Volcano 10Q 2013 Q3 Quarterly report

Volcano (VOLC) Inactive 10-Q2013 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2013



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

Commission File Number 000-52045

Volcano Corporation

(Exact name of registrant as specified in its charter)



Delaware		33-0928885
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

3721 Valley Centre Drive, Suite 500 San Diego, CA		92130
(Address of principal executive offices)		(Zip Code)

(800) 228-4728

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:



Class		Outstanding at October 31, 2013
Common stock, $0.001 par value		54,887,281

VOLCANO CORPORATION

Quarterly Report on Form 10-Q for the quarter ended September 30, 2013

Index

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements

VOLCANO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



	September 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	211,406		$	330,635
Short-term available-for-sale investments	188,778			140,960
Accounts receivable, net	76,297			76,348
Inventories	66,967			52,811
Prepaid expenses and other current assets	33,260			21,773
Total current assets	576,708			622,527
Long-term available-for-sale investments	89,210			44,385
Property and equipment, net	119,965			104,385
Intangible assets, net	60,631			50,657
Goodwill	53,082			51,577
Other non-current assets	28,104			28,813
Total assets	$	927,700		$	902,344
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	15,418		$	16,284
Accrued compensation	23,615			23,227
Accrued expenses and other current liabilities	24,473			23,529
Deferred revenues	9,453			9,789
Contingent consideration	2,911			2,908
Total current liabilities	75,870			75,737
Convertible senior notes	396,211			382,300
Other long-term debt	1,232			1,119
Deferred revenues	4,435			4,661
Contingent consideration, non-current portion	29,657			27,323
Other non-current liabilities	7,009			2,859
Total liabilities	514,414			493,999
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at September 30, 2013 and December 31, 2012	—			—
Common stock, par value of $0.001; 250,000 shares authorized at September 30, 2013 and December 31, 2012; 54,815 and 53,944 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively	55			54
Additional paid-in capital	512,112			494,276
Accumulated other comprehensive loss	(2,974		)	(4,083		)
Accumulated deficit	(95,907		)	(81,902		)
Total stockholders’ equity	413,286			408,345
Total liabilities and stockholders’ equity	$	927,700		$	902,344

See notes to unaudited condensed consolidated financial statements.

VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenues	$	95,809		$	93,656		$	290,384		$	279,389
Cost of revenues, excluding amortization of intangibles	33,458			33,248			102,624			94,797
Gross profit	62,351			60,408			187,760			184,592
Operating expenses:
Selling, general and administrative	45,479			40,699			134,784			127,035
Research and development	16,609			13,032			50,214			40,560
Amortization of intangibles	834			710			2,488			2,470
Acquisition-related items	1,253			—			3,742			—
Restructuring charges	4,616			—			4,874			—
Total operating expenses	68,791			54,441			196,102			170,065
Operating (loss) income	(6,440		)	5,967			(8,342		)	14,527
Interest income	327			223			970			656
Interest expense	(6,756		)	(1,844		)	(19,908		)	(4,993		)
Exchange rate gain (loss)	54			(218		)	(1,025		)	(319		)
Other, net	(33		)	(23		)	4,144			(31		)
(Loss) income before income tax	(12,848		)	4,105			(24,161		)	9,840
Income tax (benefit) expense	(4,392		)	2,130			(10,156		)	4,295
Net (loss) income	$	(8,456	)	$	1,975		$	(14,005	)	$	5,545
Net (loss) income per share:
Basic	$	(0.15	)	$	0.04		$	(0.26	)	$	0.10
Diluted	$	(0.15	)	$	0.04		$	(0.26	)	$	0.10
Shares used in calculating net (loss) income per share:
Basic	54,652			53,659			54,466			53,309
Diluted	54,652			55,265			54,466			55,097

See notes to unaudited condensed consolidated financial statements.

VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net (loss) income	$	(8,456	)	$	1,975	$	(14,005	)	$	5,545
Other comprehensive income
Foreign currency translation adjustments	1,522			51		1,527			546
Changes in unrealized gain (loss) on available-for-sale investments, net of tax	190			100		(4		)	89
Changes in unrealized losses on foreign currency forward exchange contracts, net of tax	(422		)	—		(414		)	—
Other comprehensive income	1,290			151		1,109			635
Comprehensive (loss) income	$	(7,166	)	$	2,126	$	(12,896	)	$	6,180

See notes to unaudited condensed consolidated financial statements.

VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2012	53,944	$	54	$	494,276	$	(4,083	)	$	(81,902	)	$	408,345
Issuance of common stock under equity compensation plans	871	1		5,778								5,779
Employee stock-based compensation cost				12,058								12,058
Net loss									(14,005		)	(14,005		)
Other comprehensive loss						1,109						1,109
Balance at September 30, 2013	54,815	$	55	$	512,112	$	(2,974	)	$	(95,907	)	$	413,286

See notes to unaudited condensed consolidated financial statements.

VOLCANO CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Nine Months Ended September 30,
	2013			2012
Operating activities
Net (loss) income	$	(14,005	)	$	5,545
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	18,677			17,448
Amortization (accretion) of investment premium (discount), net	2,305			2,023
Accretion of debt discount on convertible senior notes and other long term liabilities	14,148			3,700
Accretion of contingent consideration	2,537			—
Non-cash stock compensation expense	12,098			11,428
Asset impairment related to restructuring	4,616			—
Gain on sale of other long-term investment	(4,153		)	—
Effect of exchange rate changes and others	10,797			2,502
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(3,249		)	(2,119		)
Inventories	(15,195		)	(7,467		)
Prepaid expenses and other assets	(16,834		)	(1,847		)
Accounts payable	(2,599		)	(521		)
Accrued compensation	(535		)	(1,573		)
Accrued expenses and other liabilities	983			6,077
Deferred revenues	(550		)	2,088
Net cash provided by operating activities	9,041			37,284
Investing activities
Purchase of short-term and long-term available-for-sale securities	(342,715		)	(237,669		)
Sale or maturity of short-term and long-term available-for-sale securities	247,790			188,556
Cash paid related to acquisitions, net of cash acquired	(15,000		)	—
Capital expenditures	(26,533		)	(36,589		)
Cash paid for other intangible assets and investments	(2,377		)	(3,107		)
Proceeds from sale of long-term investments	5,654			—
Proceeds from foreign currency exchange contracts	—			1,187
Payment for foreign currency exchange contracts	—			(215		)
Net cash used in investing activities	(133,181		)	(87,837		)
Financing activities
Repayment of capital lease liability	(22		)	(68		)
Proceeds from sale of common stock under employee stock purchase plan	3,576			3,880
Proceeds from exercise of common stock options	2,203			8,408
Net cash provided by financing activities	5,757			12,220
Effect of exchange rate changes on cash and cash equivalents	(846		)	24
Net decrease in cash and cash equivalents	(119,229		)	(38,309		)
Cash and cash equivalents, beginning of period	330,635			107,016
Cash and cash equivalents, end of period	$	211,406		$	68,707
Supplemental disclosures of cash flow information:
Cash paid for interest	$	4,542		$	3,326
Cash paid for income taxes	$	3,103		$	2,337

See notes to unaudited condensed consolidated financial statements.

VOLCANO CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2013

1. Summary of Significant Accounting Policies

Basis of Presentation and Nature of Operations

The unaudited condensed consolidated financial statements of Volcano Corporation (“we,” “us,” “our,” “Volcano” or the “Company”) contained in this quarterly report on Form 10-Q include our financial statements and the financial statements of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2012.

The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Reclassification

Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current year presentation.

Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period. Our potentially dilutive shares include outstanding common stock options, unvested restricted stock units, including those with performance conditions, and incremental shares issuable upon the conversion of the Senior Convertible Notes or upon exercise of the warrants relating to the Senior Convertible Notes. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share as discussed in the following paragraph. For the three and nine months ended September 30, 2013, potentially dilutive shares totaling 22.2 million and 21.7 million, respectively, have not been included in the computation of diluted net income (loss) per share, as the result would be anti-dilutive. For the three and nine months ended September 30, 2012, potentially dilutive shares totaling 2.0 million and 2.1 million, respectively, have not been included in the computation of diluted net income (loss) per share, as the result would be anti-dilutive.

Diluted net income (loss) per common share does not include any incremental shares related to the Senior Convertible Notes for the three and nine months ended September 30, 2013 and 2012. Because the principal amount of the Senior Convertible Notes will be settled in cash upon conversion, only the conversion spread relating to the Senior Convertible Notes may be included in our calculation of diluted net income (loss) per common share. As such, the Senior Convertible Notes have no impact on diluted net income (loss) per common share until the price of our common stock exceeds the conversion price (initially $29.64 for the 2.875% Convertible Senior Notes due 2015, or the 2015 Notes and $32.83 for the 1.75% Convertible Senior Notes due 2017, or the 2017 Notes, or collectively, the Notes, subject to adjustments) of the Notes. In addition, the diluted net income (loss) per common share does not include any incremental shares related to the exercise of the warrants related to the Notes for the three and nine months ended September 30, 2013 and 2012. The warrants will not have an impact on diluted net income per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875 for the warrants issued in connection with the 2015 Notes offering and $37.59 for the warrants issued in connection with the 2017 Notes offering, subject to adjustments). When the market price of our stock exceeds the strike price, as applicable, we will include, in the diluted net income (loss) per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method to the extent the effect is not anti-dilutive.

