not exercise their conversion right. In addition, if we fail to adjust (or to adjust adequately) the conversion rate after an event that increases their proportionate interest in us, the holders may be deemed to have received a taxable dividend. Further, if a make‑whole fundamental change occurs on or prior to the maturity date of the notes, and we increase the conversion rate for the notes converted in connection with the make‑whole fundamental change, the holders may be deemed to have received a taxable dividend. Any distribution deemed received by a non‑U.S. holder may be subject to U.S. federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, which may be set off against subsequent payments on the notes (or in certain circumstances, on our common stock).

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Item 6.Exhibits

2.1	Agreement and Plan of Merger, dated May 27, 2014, by and among the Company, SAA Merger Sub, Inc., AngioScore Inc. and Shareholder Representative Services LLC. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on May 27, 2014.
3.1	Amended and Restated Certificate of Incorporation. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 16, 2009.
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 12, 2014.
3.3	Amended and Restated Bylaws. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on April 4, 2011.
4.1	Form of Common Stock Certificate of the Company. Incorporated by reference to exhibit previously filed by the Company with its Amendment No. 2 to the Registration Statement, filed January 24, 1992 (File No. 33-44367).
4.2	Indenture, dated as of June 3, 2014, by and between the Company and Wells Fargo Bank, National Association. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 3, 2014.
4.3	First Supplemental Indenture, dated as of June 3, 2014, by and between the Company and Wells Fargo Bank, National Association. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 3, 2014.
4.4	Form of Global Note (included in Exhibit 4.3). Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 3, 2014.
10.1	Second Amendment to Credit and Security Agreement, dated May 27, 2014, by and between the Company and Wells Fargo Bank, National Association. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on May 27, 2014.
10.2	The Spectranetics Corporation Amended and Restated 2006 Incentive Award Plan, as amended and restated as of June 10, 2014. Incorporated by reference to exhibit previously filed by the Company with its Current Report on Form 8-K filed on June 12, 2014.
10.3*	Agreement of Lease, dated June 8, 2010, by and between Brandin Court Associates, LLC and AngioScore Inc.
10.4*	Agreement of Extension of Lease Term, dated May 17, 2013, by and between Brandin Court Associates, LLC and AngioScore Inc.
31.1*	Rule 13(a)-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2*	Rule 13(a)-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1**	Section 1350 Certification of Chief Executive Officer.
32.2**	Section 1350 Certification of Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document

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101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

** Furnished herewith.

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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.

	The Spectranetics Corporation
	(Registrant)
August 11, 2014		/s/ Scott Drake
		Scott Drake
		President and Chief Executive Officer
August 11, 2014		/s/ Guy A. Childs
		Guy A. Childs
		Chief Financial Officer

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EX-10.3

Exhibit 10.3

STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - GROSS

1. Basic Provisions ("Basic Provisions").

1.1.Parties: This Lease ("Lease"), dated for reference purposes only, June 1, 2010, is made by and between Brandin Court Associates, LLC, a California Limited Liability Company("Lessor") and AngioScore Inc., a Delaware Corporation("Lessee") (collectively the "Parties," or individually a "Party").

1.2.(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 5005 Brandin Court and 5045 - 5055 Brandin Court, located in the City of Fremont County of Alameda, State of California, with zip code 94538("Premises"), and generally described as: Approximately 44.345 square feet located, as shown onExhibit Aattached hereto, which Premises are located in a larger research & development building that contains two additional suites other than the Premises (the "Building"). In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls, or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.)

1.2 (b) Parking: Sixty (60) unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and no reserved vehicle parking spaces ("Reserved Vehicle Parking Spaces"). (Also see paragraph 2.6)

1.3.Term:Three (3) years ("Original Term") commencing on June 1, 2010 ("Commencement Date") and ending May 31, 2013 ("Expiration Date"). (Also see paragraph 3)

1.4.N/A

1.5.Base Rent: $26,607.00 per month ("Base Rent"), payable on the first day of each month commencing June 1, 2010 (Also see Paragraph 4.)

1.6.N/A

1.7.Security Deposit: $30,000.00 ("Security Deposit"). (Also see Paragraph 5.)

1.8.Permitted Use: Management, development and production of medical devices and other legal uses ("Permitted Use") (Also see Paragraph 6.)

1.9.Insuring Party: Lessor is the "Insuring Party."(Also see paragraph 8).

1.10.Real Estate Brokers: N/A

1.11.Guarantor: N/A (Any and all references herein to Guarantor(s) shall be disregarded.)

1.12.Exhibits: Attached hereto are Exhibit A though B, all of which constitute a part of this Lease.

2. Premises, Parking and Common Areas.

2.1.Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the term, at the rental, and upon all of the terms, convents and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental is an approximation which Lessor and Lessee agree is reasonable.

2.2.Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition and that the structural elements of the roof, bearing walls and foundation of the Premises shall be free of material defects. In addition, Lessor shall reseal the roof of the Building on or before the date that is thirty (30) days after the Commencement Date of this Lease.

2.3.Compliance with Covenants, Restrictions and Building Code. Lessor warrants that any improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises or Common Area which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said Warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3 (a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in the Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such actions, at Lessor's expense, as my be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises

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under Applicable Laws (as defined in Paragraph 2.4).

2.4.Acceptance of Premises. Lessee hereby acknowledges that (a) it has satisfied itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; and (b) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease.

2.5.N/A

2.6.Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger auto mobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other the Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)

(a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities.

(b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

(c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law.

2.7.Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers customers, contractors and invitees, including parking area, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas.

2.8.Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

2.9.Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations to the extent consistent with this Lease, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center.

2.10.Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time (without interfering with Lessee's access to or use of the Premises):

(a) To make changes to the Common Areas, including, without limitation, changes in the locations, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways;

(b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remain available;

(c) To designate other land outside the boundaries of the Industrial Center to be part of the Common Areas;

(d) To add additional building and improvements to the Common Areas;

(e) To use Common Areas while engaged in making additional improvements, repairs or alteration to the Industrial Center, or any portion thereof; and

(f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate.

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3. Term.

3.1.Term. The Commencement Date, Expiration Date and Original Date of the Lease are as specified in Paragraph 1.3.

3.2.Existing Lease. Lessor and Lessee acknowledge and agree that Lessee currently occupies the Premises pursuant to the Standard Industrial/Commercial Multi-Tenant Lease - Gross, dated June 8, 2005, between Lessor's sole member, D & J Construction, Inc., and Lessee, as amended by that the First Amendment to Standard Industrial/Commercial Multi-Lessee Lease - Gross, dated October 4, 2007 (as amended, the "Existing Lease"). Lessor and Lessee hereby agree that the term of the Existing Lease, as set forth in Section 1.3 of the Existing Lease, as extended by the First Amendment, shall be terminated as of the Commencement Date of this Lease.

4. Rent.

4.1.Base Rent. Lessee shall pay Base Rent and other charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may for time to time designate in writing to Lessee. Notwithstanding anything to the contrary in this Lease, Lessee shall have no obligation to pay to Lessor, during the Term of this Lease, any operating expenses or real property taxes with respect to the Premises, Common Areas, Building or Industrial Center.

5.Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof, the Security Deposit set forth in Paragraph 1.17 as security for Lessee's faithful performance of Lessee's obligations under this Lease. Notwithstanding the foregoing, Lessor and Lessee acknowledge and agree that Lessor, pursuant to the Existing Lease, is holding a security deposit from Lessee in the amount of $30,000 (the “Existing Security Deposit”). The Existing Security Deposit shall be fully applied to the Security Deposit required to be deposited pursuant to this Paragraph 5. No additional Security Deposit shall be required by Tenant in connection with this Lease. If Lessee fails to pay Base Rent or other charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including reasonable attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the Term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used of applied by Lessor in accordance with the terms of this Lease. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease.

6. Use.

6.1.Permitted Use.

(a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties.

(b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity to the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use.

6.2.Hazardous Substances.

(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability

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of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefore. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use or any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurance as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefore, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements).

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in on under or about the Premises or the Building, other than as previously consented to by Landlord, Lessee shall immediately give Lessor written notice thereof together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system).

(c) Lessee Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits, and reasonable attorneys' and consultants' fees arising out of or involving any Hazardous Substances brought onto the Premises by or for Lessee (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substances under the Premises from areas outside the Industrial Center). Lessee's obligations under this Paragraph 6.2 (c) shall include, but not be limited to, the effects of any decontamination or injury to person, property or the restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of the Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(d) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as of the result of Hazardous Substances on the Premises, Building or Industrial Center prior to the Commencement Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligation, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration of termination of this Lease.

(e) Warranty of Lessor. Lessor represents and warrants that, to the best of its knowledge, on the date of this Lease, there are no Hazardous Substances in, on or under the Premises, other than those used by Lessee pursuant to the Existing Lease.

(f) Acknowledgement by Lessor. Lessor acknowledges and approves the use, at the Premises, of the chemicals noted in the attached Exhibit B provided by Lessee which is made a part of this Lease.

6.3.Lessee's Compliance with Requirements. Except as otherwise provided in this Lease (including Paragraph 2.3), Lessee shall, at Lessee's sole cost and expense, with respect to its operations at the Premises, fully, diligently, and in a timely manner, materially comply, with all "Applicable Requirements," which in tum is used in this Lease to mean all laws rules, regulations, ordinances, directives, covenants, easements and restrictions or record, premise, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and I or consultants relating in any manner to the Premises, now in effect or which may hereafter come into effect; provided however, that Lessor shall, at Lessor's sole cost and expense, be responsible for any structural changes to the Premises, Building or Industrial Center that are required by the Applicable Requirements. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and

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certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint, or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements.

6.4.Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors, consultants and designated representatives, and the holders of any mortgages, deeds, of trust, or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, after reasonable advance notice to Lessee, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all other Applicable Requirements (as defined in Paragraph 6.3). Except in the case of an emergency, Lessee shall be entitled to accompany Lessor and Lessor's agents, employees, contractors and designated representatives, and Lenders during any such inspection and may restrict said persons from access to any "clean rooms" which are then in operational use or any other areas where confidential information or processes might justify Lessee restricting visitors at that time. The costs and expenses of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor for the costs and expenses of such inspections, so long as such inspection is reasonably related to the violation or contamination.

7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.

7.1.Lessee's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 6.1 (Use), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 8.7 (Indemnity), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times maintain in good condition and repair (reasonable wear and tear and damage due to casualty or condemnation excepted) the non-structural portions of the interior of the Premises and will perform routine maintenance of the heating, ventilation and air-conditioning system serving the "clean room" depicted on Exhibit A to this Lease (but not any other heating, ventilation, or air­ conditioning systems), but Lessee shall not be responsible for any items that are Landlord's responsibility pursuant to Paragraph 7.2. In addition, Lessee shall maintain, repair and replace windows, doors and plate glass in the Premises. If Lessee fails to perform Lessee's obligations under this Paragraph 7.1 within ten (10) days following written notice from Lessor, Lessor may enter upon the Premises to perform such obligations on Lessee's behalf, in accordance with Paragraph 6.4 above, and Lessee shall promptly reimburse Lessor for the reasonable cost thereof.

7.2.Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),6.1 (Use), 6.3 (Lessee's Compliance with Applicable Requirements), 7.1 (Lessee's Obligations), 8.7 (Indemnity), 9 (Damage or Destruction) and 14 (Condemnation), Lessor shall keep in good condition and repair (including necessary replacements of) all portions of the Industrial Center and its Common Areas and all structural portions of the Premises, including without limitation the foundations, exterior walls, roof structure and membrane, fire extinguishing system including the fire alarm and/or smoke detection systems and equipment, sprinklers, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and Utility Installations (including heating, ventilation and/or air conditioning systems serving the Premises, Building and Industrial Center, but not including routine maintenance of the heating, ventilation and air conditioning system serving only the "clean room" depicted on Exhibit A). In addition, Lessor, at its sole expense, shall be responsible for any replacement of the heating, ventilation and air conditioning system serving the "clean room" depicted in Exhibit A that becomes necessary during the Lease Tenn. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Paragraph 7.

7.3.Utility Installations, Trade Fixtures, Alterations.

(a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alternations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alternations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b) Consent. Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the root) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the

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outside of the Premises, do not involve puncturing, relocating, or removing the roof of any existing walls, or changing or interfering with the sprinkler or fire detection systems. Any alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications to the extent available. No additional requirements shall apply to any work which is reasonably estimated by Lessee to cost less than $60,000 to construct. For work which is reasonably estimated by Lessee to cost more than $60,000 but not more than $100,000 to construct, Lessee may be required by Lessor to demonstrate to Lessor that it has readily available cash funds in its banking accounts(s) in excess of the estimated cost of the work. For work which is reasonably estimated by the Lessee to cost more than $100,000 to construct, Lessee may be required by Lessor to deposit with Lessor as a temporary additional security deposit for the period of construction of such work, a letter of credit in favor of Lessor (or at Lessee's option, a certificate of deposit) in an amount up to Lessee's reasonably estimated cost of completing the work as security for the lien-free completion of the work. Any such temporary additional security deposit shall be promptly returned by Lessor to Lessee upon the completion of the work and payment for the same by Lessee.

(c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or material men's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises.

7.4.Ownership, Removal, Surrender, and Restoration.

(a) Ownership. All Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. All Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee.

(b) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease Term or any earlier termination date, clean and free of debris and in good condition and repair (reasonable wear and tear and damage due to casualty or condemnation excepted). Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings and equipment, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease.

8. Insurance; Indemnity.

8.1.N/A

8.2.Liability Insurance.

(a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount no less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall neither limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

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(b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

8.3.Property Insurance-Building, Improvements and Rental Value.

(a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including place glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for all Urban Consumers for the city nearest to where the Premises are located.

(b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring loss of the full rent for one year with an extended period of indemnity for an additional 180 days. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rent otherwise payable by Lessee for the next 12 month period.

(c) Lessees Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease.

8.4.Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, main insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force.

8.5.Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at Least B+, V, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders' evidencing renewal thereof, or Lessor may order such insurance charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand.

8.6.Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7.Indemnity. Except to the extent caused by Lessor, and subject to Paragraph 8.6, Lessee shall indemnify, protect, defend and hold harmless Lessor and its agents, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, reasonably attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably

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satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. Except to the extent caused by Lessee, and subject to Paragraph 8.6, Lessor shall indemnify, protect, defend and hold harmless Lessee and its officers, employees, agents and Lenders, from and against any and all claims, damages, liens, judgments, penalties, reasonable attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or management of the Industrial Center by Lessor. If any action or proceeding is brought against Lessee by reason of any of the foregoing matters, Lessor shall upon notice defend the same at Lessor's expense by counsel reasonably satisfactory to Lessee and Lessee shall cooperate with Lessor in such defense. Lessee need not have first paid any such claim in order to be defended or indemnified.

8.8.Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures. whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means or repairing the same in accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.

9. Damage or Destruction.

9.1.Definitions.

(a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than to Lessee-Owned Alterations and Utility Installations, or in other portions of the Industrial Center if there is interference with Lessee's use of the Premises, which can reasonably be repaired in three (3) months or less from the date of the damage or destruction, and the Replacement Cost thereof does not exceed a sum equal to 6 month's Base Rent.

(b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than to Lessee-Owned Alterations and Utility Installations, or in other portions of the Industrial Center if there is interference with Lessee's use of the Premises, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction and/or the Replacement Cost thereof exceeds a sum equal to six (6) month's Base Rent. Lessor shall notify Lessee in writing within thirty (30) days from the date of damage or destruction as to whether or not the damages is Partial or Total.

(c) "Insured Loss" shall mean damage or destruction to the Premises, other than to Lessee-Owned Alterations and Utility Installations and Trade Fixtures, or in other portions of the Industrial Center if there is interference with Lessee's use of the Premises, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved.

(d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation.

(e) Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises or in other portions of the Industrial Center if there is interference with Lessee's use of the Premises.

9.2.Premises Partial Damage - Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request thereof. If Lessor received said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate thirty (30) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial

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Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3.Partial Damage - Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (I) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee" commitment to pay for the repair of such damage totally at Lessee" expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination.

9.4.Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7.

9.5.Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by exercising such option on or before the later of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period, Lessor shall, at Lessor's expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option, this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5.

9.6.Abatement of Rent; Lessee's Remedies.

(a) Abatement. In the event of (i) Premises Total Destruction, (ii) Premises Partial Damages or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason or any such damage, destruction, repair, remediation or restoration.

(b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first.

9.7.Termination by Lessee. Notwithstanding any contrary provision to the Lease, Lessee may terminate the Lease if any Premises Partial Damage or Premises Total Destruction has not been repaired, to Lessee's reasonable satisfaction, within six (6) months following the date of such casualty.

9.8.Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease.

9.9.Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or

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destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith.

10. Real Property Taxes.

10.1.Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center. Notwithstanding anything to the contrary in this Lease, Lessee shall have no obligation to pay to Lessor, during the Term of this Lease, any Real Property Taxes with respect to the Premises, Common Areas, Building or Industrial Center.

10.2.Real Property Tax Definition. As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal governments, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of real property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common.

10.3.Additional Improvements. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request within a reasonable period of time after receiving written notice thereof from the Lessor.

10.4.N/A

10.5.Lessee's Property Taxes. Lessee shall pay prior to delinquency all personal property taxes assessed against and levied upon all personal property of Lessee contained in the Premises or stored within the Industrial Center.

11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, and gas and cleaning of the Premises, together with any taxes thereon.

12. Assignment and Subletting.

12.1.Lessor's Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign" or "assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent, which shall not be unreasonably withheld, conditioned or delayed.

(b) Lessee's remedy for any breach of this Paragraph 12.I by Lessor shall be limited to compensatory damages and/or injunctive relief.

12.2.Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease.

(b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease.

(c) The consent of Lessor to any assignment or subletting shall not constitute consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee.

(d) In the event of any Default of Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any. Lessee agrees to

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provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. Lessor shall deliver a written notice to Lessee granting or withholding consent within ten (10) business days following receipt of the request. Lessor shall provide a reasonably detailed explanation for any withholding of consent.

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing.

12.3.Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, or by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease.

(c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein, with shall not be unreasonably withheld.

(d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.

(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

12.4.Permitted Assignments and Subleases. Notwithstanding anything to the contrary contained in the Lease, Lessee, without Lessor's consent, may sublet the Premises or assign the Lease to: (a) a parent, subsidiary or other affiliate controlling, controlled by or under common control with Lessee; (b) a successor corporation by merger (so long as the successor corporation has a net worth of at least $50 million), or (c) a purchaser of substantially all of Lessee's assets located at the Premises (so long as the purchaser has a net worth of at least $50 million) (collectively "Permitted Transferees"). For purposes of this Lease, (i) a change in control of Lessee so long as, following the change of control, either Lessee or any entity controlling Lessee has a net worth of at least $50 million, (ii) a sale of Lessee's capital stock through any public exchange, or (ii) a public offering of Lessee's capital stock shall not be deemed an assignment, subletting or other transfer of this Lease or the Premises requiring Lessor's consent.

13. Default; Breach; Remedies.

13.1.Default; Breach. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period to cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:

(a) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

(b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or

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any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee.

(c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iii) the subordination or non-subordination of this Lease per Paragraph 30, (iv) the execution of any document requested under Paragraph 42 (easements), or (v) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee.

(d) A default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.l(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a breach of this Lease by Lessee if Lessee commences such cure within such thirty (30) day period and thereafter diligently prosecutes such cure to completion.

(e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days: (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.l(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions.

13.2.Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to Lessor by cashiers check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee provides could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee provides could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceedings the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages.

(b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1941.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Acts of maintenance or preservation, efforts to release the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession.

(c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located.

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(d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.

13.3.N/A

13.4.Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance.

13.5.Breach By Lessor.

(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. Notwithstanding the foregoing, if a breach of this Lease by Lessor results in a substantial interference with Lessee's use of the Premises, a reasonable time shall in no event be more than two (2) business days.

(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure, they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from rent an amount equal to the cost of the cure. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14.Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation", this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten ( 10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair.

15. N/A

16. Estoppel Certificate.

16.1.Each Party (as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement n writing in form similar to the then most current

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"Estoppel Certificate" form published by the AIR Commercial Real Estate Association plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

16.2.If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that" (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

16.3.At Landlord's request, Tenant shall deliver to Landlord a copy, certified by an officer of Tenant as being a true and correct copy, of Tenant's most recent audited financial statement, or, if unaudited, certified by Tenant's chief financial officer as being true, complete and correct in all material respects; provided that, any person or entity viewing such financial statements shall execute a commercially reasonable non-disclosure agreement.

17.Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Upon transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of Lessor's interest in this Lease shall remain liable and responsible with regarding to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6.2 above.

18.Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19.Limitation on Liability. Subject to the provisions of paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers, or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.

20.Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

21.Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be "rent".

22.No Prior or other Agreements This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective.

23.Notices.

23.1.Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee.

23.2.Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery (or refusal thereof) shown on the receipt card. Notices delivered by Untied States Express Mail or overnight courier that guarantees next day delivery shall be deemed given when received. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt

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of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day.

24.Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision of provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not e a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

25.Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and delivery to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto.

26.No Right to Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred twenty-five percent (125%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27.Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28.Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29.Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State of California. Any litigation between the Parties hereto concerning this Lease shall be initiated in Alameda County.

30.Subordination; Attornment; Non-Disturbance.

30.1.Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations or Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall given written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2.Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent.

30.3.Non-Disturbance. Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-disturbance Agreement") from any Lender, which Non-Disturbance Agreement provides that

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Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises.

30.4.Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination attornment and/or non-disturbance agreement as is provided for herein.

30.5.Non-Disturbance Agreement from Current Lender. Lessor shall cause any Lender holding a Security Device encumbering the Industrial Center on the date of this Lease to execute and deliver to Lessee a Non-Disturbance Agreement reasonably acceptable to Lessee within thirty (30) days following the date of this Lease.

31.Attorney's Fees. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to reasonable attorney's fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.

32.Lessor's Access; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises for purposes of inspecting the Premises, making necessary repairs, and showing the Premises to prospective purchasers of the Industrial Center. Any entry by Lessor, its agents or representatives or any other party on the Premises shall (a) require Lessee's advance consent, which shall not be unreasonably withheld and (b) not unreasonably interfere with Lessee's use of the Premises. Lessee may deny or condition admittance to the "clean room" depicted on Exhibit A. Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on the Premises any ordinary "For Sublease" signs.