The call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes, are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.

The basic and diluted net income (loss) per common share calculations for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands, except per share data):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net (loss) income	$	(8,456	)	$	1,975	$	(14,005	)	$	5,545
Weighted average common shares outstanding for basic	54,652			53,659		54,466			53,309
Dilutive potential common stock outstanding:
Stock options	—			1,376		—			1,481
Restricted stock units	—			222		—			300
Employee stock purchase plan	—			8		—			7
Weighted average common shares outstanding for diluted	54,652			55,265		54,466			55,097
Net (loss) income per share:
Basic	$	(0.15	)	$	0.04	$	(0.26	)	$	0.10
Diluted	$	(0.15	)	$	0.04	$	(0.26	)	$	0.10

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued an accounting standard update to require entities to disclose in a single location, either in the financial statements or in the notes to the financial statements, the effects of reclassifications out of accumulated other comprehensive income. The Company adopted this accounting standard update in the first quarter of 2013 and the adoption did not have a material impact on our unaudited condensed consolidated financial statements.

2. Acquisitions and Acquisition-Related Items

Pioneer Acquisition

On August 30, 2013, we completed the acquisition of the Pioneer Plus^TM diagnostic ultrasound transducer and percutaneous catheter, or Pioneer, from Medtronic, Inc. or Medtronic. The product line is an interventional medical device designed to enable the crossing of sub-total, total and chronic total occlusions within the peripheral vasculature, potentially eliminating the need for surgery. This acquisition represents a further expansion of our peripheral therapeutics product line.

This transaction was structured as an asset purchase and was accounted for as a business combination with an aggregate purchase price of $15.0 million. The assets acquired, primarily intangible assets, were recorded at their estimated fair values as of the acquisition date. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to this allocation may occur as additional information becomes available related to the valuation of inventory, fixed assets and intangible assets.

The acquisition was not individually or collectively considered material to the overall unaudited condensed consolidated financial statements and the results of the Company’s operations. We have included the operating results associated with the Pioneer acquisition in our unaudited condensed consolidated financial statements from the date of acquisition.

Crux Acquisition

On December 12, 2012 we completed the acquisition of all outstanding equity interests in Crux Biomedical, Inc., or Crux, a privately-held company engaged in the development of filter technology for the vascular, cardiovascular and interventional radiology markets. The primary reason for the acquisition was to diversify our product offerings, allow us the opportunity to better position ourselves in the peripheral vascular market and to increase our IVUS product sales. The transaction was accounted for as a business combination. The operating results of Crux from the date of acquisition were included in our unaudited condensed consolidated financial statements.

Consideration

We made up-front cash payments totaling $39.1 million in exchange for 100% of Crux's capital stock, of which $3.9 million is being held in escrow to satisfy claims for indemnification for certain matters made within 12 months following the closing.

We also have a receivable for a working capital shortfall to target which is expected to be settled in 2014. The fair value of the working capital receivable represents the amount by which the working capital acquired in the transaction was less than the target working capital as stated in the Merger Agreement. The receivable will be accreted to its fair value with accretion recorded in acquisition-related items within operating expense. The receivable has a legal right of offset against milestone payments, which are expected to be paid beginning in 2014, and therefore is reflected as a contra liability. The working capital receivable was estimated to be approximately $1.2 million and the fair value of this receivable was estimated to be $900,000 at acquisition. According to the working capital audit completed in the second quarter of 2013, the working capital receivable was adjusted to be approximately $1.4 million and the fair value of this receivable was estimated to be $1.1 million at acquisition. The $200,000 adjustment is a result of additional information about facts that existed at the acquisition date that we obtained after that date, therefore this adjustment resulted in an increase in the working capital receivable and a reduction to goodwill.