33.Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent.

34.Signs. Lessee may place signs on the Premises with Lessor's consent, which shall not be unreasonably withheld. Lessee shall be entitled to the signage right elsewhere on the Industrial Center (for example, at street entrances to the Industrial Center) comparable to the of the other tenants. Lessor shall, at it sole cost and expense, not to exceed $2,000.00, update the Industrial Center monument signage in a manner reasonably satisfactory to Lessee, within thirty (30) days of the Commencement Date of this Lease.

35.Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest shall constitute Lessor's election to have such event constitute the termination of such interest.

36.Consents. Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee or Lessor upon receipt or any invoice and supporting documentation therefore. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further other conditions as are then reasonable with reference to the particular mater for which consent is being given.

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37.N/A

38.Quiet Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease.

39.Options.

39.1.Definition. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the term of this Lease to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to leas the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor.

39.2.Options Personal to Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee or by any sublessee or assignee under any sublease or assignment for which Lessor's consent was not required under the terms of this Lease.

39.3.Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised.

39.4.Effect of Default on Options.

(a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured.

(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c) All rights of Lessee under the provisions of an option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.

39.5.Options to Extend Term of Lease and Base Rent during Extended Terms.

(a) Lessee shall have the right to extend the Term of the Lease for two additional periods of three (3) years each (each, an "Extended Term"), beginning upon the expiration of the initial term (or the end of the first Extended Term, in the case of the second Extended Term), on all of the terms and conditions of the Lease, except that Base Rent shall be increased during any Extended Term as described below. If Lessee elects to extend this Lease for the Extended Term, Lessee shall give written notice of its exercise to the Lessor at least sixty (60) days but not more than six (6) months before the expiration of the initial term (or at least sixty (60) days but not more than six (6) months before the expiration of the first Extended Term, in the case of Lessee's exercise of its options for the second Extended Term).

(b) Base Rent for each Extended Term shall be determined by comparing (a) the Consumer Price Index for All Urban Consumers (San Francisco/Oakland/San Jose Area; all items; 1982-1984 equals 100) published by the United States Department of Labor, Bureau of Statistics (the "Index") for the most recent calendar month prior to the first Extended Term) to (b) the Index for the most recent calendar month prior to the first Extended Term (or, in the case of the adjustment for the second Extended Term, for the most recent calendar month prior to the second Extended Term). Base Rend shall be adjusted once at the beginning of each Extended Term in proportion to the increase in the Index over the periods described in the prior sentence.

40.Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees.

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41.Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

42.Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

43.Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease.

44.Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, delivery to Lessor evidence satisfactory to Lessor of such authority.

45.Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

46.Offer. Preparation of this Lease by either Lessor Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

47.Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification.

48.Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor Lessee, the obligations of such multiple parties shall be joint and several responsibility of all persons or entities named herein as such Lessor or Lessee.

18

The preparation and submission of a draft of this Lease by either party to the other shall not constitute an offer, nor shall either party be bound to any terms of this Lease or the entirety of the Lease itself until both parties have signed a final document and an original document signed by both parties has been received by each party. Until such time as the parties are bound as described in the previous sentence, either party is free to terminate negotiations with no obligation to the other.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE AND ON THE DATES SPECIFIED ABOVE THEIR RESPECTIVE SIGNATURES.

Executed at: Fremont, CA on: June 8, 2010 By LESSOR: Brandin Court Associates, LLC, a California limited liability company By: D & J Construction, Inc.,       a California corporation, its Sole Member By: /s/ Tammy Eliseian TAMMY ELISEIAN, President Address: 3390 Seldon Court, Fremont, CA 94538 Executed at: Fremont, CA on: June 8, 2010 By LESSEE: AngioScore Inc., a Delaware corporation By: /s/ James B. Andrews JAMES B. ANDREWS, Senior VP and CFO Address: 5055 Brandin Court, Fremont, CA 94538

19

EX-10.4

Exhibit 10.4

May 17, 2013

Brandin Court Associates, LLC

3390 Seldon Court

Fremont, CA 94538

Attn: Tammy Eliseian, President

Re: AngioScore Inc. Lease at 5055 Brandin Court, Fremont, CA 94538

Exercise of Option to Extend Term

Dear Ms. Eliseian,

As you know, AngioScore Inc. entered into that certain Lease (the "Lease") on June 10, 2010 with Brandin Court Associates, LLC, regarding the facilities at the above address and described in such Lease.

Pursuant to Section 39.5(a) of the Lease (Option to Extend Term of Lease), AngioScore is hereby providing notice to you of the exercise of its right to extend the term of the Lease for an additional three (3) year period following expiration of the Original Term of the Lease on May 31, 2013 .

Per our discussions:

1. We have agreed that the Base Rent for the Extended Term (as adjusted by Section 39.5(b) of the Lease) shall be $28,625.00 per month.

2. You have agreed to re-roof the area above the manufacturing clean room, the manufacturing gowning room, and the storage warehouse in suite 5045-5055. The re-roof area will include the proposed clean room and warehouse expansion areas. The timing will be at a mutually agreeable date during the 2013 calendar year. AngioScore will pay Brand in Court Associates, LLC $5,500 towards the cost of the project.

Please acknowledge your receipt of this letter and agreement to the Extended Term by countersigning this letter below.

Sincerely,

/s/ James B. Andrews

James B. Andrews

Senior Vice President, Finance and CFO

ACKNOWLEDGED AND AGREED:

Brandin Court Associates, LLC,

a California limited liability company

By: D & J Construct ion, Inc.,

a California corporation, its Sole Member

By: /s/ Tammy Eliseian

TAMMY ELISEIAN, President

Date: 5/17/13

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Scott Drake, certify that:

1.I have reviewed this quarterly report on Form 10-Q of The Spectranetics Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 11, 2014
	/s/ Scott Drake
	Scott Drake
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Guy A. Childs, certify that:

1.        I have reviewed this quarterly report on Form 10-Q of The Spectranetics Corporation;

2.        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.        The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.        The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 11, 2014
	/s/ Guy A. Childs
	Guy A. Childs
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of The Spectranetics Corporation (the “Company”) hereby certifies, to such officer's knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 11, 2014	/s/ Scott Drake
	Scott Drake
	Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of The Spectranetics Corporation (the “Company”) hereby certifies, to such officer's knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 11, 2014	/s/ Guy A. Childs
	Guy A. Childs
	Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

XML

Segment Reporting (Segment Reporting) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Segments, Geographical Areas [Abstract]
Operating (loss) income	$ (5,829)	$ (678)	$ (11,347)	$ (2,183)
Assets	476,306		476,306		217,157
U.S. Medical
Segments, Geographical Areas [Abstract]
Operating (loss) income	(6,205)	(625)	(11,587)	(2,546)
Assets	441,813		441,813		198,639
International Medical
Segments, Geographical Areas [Abstract]
Operating (loss) income	376	(53)	240	363
Assets	$ 34,493		$ 34,493		$ 18,518

XML

Stock-Based Compensation (Narrative) (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated share-based compensation expense	$ 1,300,000	$ 800,000	$ 2,600,000	$ 1,600,000
Unrecognized compensation expense	23,700,000		23,700,000
Weighted-average recognition period			3 years 3 months 18 days
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period			4 years
Award expiration period			10 years
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period			1 year
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period			4 years
Performance Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period			3 years
Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share price	$ 22.88		$ 22.88
Estimated forfeiture rate	12.50%		12.50%
Common Stock | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average grant date fair value of options	$ 13.42	$ 11.04	$ 13.64	$ 10.21
In-the-money options exercisable amount	1,500,000		1,500,000
Total intrinsic value of options exercised			8,200,000	3,600,000
Expected term	5 years 9 months 4 days	5 years 10 months 6 days	5 years 9 months 4 days	5 years 10 months 10 days
Common Stock | Spectranetics Corporation 2006 Incentive Award Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available for future issuance	3,500,000		3,500,000
Common Stock | ESPP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available for future issuance	300,000		300,000
Allocated share-based compensation expense	144,000	107,000	266,000	196,000
Number of shares authorized	700,000		700,000
Maximum number of shares per employee			2,500
Maximum fair value per employee			25,000
Purchase price of common stock, percent			85.00%
Expected term			6 months
Minimum | Performance Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Target Payout Opportunities, Percent	0.00%		0.00%
Unrecognized compensation expense	11,900,000		11,900,000
Maximum | Performance Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Target Payout Opportunities, Percent	250.00%		250.00%
Unrecognized compensation expense	$ 41,200,000		$ 41,200,000

XML

Business Combination (Pro Forma Revenue) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Business Combinations [Abstract]
Revenue	$ 60,089	$ 53,143	$ 113,573	$ 103,928
Net loss	$ (8,995)	$ (10,593)	$ (22,164)	$ (17,523)

XML

Segment Reporting (Narrative) (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Segment Reporting Information [Line Items]
Number of Lines of Business			1
Number of Reportable Segments			2
Number of Product Lines			2
Sales Revenue | Customer Concentration Risk
Segment Reporting Information [Line Items]
Segment Reporting, Number of Major Customers			0	0
Sales Revenue | Geographic Concentration Risk
Segment Reporting Information [Line Items]
Segment Reporting, Number of Major Customers			0	0
U.S. Medical
Segment Reporting Information [Line Items]
Segment Reporting Information, Intersegment Revenue	$ 2.4	$ 2.2	$ 4.1	$ 3.8

XML

Composition of Certain Financial Statement Items (Notes)

6 Months Ended

Jun. 30, 2014

Balance Sheet Related Disclosures [Abstract]

Composition of Certain Financial Statement Items

COMPOSITION OF CERTAIN FINANCIAL STATEMENT ITEMS

Inventories

Inventories, net, consisted of the following (in thousands): 

	June 30, 2014		December 31, 2013
Raw materials	$	7,893	$	4,132
Work in process	4,481		1,696
Finished goods	13,605		3,648
	$	25,979	$	9,476

Inventories at June 30, 2014 included $14.9 million of inventories acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

Property and Equipment

Property and equipment, net, consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Equipment held for rental or loan	$	44,342		$	42,949
Manufacturing equipment and computers	29,845			24,827
Leasehold improvements	6,536			5,697
Furniture and fixtures	3,257			2,446
Building and improvements	1,276			1,276
Land	270			270
Less: accumulated depreciation and amortization	(54,992		)	(49,184		)
	$	30,534		$	28,281

Property and equipment at June 30, 2014 included $0.7 million of property and equipment acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Accrued payroll and employee-related expenses	$	12,709		$	11,007
Accrued transaction costs	2,050			—
Accrued sales, income, and excise taxes	1,522			1,659
Accrued clinical study expense	1,239			872
Deferred rent	1,172			1,204
Accrued legal costs	1,056			134
Employee stock purchase plan liability	900			801
Accrued royalties	669			571
Contingent consideration, current portion	500			500
Accrued interest on convertible notes	453			—
Other accrued expenses	5,483			3,286
Less: long-term portion	(1,195		)	(1,215		)
Accrued liabilities: current portion	$	26,558		$	18,819

Accrued liabilities at June 30, 2014 included $3.3 million of accrued liabilities acquired from AngioScore. See Note 2, “Business Combination,” for further discussion.

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Composition of Certain Financial Statement Items (Accrued Liabilities) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Accrued Liabilities, Current [Abstract]
Accrued payroll and employee-related expenses	$ 12,709	$ 11,007
Accrued transaction costs	2,050	0
Accrued sales, income, and excise taxes	1,522	1,659
Accrued clinical study expense	1,239	872
Deferred rent	1,172	1,204
Accrued legal costs	1,056	134
Employee stock purchase plan liability	900	801
Accrued royalties	669	571
Contingent consideration, current portion	500	500
Accrued interest on convertible notes	453	0
Other accrued expenses	5,483	3,286
Less: long-term portion	(1,195)	(1,215)
Accrued liabilities: current portion	$ 26,558	$ 18,819

XML

Composition of Certain Financial Statement Items (Property and Equipment) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Less: accumulated depreciation and amortization	$ (54,992)	$ (49,184)
Property and equipment, net	30,534	28,281
Equipment held for rental or loan
Property, Plant and Equipment [Line Items]
Property and equipment, gross	44,342	42,949
Manufacturing equipment and computers
Property, Plant and Equipment [Line Items]
Property and equipment, gross	29,845	24,827
Leasehold improvements
Property, Plant and Equipment [Line Items]
Property and equipment, gross	6,536	5,697
Furniture and fixtures
Property, Plant and Equipment [Line Items]
Property and equipment, gross	3,257	2,446
Building and improvements
Property, Plant and Equipment [Line Items]
Property and equipment, gross	1,276	1,276
Land
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 270	$ 270

XML

Composition of Certain Financial Statement Items (Business Acquisition) (Details) (AngioScore, USD $)	Jun. 30, 2014
AngioScore
Business Acquisition [Line Items]
Inventories	$ 14,884,000
Accrued Liabilities Acquired	3,300,000
Property and equipment, net	$ 712,000

XML

Goodwill and Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Goodwill [Roll Forward]
Balance as of December 31, 2013	$ 14,846
Additional goodwill related to AngioScore acquisition (Note 2)	133,649
Balance as of June 30, 2014	148,495
U.S. Medical
Goodwill [Roll Forward]
Balance as of December 31, 2013	8,165
Additional goodwill related to AngioScore acquisition (Note 2)	118,948
Balance as of June 30, 2014	127,113
International Medical
Goodwill [Roll Forward]
Balance as of December 31, 2013	6,681
Additional goodwill related to AngioScore acquisition (Note 2)	14,701
Balance as of June 30, 2014	$ 21,382

XML

Convertible Senior Notes (Notes)

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

Convertible Senior Notes

CONVERTIBLE SENIOR NOTES

On June 3, 2014, the Company closed the sale of $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (the “Notes”) pursuant to an underwriting agreement dated May 28, 2014. Interest will be paid semi-annually in arrears on December 1 and June 1 of each year, commencing December 1, 2014. The Notes will mature on June 1, 2034, unless earlier converted, redeemed, or repurchased in accordance with the terms of the Notes. The initial conversion rate of the Notes is 31.9020 shares of the Company’s common stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $31.35 per share). The conversion rate will be subject to adjustment upon the occurrence of certain events specified in the indenture governing the Notes. Holders may surrender their Notes for conversion at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date. On or after June 5, 2018 and prior to June 5, 2021, the Company may redeem any or all of the Notes in cash if the closing price of the Company’s common stock exceeds 130% of the conversion price then in effect for a specified number of days, and on or after June 5, 2021, the Company may redeem the Notes without any such condition.

Holders of the Notes may require the Company to repurchase all or a portion of their Notes on each of June 5, 2021, June 5, 2024 and June 5, 2029, or following a fundamental change (as defined in the indenture governing the Notes), in each case, at a repurchase price in cash equal to 100% of the principal amount of the Notes being repurchased plus accrued and unpaid interest to, but excluding, the date of repurchase.

The Notes are subject to customary events of default, which may result in the acceleration of the maturity of the Notes.

The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with any of the Company’s unsecured indebtedness that is not so subordinated, are effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.

The Company received $222.5 million from the issuance of the Notes, net of $7.5 million of debt issuance costs incurred. The debt issuance costs are being amortized over a seven year period using the effective interest method. The Company used all of the net proceeds to fund the acquisition of AngioScore (see Note 2).

XML

Goodwill and Intangible Assets (Intangible Assets) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
Patents	$ 530		$ 530
Less: accumulated amortization	(1,704)		(1,431)
Finite-Lived Intangible Assets, Net	112,816		5,609
AngioScore | Technology
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	73,510		0
AngioScore | IPR&D
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	3,750		0
AngioScore | Customer relationships
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	23,320		0
AngioScore | Distributor relationships
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	1,940		0
AngioScore | Trademark and trade names
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	4,380		0
AngioScore | Non-compete agreement
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	580		0
Upstream | Technology
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	6,310	[1]	6,310	[1]
Upstream | Non-compete agreement
Finite-Lived Intangible Assets [Line Items]
Acquired Intangible Assets	$ 200	[1]	$ 200	[1]

[1] In January 2013, the Company acquired certain product lines from Upstream Peripheral Technologies, Ltd. As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements.

XML

Income Tax Disclosure (Details)	6 Months Ended
	Jun. 30, 2014
Income Tax Disclosure [Abstract]
Goodwill Amortization Period, Tax Purposes	15 years

XML

Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 107,027	$ 128,395
Trade accounts receivable, less allowance for doubtful accounts and sales returns of $1,094 and $782, respectively	38,045	26,766
Inventories, net	25,979	9,476
Deferred income taxes, net	445	445
Prepaid expenses and other current assets	4,193	2,748
Total current assets	175,689	167,830
Property and equipment, net	30,534	28,281
Debt issuance costs, net	7,421	0
Goodwill	148,495	14,846
Other intangible assets, net	112,816	5,609
Other assets	1,351	591
Total assets	476,306	217,157
Current liabilities:
Accounts payable	4,639	2,587
Accrued liabilities	26,558	18,819
Deferred revenue	1,951	1,819
Total current liabilities	33,148	23,225
Convertible senior notes	230,000	0
Accrued liabilities, net of current portion	1,195	1,215
Contingent consideration, net of current portion	27,316	1,352
Deferred income taxes	1,534	1,365
Total liabilities	293,193	27,157
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued	0	0
Common stock, $.001 par value; authorized 120,000,000 and 60,000,000 shares, respectively; issued and outstanding 41,695,290 and 41,230,286 shares, respectively	41	41
Additional paid-in capital	289,895	284,494
Accumulated other comprehensive loss	(367)	(305)
Accumulated deficit	(106,456)	(94,230)
Total stockholders’ equity	183,113	190,000
Total liabilities and stockholders’ equity	$ 476,306	$ 217,157

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General (Notes)

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

General

GENERAL

The accompanying condensed consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly-owned Dutch subsidiary, Spectranetics International, B.V., including the accounts of the wholly-owned subsidiaries of Spectranetics International, B.V.: Spectranetics II B.V., Spectranetics Deutschland GmbH, Spectranetics Austria GmbH, Spectranetics France SARL, Spectranetics Switzerland GmbH, and Spectranetics Denmark ApS. The condensed consolidated balance sheet as of June 30, 2014 also includes the accounts of The Spectranetics Corporation’s wholly-owned subsidiary, AngioScore Inc. (“AngioScore”), which was acquired on that date. The aforementioned entities are collectively referred to as the “Company.” All intercompany balances and transactions have been eliminated in consolidation.

The Company develops, manufactures, markets, and distributes single-use medical devices used in minimally invasive procedures within the cardiovascular system. The Company’s Vascular Intervention products include a range of laser catheters to ablate blockages in arteries above and below the knee (peripheral atherectomy); support catheters to facilitate crossing of peripheral and coronary arterial blockages, retrograde access and guidewire retrieval devices used in the treatment of peripheral arterial blockages, including chronic total occlusions (crossing solutions); aspiration and cardiac laser catheters to treat blockages in the heart (coronary atherectomy and thrombectomy); and effective June 30, 2014, AngioSculpt^® scoring balloons used in both peripheral and coronary procedures. The Company’s Lead Management products include excimer laser sheaths, dilator sheaths, and cardiac lead management accessories for the removal of pacemaker and defibrillator cardiac leads. The Company also sells, rents, and services its CVX-300^® laser systems.

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management must make certain estimates, judgments, and assumptions based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, intangible assets and goodwill, valuation allowances and reserves for receivables, inventories, and deferred income tax assets, contingent consideration liabilities for acquisitions, stock-based compensation expense, estimated clinical trial expenses, accrued estimates for incurred but not reported claims under partially self-insured employee health benefit programs, and loss contingencies, including those related to litigation. Actual results could differ from those estimates.

The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments necessary for a fair presentation of the assets, liabilities and results of operations for the interim periods presented have been reflected herein and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current period presentation.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU 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. The ASU will be effective for the Company beginning January 1, 2017, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its results of operations, financial position, and consolidated financial statements.

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Stock-Based Compensation (Stock Option Activity) (Details) (Common Stock, USD $)	6 Months Ended
	Jun. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Options outstanding at January 1, 2014 (shares)	3,153,234
Granted (shares)	230,685
Exercised (shares)	(373,022)
Canceled (shares)	(44,245)
Options outstanding at June 30, 2014 (shares)	2,966,652
Options exercisable at June 30, 2014	1,540,103
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Options outstanding at January 1, 2014, weighted average exercise price (in dollars per share)	$ 9.72
Granted, weighted average exercise price (in dollars per share)	$ 23.67
Exercised, weighted average exercise price (in dollars per share)	$ 5.87
Canceled, weighted average exercise price (in dollars per share)	$ 12.36
Options outstanding at June 30, 2014, weighted average exercise price (in dollars per share)	$ 11.25
Options exercisable at June 30, 2014, weighted average exercise price (in dollars per share)	$ 7.15
Options outstanding at June 30, 2014, weighted average remaining contractual term (in years)	7 years 1 month 2 days
Options exercisable at June 30, 2014, weighted average remaining contractual term (in years)	5 years 7 months 10 days
Options outstanding at June 30, 2014, aggregate intrinsic value	$ 34,716,127
Options exercisable at June 30, 2014, aggregate intrinsic value	24,219,975
Restricted Stock
Number of Shares [Roll Forward]
Outstanding at January 1, 2014 (shares)	22,190
Awarded (shares)	26,802
Vested/Released (shares)	(22,190)
Outstanding at June 30, 2014 (shares)	26,802
Weighted Average Grant Date Fair Value [Abstract]
Awards outstanding at January 1, 2014 (in dollars per share)	$ 18.93
Awarded (in dollars per share)	$ 22.39
Vested/Released (in dollars per share)	$ 18.93
Awards outstanding at June 30, 2014 (in dollars per share)	$ 22.39
Restricted Stock Units (RSUs)
Number of Shares [Roll Forward]
Outstanding at January 1, 2014 (shares)	158,622
Awarded (shares)	89,458
Vested/Released (shares)	(25,450)
Forfeited (shares)	(11,113)
Outstanding at June 30, 2014 (shares)	211,517
Weighted Average Purchase Price [Roll Forward]
Restricted stock units outstanding at January 1, 2014 (in dollars per share)	$ 0.00
Awarded (in dollars per share)	$ 0.00
Vested/Released (in dollars per share)	$ 0.00
Forfeited (in dollars per share)	$ 0.00
Restricted stock units outstanding at June 30, 2014 (in dollars per share)	$ 0.00
Weighted Avg. Remaining Contractual Term (In Years)	1 year 8 months 9 days
Equity Other than Options, Exercisable, Intrinsic Value	$ 4,839,509
Performance Stock Units
Number of Shares [Roll Forward]
Outstanding at January 1, 2014 (shares)	0
Awarded (shares)	500,985
Vested/Released (shares)	0
Outstanding at June 30, 2014 (shares)	500,985
Weighted Average Grant Date Fair Value [Abstract]
Awards outstanding at January 1, 2014 (in dollars per share)	$ 0.00
Awarded (in dollars per share)	$ 23.43
Vested/Released (in dollars per share)	$ 0.00
Awards outstanding at June 30, 2014 (in dollars per share)	$ 23.43