In addition, under the Merger Agreement, we previously agreed to pay a cash milestone payment of $3.0 million following the achievement of written clearance by the U.S. Food and Drug Administration, or FDA, of a 510(k) notification for the commercial sale in the United States of an inferior vena cava filter retrieval device currently being developed by Crux, provided such 510(k) notification was submitted on or before June 30, 2013. On July 1, 2013, we entered into an amendment to the Merger Agreement to extend the date by which the 510(k) notification must be submitted from June 30, 2013 to November 30, 2013 for the $3.0 million milestone payment to remain eligible to be paid. The fair value of this contingent consideration was previously estimated to be $2.9 million at acquisition. We revalued the contingent milestone payment based on the amended submission timeline and the fair value of this contingent consideration was estimated to be $2.9 million at September 30, 2013. The fair value of this contingent consideration was recorded as a current liability. We determined the fair value of the contingent consideration relative to FDA clearance using various estimates, including probabilities of success, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. The key assumptions used to determine the fair value of the contingent consideration include a 99% probability of success with respect to the 510(k) notification submission on or before November 30, 2013, 5% discount rate and probability adjusted milestone payment date ranges from December 29, 2013 to February 28, 2014.

Furthermore, subject to the terms of the Merger Agreement, we may be required to make payments upon reaching various sales milestones. We estimated the contingent milestone payments to be approximately $46.6 million and the fair value of this contingent consideration was estimated to be $28.0 million at acquisition. We determined the fair value of the contingent consideration relative to the milestone payments based on commercial sales of Crux products using various estimates, including revenue projections, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At September 30, 2013, for the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 14% discount rate and probability-weighted expected milestone payment ranges from $32.8 million to $70.1 million based on estimated commercial sales of Crux products ranging from $118.6 million to $304.2 million from 2014 to mid-year 2018.

Using different valuation assumptions could result in significant differences in the fair value of the contingent consideration and accretion expense in the current or future periods.

The following table sets forth the changes in the estimated fair value of the Company’s contingent liabilities (net with working capital receivable adjustment) measured on a recurring basis using significant unobservable inputs (Level 3) (in thousands):



	September 30, 2013
	Three Months Ended		Nine Months Ended
Fair value measurement at beginning of period	$	31,687	$	30,231
Change in fair value measurement included in operating expenses	881		2,337
Contingent consideration settled	—		—
Fair value measurement at end of period	32,568		32,568

A reconciliation of upfront payments in accordance with the Merger Agreement to the total purchase price is presented below (in thousands):



Base payment per agreement	$	36,000
Reimbursement of transaction expenses incurred by Crux	3,100
Total up-front payments	39,100
Estimated fair value of receivable for working capital adjustment	(1,100		)
Estimated fair value of contingent consideration	30,900
Total purchase price	$	68,900

Purchase price allocation

During the nine months ended September 30, 2013, the Company recorded minor adjustments to other current assets, deferred tax asset and goodwill, as a result of updating the purchase accounting. The Company recorded the identifiable assets acquired and liabilities assumed at fair value as follows (in thousands):



	December 12, 2012
Current assets:
Cash and cash equivalents	$	1,474
Other current assets	253
Property and equipment	39
In-process research and development	28,400
Covenant-not-to-compete	200
Deferred tax asset	11,281
Total assets acquired	41,647
Current liabilities:
Accounts payable	(223		)
Accrued expenses	(302		)
Other long term payable	(97		)
Deferred tax liability	(10,307		)
Total liabilities assumed	(10,929		)
Goodwill	38,182
Net assets acquired	$	68,900

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to this allocation may occur as additional information becomes available related to indemnification claims and income taxes, with such changes recorded as an adjustment to goodwill.

The IPR&D asset we recorded in the amount of $28.4 million represents an estimate of the fair value of in-process technology related to Crux's filter technology and retrieval device programs. The estimated fair value was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Crux of 14%, which represents a rate of return that a market participant would expect for these assets.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed, $38.2 million, represents the goodwill amount resulting from the acquisition, which was allocated to our medical segment and is not deductible for income tax purpose. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Further, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force.

Pro forma financial information

The following pro forma information presents the combined results of operations for the three and nine months ended September 30, 2012 as if the acquisition of Crux had been completed as of the beginning of 2012 (in thousands, except per share data):



	Three Months Ended		Nine Months Ended
	September 30, 2012		September 30, 2012
Revenues	93,656		279,389
Net income	471		1,333
Net loss per share, basic and diluted:
Basic	$	0.01	$	0.03
Diluted	$	0.01	$	0.02
Shares used in computing basic and diluted net loss per share:
Basic	53,659		53,309
Diluted	55,265		55,097

The pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations.