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Business Combination (Narrative) (Details) (USD $)	3 Months Ended		6 Months Ended			6 Months Ended					6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Jun. 30, 2014 Minimum	Jun. 30, 2014 Maximum	Jun. 30, 2014 Convertible Debt	Jun. 03, 2014 Convertible Debt	Jun. 30, 2014 Convertible Debt Senior Convertible Notes	Jun. 30, 2014 AngioScore	Jun. 30, 2014 AngioScore Domestic Tax Authority	Jun. 30, 2014 AngioScore Revenue Milestone	Jun. 30, 2014 AngioScore European CE Mark Approval for Coronary Arteries	Jun. 30, 2014 AngioScore European CE Mark Approval for Peripheral Arteries	Jun. 30, 2014 AngioScore US Investigational Device Exemption
Business Acquisition [Line Items]
Cash payments to acquire business											$ 230,000,000
Sales ratio multiple											2.0
Sales ratio multiple, threshold											10.00%
Contingent consideration arrangements, high end of potential range													50,000,000	5,000,000	5,000,000	15,000,000
Convertible senior notes	230,000,000		230,000,000		0				230,000,000	230,000,000
Due diligence, transaction, and integration costs	3,958,000	0	4,229,000	0
Fair value of contingent consideration											25,886,000
Discount Rate						9.00%	19.00%
Stated interest rate								2.625%	2.625%
Operating Loss Carryforwards												$ 87,000,000

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Net Loss Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, Amount			2,300,000	1,900,000
Earnings Per Share Reconciliation [Abstract]
Net loss	$ (6,565)	$ (728)	$ (12,226)	$ (1,687)
Historical common shares outstanding at beginning of period					41,535,010	41,208,096	35,053,311	34,839,131
Weighted average common shares issued	68,333	3,715,658	271,230	2,035,649
Weighted average common shares outstanding — basic	41,603,343	38,768,969	41,479,326	36,874,780
Effect of dilution — stock options	0	0	0	0
Weighted average common shares outstanding — diluted	41,603,343	38,768,969	41,479,326	36,874,780
Net loss per share — basic and diluted	$ (0.16)	$ (0.02)	$ (0.29)	$ (0.05)
Convertible Debt Securities
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share, Amount			7,300,000

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Business Combination (Schedule of Assets Acquired and Liabilities Assumed) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Business Acquisition [Line Items]
Goodwill	$ 148,495	$ 14,846
Customer relationships
Business Acquisition [Line Items]
Weighted average useful life	10 years
Distributor relationships
Business Acquisition [Line Items]
Weighted average useful life	2 years
AngioScore
Business Acquisition [Line Items]
Accounts receivable	8,461
Inventories	14,884
Prepaids and other current assets	411
Property and equipment, net	712
Other long term assets	30
Total tangible assets acquired	24,498
Less: liabilities assumed	5,435
Net tangible assets less liabilities	19,063
Goodwill	133,649
Total purchase price	260,192
AngioScore | Technology
Business Acquisition [Line Items]
Acquired Intangible Assets	73,510	0
Weighted average useful life	10 years
AngioScore | IPR&D
Business Acquisition [Line Items]
Acquired Intangible Assets	3,750	0
AngioScore | Customer relationships
Business Acquisition [Line Items]
Acquired Intangible Assets	23,320	0
AngioScore | Distributor relationships
Business Acquisition [Line Items]
Acquired Intangible Assets	1,940	0
AngioScore | Trademark and trade names
Business Acquisition [Line Items]
Acquired Intangible Assets	4,380	0
Weighted average useful life	6 years
AngioScore | Non-compete agreement
Business Acquisition [Line Items]
Acquired Intangible Assets	$ 580	$ 0
Weighted average useful life	2 years

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Business Combination (Notes)

6 Months Ended

Jun. 30, 2014

Business Combinations [Abstract]

Business Combination

BUSINESS COMBINATION

On June 30, 2014 (the “Acquisition Date”), the Company completed its acquisition of AngioScore, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of May 27, 2014. AngioScore develops, manufactures and markets the AngioSculpt Scoring Balloon Catheter for the treatment of coronary artery disease and peripheral artery disease. The primary reasons for the AngioScore acquisition are to extend the Company’s existing product lines, leverage its current customer call points, expand its markets and sales coverage, increase revenue, and drive operating efficiencies.

Under the terms of the Merger Agreement, the Company paid the former AngioScore stockholders merger consideration of $230 million in cash, plus certain adjustments relating to working capital set forth in the Merger Agreement, on the Acquisition Date. The Company also has agreed to pay additional contingent merger consideration as follows:

(a) annual cash payments for net sales of AngioScore products occurring in calendar years 2015, 2016 and 2017 equal to a multiple of 2.0 times each year’s annual increase in net sales in excess of 10% over the highest preceding year net sales, provided that the year-over-year change in net sales is positive and that such payments in the aggregate will not exceed $50 million (“Revenue Payments”);

(b) the following payments related to AngioScore’s Drug-Coated AngioSculpt product:

(i) a cash payment of $5 million if the product receives European CE mark approval for use in the coronary arteries by December 31, 2016;

(ii) a cash payment of $5 million if the product receives European CE mark approval for use in the peripheral arteries by December 31, 2016; and

(iii) a cash payment of $15 million if the product receives U.S. investigational device exemption approval for use in the coronary or peripheral arteries by December 31, 2016.

The cash consideration was financed in part using the net proceeds from the Company’s public offering of $230 million aggregate principal amount of 2.625% Convertible Senior Notes due 2034 (see Note 3).

The Company accounted for the acquisition as a business combination and recorded the assets acquired, liabilities assumed, and the estimated future consideration obligations at their respective fair values as of the Acquisition Date. The components of the aggregate preliminary purchase price for the acquisition were as follows (in thousands):

Cash, including working capital adjustment	$	234,306
Fair value of contingent consideration	25,886
Total purchase price	$	260,192

The Company recorded total contingent consideration liabilities at their fair value of $25.9 million. The Company used a probability-weighted approach to estimate the achievement of the future revenue and regulatory approval milestones, and discount rates ranging from 9% to 19%. The selection of the discount rates reflects the inherent risks of achieving the respective milestones. The working capital adjustment represents the difference between actual working capital acquired as of June 30, 2014 and historical average working capital as defined in the Merger Agreement.

Net Assets Acquired

The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the preliminary allocation of assets acquired and liabilities assumed as of the Acquisition Date (in thousands):

	Allocation of purchase price		Amortization period (in years)
Accounts receivable	$	8,461
Inventories	14,884
Prepaids and other current assets	411
Property and equipment, net	712
Other long term assets	30
Total tangible assets acquired	24,498
Less: liabilities assumed	5,435
Net tangible assets less liabilities	$	19,063
Intangible assets:
Technology	73,510		10
In-process research and development (“IPR&D”)	3,750
Customer relationships	23,320		10
Distributor relationships	1,940		2
Trademark and trade names	4,380		6
Non-compete agreements	580		2
Goodwill	133,649
Total purchase price	$	260,192

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the Acquisition Date. The accounting for the acquisition is preliminary due to the ongoing analysis of the tangible and intangible assets acquired. Upon completion of this analysis, the Company may record adjustments to the estimated amounts recorded as further information about conditions existing at the Acquisition Date becomes available. The final fair value determinations may be different than those reflected in our condensed consolidated financial statements at June 30, 2014.

We determined the fair value of the inventory based on its estimated selling price less cost to sell and normal profit margin.

The fair value of the technology intangible assets was determined based upon the present value of expected future cash flows, utilizing a risk-adjusted discount rate. The customer and distributor relationships and the non-compete agreements were valued based on a “with and without” approach. The “with and without” method measures an asset value by estimating the difference in cash flows generated by the business with the asset in-use versus without the asset. The difference in cash flows is attributable to incremental earnings or cost savings associated with the asset. The trademark and trade names were valued based on a “relief from royalty” approach. The “relief from royalty” method is based on the premise that a third party would be willing to pay a royalty to use the trade name/trademark asset owned by the subject company.  The projected royalties are converted into their present value equivalents through the application of a risk adjusted discount rate. These fair value measurements are based on significant unobservable inputs, based on management’s estimates and assumptions.

The IPR&D asset, which is accounted for as an indefinite-lived intangible asset until completion of the project, represents an estimate of the fair value of in-process technology related to AngioScore’s Drug-Coated AngioSculpt product line. The estimated fair value was determined using the multi-period excess earnings method, a variation of the income approach.

The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the benefits the Company expects to realize by expanding its product offerings and addressable markets, thereby contributing to an expanded revenue base. The Company will also substantially increase the size of its direct sales organization, while realizing cost synergies associated with eliminating redundant positions, primarily in selling, general and administrative functions. Goodwill was allocated to the Company’s operating segments based on the relative expected benefits as disclosed in Note 5, “Goodwill and Intangible Assets.”

The assets and liabilities assumed in the acquisition have been included in the Company’s condensed consolidated balance sheet as of June 30, 2014. The results of AngioScore operations will be included in the Company’s condensed consolidated financial statements for periods beginning on and after July 1, 2014. The Company is currently evaluating the impact of the AngioScore acquisition on its reportable operating segments.

Acquisition Costs

Acquisition-related expenses were $4.0 million and $4.2 million for the three and six months ended June 30, 2014, respectively, and primarily included investment banking, accounting, consulting, and legal fees. These costs are included within the “Due diligence, transaction, and integration costs” line of the condensed consolidated statements of operations.

Taxes

As part of the AngioScore acquisition, the Company acquired AngioScore’s net deferred tax assets and liabilities, including net operating loss carryforwards estimated at $87 million for federal purposes at June 30, 2014. The Company is currently evaluating the realizability of the net deferred tax assets acquired, net of the deferred tax liabilities that arise from the recording of intangible assets as part of the purchase price allocation. Based on its preliminary purchase price allocation, the Company does not expect the net deferred tax asset/liability resulting from the acquisition to be significant.

Unaudited Supplemental Pro Forma Financial Information

The unaudited pro forma results presented below include the combined results of both entities as if the acquisition had been consummated as of January 1, 2013. Certain pro forma adjustments have been made to reflect the impact of the purchase transaction, primarily consisting of amortization of intangible assets with determinable lives and interest expense on long-term debt. In addition, certain historical expenses, such as warrant expense and interest expense associated with debt that was immediately repaid, were eliminated from these pro-forma results. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it indicative of future operating results. The pro forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2014			2013			2014			2013
Revenue	$	60,089		$	53,143		$	113,573		$	103,928
Net loss	$	(8,995	)	$	(10,593	)	$	(22,164	)	$	(17,523	)

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Trade accounts receivable, less allowance for doubtful accounts and sales returns	$ 1,094	$ 782
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	120,000,000	60,000,000
Common stock, shares issued	41,695,290	41,230,286
Common stock, shares outstanding	41,695,290	41,230,286

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Composition of Certain Financial Statement Items (Tables)

6 Months Ended

Jun. 30, 2014

Balance Sheet Related Disclosures [Abstract]

Schedule of Inventory, Current

Inventories, net, consisted of the following (in thousands): 

	June 30, 2014		December 31, 2013
Raw materials	$	7,893	$	4,132
Work in process	4,481		1,696
Finished goods	13,605		3,648
	$	25,979	$	9,476

Property, Plant and Equipment

Property and equipment, net, consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Equipment held for rental or loan	$	44,342		$	42,949
Manufacturing equipment and computers	29,845			24,827
Leasehold improvements	6,536			5,697
Furniture and fixtures	3,257			2,446
Building and improvements	1,276			1,276
Land	270			270
Less: accumulated depreciation and amortization	(54,992		)	(49,184		)
	$	30,534		$	28,281

Schedule of Accrued Liabilities

Accrued liabilities consisted of the following (in thousands): 

	June 30, 2014			December 31, 2013
Accrued payroll and employee-related expenses	$	12,709		$	11,007
Accrued transaction costs	2,050			—
Accrued sales, income, and excise taxes	1,522			1,659
Accrued clinical study expense	1,239			872
Deferred rent	1,172			1,204
Accrued legal costs	1,056			134
Employee stock purchase plan liability	900			801
Accrued royalties	669			571
Contingent consideration, current portion	500			500
Accrued interest on convertible notes	453			—
Other accrued expenses	5,483			3,286
Less: long-term portion	(1,195		)	(1,215		)
Accrued liabilities: current portion	$	26,558		$	18,819

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 31, 2014
Entity Information [Line Items]
Entity Registrant Name	SPECTRANETICS CORP
Entity Central Index Key	0000789132
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		41,838,125

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Goodwill

The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2014 was as follows (in thousands):

	U.S. Medical		International Medical		Total
Balance as of December 31, 2013	$	8,165	$	6,681	$	14,846
Additional goodwill related to AngioScore acquisition (Note 2)	118,948		14,701		133,649
Balance as of June 30, 2014	$	127,113	$	21,382	$	148,495

Schedule of Acquired Intangible Assets

Acquired intangible assets consisted of the following (in thousands):

	June 30, 2014			December 31, 2013
Acquired as part of AngioScore acquisition (Note 2):
Technology	$	73,510		$	—
IPR&D	3,750			—
Customer relationships	23,320			—
Distributor relationships	1,940			—
Trademark and trade names	4,380			—
Non-compete agreements	580			—
Acquired as part of Upstream acquisition (1)
Technology	6,310			6,310
Non-compete agreement	200			200
Patents	530			530
Less: accumulated amortization	(1,704		)	(1,431		)
	$	112,816		$	5,609

___________________

(1) In January 2013, the Company acquired certain product lines from Upstream Peripheral Technologies, Ltd. As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements.

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Condensed Consolidated Statements of Operations and Comprehensive Loss (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenue	$ 43,555	$ 39,453	$ 83,169	$ 77,128
Cost of products sold	10,506	10,625	20,840	20,944
Gross profit	33,049	28,828	62,329	56,184
Operating expenses:
Selling, general and administrative	28,452	23,065	56,192	45,866
Research, development and other technology	5,704	5,484	11,791	10,656
Due diligence, transaction, and integration costs	3,958	0	4,229	0
Medical device excise tax	588	509	1,113	1,031
Intangible asset amortization	136	246	273	410
Contingent consideration expense	40	202	78	404
Total operating expenses	38,878	29,506	73,676	58,367
Operating loss	(5,829)	(678)	(11,347)	(2,183)
Other income (expense):
Interest (expense) income, net	(489)	6	(488)	2
Foreign currency transaction (loss) gain	(1)	0	2	(25)
Other income, net	0	8	0	8
Total other (expense) income	(490)	14	(486)	(15)
Loss before income taxes	(6,319)	(664)	(11,833)	(2,198)
Income tax expense (benefit)	246	64	393	(511)
Net loss	(6,565)	(728)	(12,226)	(1,687)
Net loss per share —
Basic and diluted (in dollars per share)	$ (0.16)	$ (0.02)	$ (0.29)	$ (0.05)
Other comprehensive loss, net of tax
Foreign currency translation adjustments	(75)	126	(62)	(57)
Comprehensive loss, net of tax	$ (6,640)	$ (602)	$ (12,288)	$ (1,744)
Weighted average common shares outstanding —
Basic and diluted (in shares)	41,603,343	38,768,969	41,479,326	36,874,780

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Net Loss Per Share (Notes)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Net Loss Per Share

NET LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding (excluding restricted shares). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted net loss per share is computed in a manner consistent with that of basic net loss per share while giving effect to all potentially dilutive common shares outstanding during the period, which include the assumed exercise of stock options and the assumed vesting of restricted stock using the treasury stock method, and the assumed conversion of shares under the Notes using the “if-converted” method.

Options to purchase common stock, the vesting of restricted stock, and shares issuable upon conversion of the Notes are considered to be potentially dilutive common shares but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive for all periods presented as a result of the net losses incurred for each period. Therefore, diluted net loss per share was the same as basic net loss per share for the three and six months ended June 30, 2014 and June 30, 2013.  As a result, stock options and restricted stock outstanding representing 2.3 million and 1.9 million shares as of June 30, 2014 and June 30, 2013, respectively, were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive. In addition, 7.3 million shares issuable upon the conversion of the Notes were excluded from the computation of diluted net loss per share as of June 30, 2014 because their inclusion would have been anti-dilutive also.

A summary of the net loss per share calculation is shown below for the periods indicated (in thousands, except share and per share amounts):

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Net loss	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Common shares outstanding:
Historical common shares outstanding at beginning of period	41,535,010			35,053,311			41,208,096			34,839,131
Weighted average common shares issued	68,333			3,715,658			271,230			2,035,649
Weighted average common shares outstanding — basic	41,603,343			38,768,969			41,479,326			36,874,780
Effect of dilution — stock options	—			—			—			—
Weighted average common shares outstanding — diluted	41,603,343			38,768,969			41,479,326			36,874,780
Net loss per share — basic and diluted	$	(0.16	)	$	(0.02	)	$	(0.29	)	$	(0.05	)

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Stock-Based Compensation (Notes)

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

STOCK-BASED COMPENSATION

The Company maintains stock option plans that provide for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units, and stock appreciation rights. The plans provide that stock options may be granted with exercise prices not less than the fair value at the date of grant. Options granted through June 30, 2014 generally vest over four years and expire ten years from the date of grant. Restricted stock awards granted to non-employee members of the Board of Directors vest over one year. Restricted stock units granted to certain officers of the Company vest over four years. At June 30, 2014, there were 3.5 million shares available for future issuance under these plans. 

In June 2014, the Compensation Committee of the Board of Directors approved a grant of performance stock units (“PSUs”) to certain of the Company’s officers. PSUs vest based on achieving specified performance measurements over a three-year “cliff” performance period plus an additional year “cliff” time vesting. The PSUs have target payout opportunities of between 0% and 250%. The performance measurements include a compounded annual growth rate for revenue over a three-year period and Adjusted EBITDA for the year ended December 31, 2016.

Valuation and Expense Information

The Company recognized stock-based compensation expense of $1.3 million and $0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $2.6 million and $1.6 million for the six months ended June 30, 2014 and 2013, respectively.  This expense consisted of compensation expense related to (1) employee stock options based on the value of share-based payment awards, (2) restricted stock awards issued to the Company’s directors, (3) restricted stock units and performance stock units issued to certain of the Company’s officers, and (4) the estimated fair value of shares expected to be issued under the Company’s employee stock purchase plan. Stock-based compensation expense is recognized based on awards ultimately expected to vest and is reduced for estimated forfeitures. The Company recognizes compensation expense for these awards on a straight-line basis over the service period.

With respect to the PSUs, the number of shares that vest and are issued to the recipient is based upon the Company’s performance as measured against the specified targets over a three-year period as determined by the Compensation Committee of the Board of Directors. Although there is no guarantee that performance targets will be achieved, the Company estimates the fair value of the PSUs based on its closing stock price at the time of grant at target performance. Over the performance period, the number of shares of common stock that will ultimately vest and be issued and the related compensation expense is adjusted based upon the Company’s estimate of achieving such performance targets. The number of shares delivered to recipients and the related compensation cost recognized as an expense will be based on the actual performance metrics as set forth in the applicable PSU award agreement.

For all options not subject to a market condition, the fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions, including vesting provisions and restrictions on transfers, hedging and pledging, among others, and are often exercised prior to their contractual expiration. Expected volatilities used in the fair value estimate are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield in effect at the time of grant. The following is a summary of the assumptions used for the stock options granted during the three and six months ended June 30, 2014 and 2013, respectively, using the Black-Scholes pricing model:

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Expected life (years)	5.76		5.85		5.76		5.86
Risk-free interest rate	1.62	%	1.38	%	1.63	%	0.89	%
Expected volatility	63.68	%	65.73	%	63.70	%	65.67	%
Expected dividend yield	—		—		—		—

The weighted average grant date fair value of options granted during the three months ended June 30, 2014 and 2013 was $13.42 and $11.04, respectively, and during the the six months ended June 30, 2014 and 2013 was $13.64 and $10.21, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2014	3,153,234		$	9.72
Granted	230,685		23.67
Exercised	(373,022	)	5.87
Canceled	(44,245	)	12.36
Options outstanding at June 30, 2014	2,966,652		$	11.25	7.09	$	34,716,127
Options exercisable at June 30, 2014	1,540,103		$	7.15	5.61	$	24,219,975

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $22.88 as of June 30, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. In-the-money options exercisable as of June 30, 2014 totaled approximately 1.5 million, as all options exercisable were in the money as of that date.  The total intrinsic value of options exercised was $8.2 million and $3.6 million during the six months ended June 30, 2014 and 2013, respectively.

The following table summarizes restricted stock award activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2014	22,190		$	18.93
Awarded	26,802		22.39
Vested/Released	(22,190	)	18.93
Restricted stock awards outstanding at June 30, 2014	26,802		$	22.39

The following table summarizes restricted stock unit activity during the six months ended June 30, 2014: 

	Shares		Weighted  Average  Purchase Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Restricted stock units outstanding at January 1, 2014	158,622		$	—
Awarded	89,458		—
Vested/Released	(25,450	)	—
Forfeited	(11,113	)	—
Restricted stock units outstanding at June 30, 2014	211,517		$	—	1.69	$	4,839,509

The following table summarizes PSU activity during the six months ended June 30, 2014: 

	Shares	Weighted Average Grant Date Fair Value
Performance stock units outstanding at January 1, 2014	—	$	—
Awarded (at target performance)	500,985	23.43
Vested/Released	—	—
Performance stock units outstanding at June 30, 2014	500,985	$	23.43

As of June 30, 2014, there was $23.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans, assuming at-target performance for the PSUs. Assuming the minimum of 0% and maximum of 250% payout opportunities for the PSUs, the range of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s stock option plans was between $11.9 million and $41.2 million as of June 30, 2014. This expense is based on an assumed future forfeiture rate of approximately 12.50% per year for Company employees and is expected to be recognized over a weighted-average period of approximately 3.3 years.

Employee Stock Purchase Plan

In June 2010, the Company’s stockholders approved The Spectranetics Corporation 2010 Employee Stock Purchase Plan (“ESPP”).  The ESPP, as amended in 2012, provides for the sale of up to 700,000 shares of common stock to eligible employees, limited to the lesser of 2,500 shares per employee per six-month period or a fair market value of $25,000 per employee per calendar year. Stock purchased under the ESPP is restricted from sale for one year following the date of purchase. Stock can be purchased from amounts accumulated through payroll deductions during each six-month period. The purchase price is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the respective six-month offering period.  This discount does not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes. At June 30, 2014, there were approximately 300,000 shares available for future issuance under this plan. 

The fair value of the offerings under the ESPP is determined on the first day of the semi-annual purchase period using the Black-Scholes option-pricing model. The expected term of six months was based upon the offering period of the ESPP. Expected volatility was determined based on the historical volatility from daily share price observations for the Company’s stock covering a period commensurate with the expected term of the ESPP. The risk-free interest rate was based on the six-month U.S. Treasury daily yield rate. The expected dividend yield was based on the Company’s historical practice of electing not to pay dividends to its stockholders. For the three months ended June 30, 2014 and 2013, the Company recognized $144,000 and $107,000, respectively, and for the six months ended June 30, 2014 and 2013, the Company recognized $266,000 and $196,000, respectively, of compensation expense related to the ESPP.

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Business Combination (Components of Purchase Price) (Details) (AngioScore, USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
AngioScore
Business Acquisition [Line Items]
Cash, including working capital adjustment	$ 234,306
Fair value of contingent consideration	25,886
Total purchase price	$ 260,192

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions

The following is a summary of the assumptions used for the stock options granted during the three and six months ended June 30, 2014 and 2013, respectively, using the Black-Scholes pricing model:

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Expected life (years)	5.76		5.85		5.76		5.86
Risk-free interest rate	1.62	%	1.38	%	1.63	%	0.89	%
Expected volatility	63.68	%	65.73	%	63.70	%	65.67	%
Expected dividend yield	—		—		—		—

Schedule of Share-based Compensation, Stock Options, Activity

The following table summarizes stock option activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2014	3,153,234		$	9.72
Granted	230,685		23.67
Exercised	(373,022	)	5.87
Canceled	(44,245	)	12.36
Options outstanding at June 30, 2014	2,966,652		$	11.25	7.09	$	34,716,127
Options exercisable at June 30, 2014	1,540,103		$	7.15	5.61	$	24,219,975

Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity

The following table summarizes restricted stock award activity during the six months ended June 30, 2014: 

	Shares		Weighted Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2014	22,190		$	18.93
Awarded	26,802		22.39
Vested/Released	(22,190	)	18.93
Restricted stock awards outstanding at June 30, 2014	26,802		$	22.39

Schedule of Share-based Compensation, Restricted Stock Units Award Activity

The following table summarizes restricted stock unit activity during the six months ended June 30, 2014: 

	Shares		Weighted  Average  Purchase Price		Weighted Avg. Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
Restricted stock units outstanding at January 1, 2014	158,622		$	—
Awarded	89,458		—
Vested/Released	(25,450	)	—
Forfeited	(11,113	)	—
Restricted stock units outstanding at June 30, 2014	211,517		$	—	1.69	$	4,839,509

Schedule of Share-based Compensation Arrangement by Share-based Payment Award, Performance-Based Units, Vested and Expected to Vest

The following table summarizes PSU activity during the six months ended June 30, 2014: 

	Shares	Weighted Average Grant Date Fair Value
Performance stock units outstanding at January 1, 2014	—	$	—
Awarded (at target performance)	500,985	23.43
Vested/Released	—	—
Performance stock units outstanding at June 30, 2014	500,985	$	23.43

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Commitments and Contingencies (Notes)

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

COMMITMENTS AND CONTINGENCIES

Litigation

The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below. The costs associated with such proceedings or other legal proceedings that may be commenced could have a material adverse effect on the Company’s future consolidated results of operations, financial position, or cash flows.

Trireme

In July 2012, AngioScore sued Trireme Medical, Inc. (“Trireme”), Eitan Konstantino, Quattro Vascular Pte, Ltd., and QT Vascular Ltd., in the U.S. District Court for the Northern District of California, alleging patent infringement. In this action, AngioScore seeks injunctive relief and damages. The defendants have filed counterclaims against AngioScore for unfair competition, interference with business relationships, false advertising, and defamation. In June 2014, AngioScore moved to amend its complaint (i) to allege that Trireme’s Chief Executive Officer, Eitan Konstantino, who is a former founder, officer, and member of the board of directors of AngioScore, breached his fiduciary duties to AngioScore by developing the Chocolate balloon catheter while he served as a member of the AngioScore board of directors, and (ii) to add claims against the other defendants for aiding and abetting that breach. The case is scheduled for trial in April 2015.

On June 25, 2014, Trireme sued AngioScore in the U.S. District Court for the Northern District of California seeking to change the inventorship of three patents owned by AngioScore. Trireme alleges that an Israeli physician, Chaim Lotan, should be named as an inventor on three patents owned by AngioScore. Dr. Lotan allegedly assigned the rights he may have had in the three patents to Trireme. The Company intends to vigorously defend against Trireme’s claims.

Konstantino

On May 15, 2014, AngioScore sued Eitan Konstantino in state court in California seeking a declaratory judgment that AngioScore owes no indemnification obligations to Mr. Konstantino under his indemnification agreement with AngioScore resulting from AngioScore’s claim that Mr. Konstantino breached his fiduciary duties to AngioScore while serving as a member of the AngioScore board of directors. The parties are in the early pleading stages and discovery has not begun.

In response to AngioScore’s suit in California state court, Mr. Konstantino sued AngioScore on May 21, 2014 in the Delaware Court of Chancery seeking a ruling that, under the indemnification agreement between Mr. Konstantino and AngioScore, AngioScore must advance Mr. Konstantino’s attorneys fees related to the breach of fiduciary duty claims asserted by AngioScore and indemnify Mr. Konstantino in the event he is found liable for breaching his fiduciary duties. AngioScore filed a crossclaim adding Trireme and QT Vascular to the case, asserting that the defendant companies must contribute to any fees that AngioScore must pay to Mr. Konstantino due to his service on the board of directors of the defendant companies. The parties have undertaken limited discovery and the Chancery Court heard arguments on August 6, 2014. The Company intends to vigorously defend against Mr. Konstantino’s claims.

Other

The Company is involved in other legal proceedings in the normal course of business and does not expect them to have a material adverse effect on its business.

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Segment Reporting (Notes)

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Segment Reporting

SEGMENT REPORTING

The Company operates in one line of business consisting of developing, manufacturing, marketing, and distributing fiber-optic and non-fiber-optic disposable products and a proprietary excimer laser system to treat certain vascular and coronary conditions.

Within this line of business, the Company has identified two geographic operating segments: (1) U.S. Medical and (2) International Medical. U.S. Medical and International Medical offer the same products and services but operate in different geographic regions, have different distribution networks, and different regulatory environments. The Company aggregates its two product lines, Vascular Intervention and Lead Management, based on their similar economic, operational, and regulatory characteristics.

The Company is currently evaluating the impact of the AngioScore acquisition on its reportable operating segments.

Additional information regarding each operating segment is discussed below.

U. S. Medical

This segment includes customers in the United States and Canada. Products offered by this segment include single-use medical devices used in minimally invasive procedures within the cardiovascular system, including fiber-optic devices and non-fiber-optic products (disposables), an excimer laser system (equipment), and the service of the excimer laser system (service). The Company is subject to product approvals from the U.S. Food and Drug Administration (“FDA”) and Health Canada. The Company’s products are used in multiple vascular procedures, including peripheral atherectomy, crossing arterial blockages, coronary atherectomy and thrombectomy, and the removal of cardiac lead wires from patients with pacemakers and cardiac defibrillators.

U.S. Medical is also corporate headquarters for the Company. All manufacturing, research and development, and corporate administrative functions are performed within this operating segment. For the six months ended June 30, 2014 and 2013, a portion of research, development and other technology expenses, and general and administrative expenses incurred in the U.S. has been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.

Manufacturing activities are performed entirely within the U.S. Medical segment. Revenue associated with intersegment product transfers to International Medical was $2.4 million and $2.2 million for the three months ended June 30, 2014 and 2013, respectively, and $4.1 million and $3.8 million for the six months ended June 30, 2014 and 2013, respectively. Revenue is based upon transfer prices, which provide for intersegment profit eliminated upon consolidation.

International Medical

The International Medical segment has its headquarters in the Netherlands, and serves Europe, the Middle East, Asia Pacific, Latin America, and Puerto Rico. Products offered by this segment are substantially the same as those offered by U.S. Medical. The Company is subject to product approvals from various international regulatory bodies. The International Medical segment is engaged primarily in distribution activities, with no manufacturing or product development functions. Certain U.S.-incurred research, development and other technology expenses, and general and administrative expenses have been allocated to International Medical based on a percentage of revenue because these expenses support the Company’s ability to generate revenue within the International Medical segment.

Summary financial information relating to operating segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Revenue:
Disposable products	$	31,744	$	28,239	$	60,326	$	55,188
Service and other, net of allowance for sales returns	2,331		2,524		4,567		5,032
Equipment sales and rentals	779		1,547		1,733		2,881
Subtotal	34,854		32,310		66,626		63,101
International Medical:
Disposable products	6,866		5,736		12,775		11,059
Service and other, net of allowance for sales returns	541		364		1,074		734
Equipment sales and rentals	1,294		1,043		2,694		2,234
Subtotal	8,701		7,143		16,543		14,027
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Segment operating (loss) income:
U.S. Medical	$	(6,205	)	$	(625	)	$	(11,587	)	$	(2,546	)
International Medical	376			(53		)	240			363
Total operating loss	$	(5,829	)	$	(678	)	$	(11,347	)	$	(2,183	)

	As of June 30, 2014		As of December 31, 2013
Segment assets:
U.S. Medical	$	441,813	$	198,639
International Medical	34,493		18,518
Total assets	$	476,306	$	217,157

For the six months ended June 30, 2014 and 2013, no individual customer represented 10% or more of consolidated revenue.  No individual countries, other than the United States, represented at least 10% of consolidated revenue for the six months ended June 30, 2014 or 2013.

Revenue by Product Line

	Three Months Ended   June 30,				Six Months Ended   June 30,
(in thousands)	2014		2013		2014		2013
Revenue
Disposable products revenue:
Vascular intervention	$	22,496	$	18,897	$	42,517	$	36,090
Lead management	16,114		15,078		30,584		30,157
Total disposable products revenue	38,610		33,975		73,101		66,247
Service and other, net of allowance for sales returns	2,872		2,888		5,641		5,766
Equipment sales and rentals	2,073		2,590		4,427		5,115
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

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Income Taxes (Notes)

6 Months Ended

Jun. 30, 2014

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The Company maintains a valuation allowance for substantially all of its deferred tax assets, including its U.S. net operating losses, and therefore does not expect to incur a current U.S. federal tax expense or benefit against its pretax income during the year ending December 31, 2014. The Company does, however, expect to incur current state and foreign tax expense during 2014. In addition, the Company expects to incur deferred U.S. federal and state tax expense in 2014, representing a deferred tax liability related to the difference between tax and book accounting for its goodwill, which is amortized over 15 years for tax purposes but not amortized for book purposes.

The Company’s ability to realize the benefit of its deferred tax assets in future periods will depend on the generation of future taxable income and tax planning strategies. Due to the Company’s history of losses and its planned near-term investments in its growth, the Company has recorded a full valuation allowance against substantially all of its deferred tax assets. The Company does not expect to reduce the valuation allowance against its deferred tax assets to below 100% of its gross amount until it has a sufficient historical trend of taxable income and can predict future income with a higher degree of certainty.

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Business Combination (Tables)

6 Months Ended

Jun. 30, 2014

Business Combinations [Abstract]

Schedule of Business Acquisitions, by Acquisition

The components of the aggregate preliminary purchase price for the acquisition were as follows (in thousands):

Cash, including working capital adjustment	$	234,306
Fair value of contingent consideration	25,886
Total purchase price	$	260,192

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The following table summarizes the preliminary allocation of assets acquired and liabilities assumed as of the Acquisition Date (in thousands):

	Allocation of purchase price		Amortization period (in years)
Accounts receivable	$	8,461
Inventories	14,884
Prepaids and other current assets	411
Property and equipment, net	712
Other long term assets	30
Total tangible assets acquired	24,498
Less: liabilities assumed	5,435
Net tangible assets less liabilities	$	19,063
Intangible assets:
Technology	73,510		10
In-process research and development (“IPR&D”)	3,750
Customer relationships	23,320		10
Distributor relationships	1,940		2
Trademark and trade names	4,380		6
Non-compete agreements	580		2
Goodwill	133,649
Total purchase price	$	260,192

Business Acquisition, Pro Forma Information

The pro forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2014			2013			2014			2013
Revenue	$	60,089		$	53,143		$	113,573		$	103,928
Net loss	$	(8,995	)	$	(10,593	)	$	(22,164	)	$	(17,523	)

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Stock-Based Compensation (Summary of Assumptions Used) (Details) (Stock Options, Common Stock)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Stock Options | Common Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (years)	5 years 9 months 4 days	5 years 10 months 6 days	5 years 9 months 4 days	5 years 10 months 10 days
Risk-free interest rate	1.62%	1.38%	1.63%	0.89%
Expected volatility	63.68%	65.73%	63.70%	65.67%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%

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Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Schedule of Revenue by Reporting Segments

Summary financial information relating to operating segment operations is shown below. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands):

	Three Months Ended   June 30,				Six Months Ended   June 30,
	2014		2013		2014		2013
Revenue:
Disposable products	$	31,744	$	28,239	$	60,326	$	55,188
Service and other, net of allowance for sales returns	2,331		2,524		4,567		5,032
Equipment sales and rentals	779		1,547		1,733		2,881
Subtotal	34,854		32,310		66,626		63,101
International Medical:
Disposable products	6,866		5,736		12,775		11,059
Service and other, net of allowance for sales returns	541		364		1,074		734
Equipment sales and rentals	1,294		1,043		2,694		2,234
Subtotal	8,701		7,143		16,543		14,027
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

Reconciliation of Operating Profit (Loss) from Segments to Consolidated

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Segment operating (loss) income:
U.S. Medical	$	(6,205	)	$	(625	)	$	(11,587	)	$	(2,546	)
International Medical	376			(53		)	240			363
Total operating loss	$	(5,829	)	$	(678	)	$	(11,347	)	$	(2,183	)

Reconciliation of Assets from Segment to Consolidated

	As of June 30, 2014		As of December 31, 2013
Segment assets:
U.S. Medical	$	441,813	$	198,639
International Medical	34,493		18,518
Total assets	$	476,306	$	217,157

Revenue from External Customers by Products and Services

Revenue by Product Line

	Three Months Ended   June 30,				Six Months Ended   June 30,
(in thousands)	2014		2013		2014		2013
Revenue
Disposable products revenue:
Vascular intervention	$	22,496	$	18,897	$	42,517	$	36,090
Lead management	16,114		15,078		30,584		30,157
Total disposable products revenue	38,610		33,975		73,101		66,247
Service and other, net of allowance for sales returns	2,872		2,888		5,641		5,766
Equipment sales and rentals	2,073		2,590		4,427		5,115
Total revenue	$	43,555	$	39,453	$	83,169	$	77,128

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Convertible Senior Notes (Details) (USD $)			0 Months Ended	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 03, 2014 Convertible Debt	Jun. 30, 2014 Convertible Debt	Jun. 03, 2014 Convertible Debt
Debt Instrument [Line Items]
Convertible senior notes	$ 230,000,000	$ 0			$ 230,000,000
Stated interest rate				2.625%	2.625%
Conversion ratio				31.9020
Conversion price				$ 31.35
Threshold percentage of stock price trigger				130.00%
Proceeds from debt, net of issuance costs			222,500,000
Debt issuance costs			$ 7,500,000

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Commitments and Contingencies (Details) (Trireme)	0 Months Ended
	Jun. 25, 2014 patent
Trireme
Loss Contingencies [Line Items]
Loss Contingency, Patents Allegedly Infringed, Number	3

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Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net loss	$ (12,226)	$ (1,687)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,205	5,234
Stock-based compensation expense	2,628	1,645
Provision for excess and obsolete inventories	350	138
Deferred income taxes	194	(605)
Net change in operating assets and liabilities	(5,621)	(9,054)
Net cash used in operating activities	(9,470)	(4,329)
Cash flows from investing activities:
Capital expenditures	(2,914)	(1,665)
Acquisition-related payments	(234,306)	(6,500)
Net cash used in investing activities	(237,220)	(8,165)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes	230,000	0
Debt issuance costs, convertible senior notes	(7,452)	0
Net proceeds from stock offering	0	92,037
Proceeds from the exercise of stock options and employee stock purchase plan	2,774	2,042
Net cash provided by financing activities	225,322	94,079
Effect of exchange rate changes on cash	0	(4)
Net (decrease) increase in cash and cash equivalents	(21,368)	81,581
Cash and cash equivalents at beginning of period	128,395	37,775
Cash and cash equivalents at end of period	107,027	119,356
Supplemental disclosures of cash flow information:
Cash paid for interest	23	22
Cash paid for income taxes	$ 276	$ 283

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Goodwill and Intangible Assets (Notes)

6 Months Ended

Jun. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

GOODWILL AND INTANGIBLE ASSETS

The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2014 was as follows (in thousands):

	U.S. Medical		International Medical		Total
Balance as of December 31, 2013	$	8,165	$	6,681	$	14,846
Additional goodwill related to AngioScore acquisition (Note 2)	118,948		14,701		133,649
Balance as of June 30, 2014	$	127,113	$	21,382	$	148,495

Acquired intangible assets consisted of the following (in thousands):

	June 30, 2014			December 31, 2013
Acquired as part of AngioScore acquisition (Note 2):
Technology	$	73,510		$	—
IPR&D	3,750			—
Customer relationships	23,320			—
Distributor relationships	1,940			—
Trademark and trade names	4,380			—
Non-compete agreements	580			—
Acquired as part of Upstream acquisition (1)
Technology	6,310			6,310
Non-compete agreement	200			200
Patents	530			530
Less: accumulated amortization	(1,704		)	(1,431		)
	$	112,816		$	5,609

___________________

(1) In January 2013, the Company acquired certain product lines from Upstream Peripheral Technologies, Ltd. As part of the acquisition, the Company acquired core technology intangible assets and an intangible asset related to non-compete agreements.

See further discussion of the additional goodwill and intangible assets acquired as part of the AngioScore acquisition during the three months ended June 30, 2014 in Note 2, “Business Combination.”

The Company evaluates goodwill and other intangible assets for impairment at least annually and whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. There have been no events or circumstances since the last analysis as of December 31, 2013 to indicate that the amount of goodwill or other intangible assets may not be recoverable.

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Composition of Certain Financial Statement Items (Inventories) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Balance Sheet Related Disclosures [Abstract]
Raw materials	$ 7,893	$ 4,132
Work in process	4,481	1,696
Finished goods	13,605	3,648
Inventory, net	$ 25,979	$ 9,476

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Segment Reporting (Revenue by Product Line) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenue from External Customer [Line Items]
Revenue	$ 43,555	$ 39,453	$ 83,169	$ 77,128
Disposable Products
Revenue from External Customer [Line Items]
Revenue	38,610	33,975	73,101	66,247
Disposable Products | Vascular intervention
Revenue from External Customer [Line Items]
Revenue	22,496	18,897	42,517	36,090
Disposable Products | Lead management
Revenue from External Customer [Line Items]
Revenue	16,114	15,078	30,584	30,157
Service and other, net of allowance for sales returns
Revenue from External Customer [Line Items]
Revenue	2,872	2,888	5,641	5,766
Equipment sales and rentals
Revenue from External Customer [Line Items]
Revenue	2,073	2,590	4,427	5,115
U.S. Medical
Revenue from External Customer [Line Items]
Revenue	34,854	32,310	66,626	63,101
U.S. Medical | Disposable Products
Revenue from External Customer [Line Items]
Revenue	31,744	28,239	60,326	55,188
U.S. Medical | Service and other, net of allowance for sales returns
Revenue from External Customer [Line Items]
Revenue	2,331	2,524	4,567	5,032
U.S. Medical | Equipment sales and rentals
Revenue from External Customer [Line Items]
Revenue	779	1,547	1,733	2,881
International Medical
Revenue from External Customer [Line Items]
Revenue	8,701	7,143	16,543	14,027
International Medical | Disposable Products
Revenue from External Customer [Line Items]
Revenue	6,866	5,736	12,775	11,059
International Medical | Service and other, net of allowance for sales returns
Revenue from External Customer [Line Items]
Revenue	541	364	1,074	734
International Medical | Equipment sales and rentals
Revenue from External Customer [Line Items]
Revenue	$ 1,294	$ 1,043	$ 2,694	$ 2,234

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Net Loss Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

A summary of the net loss per share calculation is shown below for the periods indicated (in thousands, except share and per share amounts):

	Three Months Ended   June 30,						Six Months Ended   June 30,
	2014			2013			2014			2013
Net loss	$	(6,565	)	$	(728	)	$	(12,226	)	$	(1,687	)
Common shares outstanding:
Historical common shares outstanding at beginning of period	41,535,010			35,053,311			41,208,096			34,839,131
Weighted average common shares issued	68,333			3,715,658			271,230			2,035,649
Weighted average common shares outstanding — basic	41,603,343			38,768,969			41,479,326			36,874,780
Effect of dilution — stock options	—			—			—			—
Weighted average common shares outstanding — diluted	41,603,343			38,768,969			41,479,326			36,874,780
Net loss per share — basic and diluted	$	(0.16	)	$	(0.02	)	$	(0.29	)	$	(0.05	)