Sync-Rx Acquisition

On November 26, 2012, we acquired all of the outstanding equity interests in Sync-Rx Ltd., or Sync-Rx, a privately-held company, which is engaged in the development of advanced software applications that optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. The Sync-Rx technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and future opportunities in physiology and peripheral and minimally invasive structural heart therapy guidance.

The aggregate purchase price was $17.3 million, of which $3.3 million is being held in escrow to satisfy claims for indemnification for certain matters made within 18 months following the closing. The transaction was accounted for as a business combination. We have included the operating results associated with the Sync-Rx acquisition in our unaudited condensed consolidated financial statements from the date of acquisition.

In connection with the acquisition, we recorded a contingent liability of $1.1 million related to a government grant received to develop the underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We expect to generate revenues sufficient to repay the liability in its entirety. The grant was recorded as other long term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At acquisition, for the fair value relative to this liability, the key assumptions in applying the income approach included an 8% discount rate and estimated commercial sales derived from the underlying technology ranging from $256.1 million to $298.3 million over the expected period of re-payment of 10 to 16 years. The long term liability will be accreted to the re-payment amount of $1.9 million plus interest, with such accretion recorded as interest expense over the expected period of re-payment. As of September 30, 2013, there were no significant changes in the range of outcomes for the contingent liability recognized as a result of the acquisition.

The preliminary purchase price allocation as of the acquisition date is summarized as follows (in thousands):



	November 26, 2012
Current assets:
Cash and cash equivalents	$	423
Accounts receivables and other current assets	72
Property and equipment	37
Developed technology	3,200
In-process research and development	1,300
Covenants not-to-compete	100
Other non-current assets	8
Deferred tax asset	2,391
Total assets acquired	7,531
Current liabilities:
Accounts payable	(56		)
Accrued expenses	(375		)
Other long-term debt	(1,100		)
Deferred tax liability	(1,150		)
Total liabilities acquired	(2,681		)
Goodwill	12,409
Net assets acquired	$	17,259

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to this allocation may occur as additional information becomes available related to the valuation of intangible assets, indemnification claims and income taxes, with such changes recorded as an adjustment to goodwill.

The $3.2 million developed technology represents an estimate of the fair value of Sync-Rx's image enhancement technology, which is subject to an estimated useful life of ten years. The IPR&D asset represents an estimate of the fair value of in-process technology related to Sync-Rx's co-registration technology, which is still under development. The estimated fair values were determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The rate used to discount net future after-tax cash flows to their present values was based on a discount rate of 19% for developed technology and 20% for the IPR&D. Significant factors considered in the calculation of the discount rates include the weighted average cost of capital, the internal rate of return and the weighted average return on assets, as well as the risks inherent in the development process for the technology.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed, $12.4 million, represents the goodwill amount resulting from the acquisition, which was allocated to our medical segment and is not deductible for income tax purpose. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Additionally, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force.

Acquisition-Related Items

During the three months ended September 30, 2013, we recorded $1.3 million in acquisition-related items, including charges of $881,000 related to the change in fair value of the contingent consideration associated with the Crux acquisition, which is primarily due to the passage of time, and $358,000 in transaction costs associated with the Pioneer acquisition.

During the nine months ended September 30, 2013, we recorded $3.7 million in acquisition-related items, including charges of $2.5 million related to the change in fair value of the contingent consideration associated with the Crux acquisition, which is primarily due to the passage of time, and $810,000 in transaction costs primarily associated with the Crux and Pioneer acquisitions.

3. Financial Statement Details

Cash and Cash Equivalents and Available-for-Sale Investments

We invest our excess funds in U.S. government securities, corporate fixed income securities, commercial paper, certificates of deposit and money market funds. As of September 30, 2013, all of our investments were classified as available-for-sale and mature within 22 months. These investments are recorded at their estimated fair value including accrued interest receivable, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss.

At September 30, 2013 and December 31, 2012, available-for-sale investments are detailed as follows (in thousands):

At September 30, 2013

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	122,373	$	42	$	4	$	122,411
U.S. Treasury and agency debt securities	66,377		10		20		66,367
Short-term available-for-sale investments	$	188,750	$	52	$	24	$	188,778
Long-term:
Corporate debt securities	$	34,142	$	20	$	20	$	34,142
U.S. Treasury and agency debt securities	55,026		42		—		55,068
Long-term available for sale investments	$	89,168	$	62	$	20	$	89,210

At December 31, 2012

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	121,883	$	52	$	5	$	121,930
U.S. Treasury and agency debt securities	19,020		10		—		19,030
Short-term available-for-sale investments	$	140,903	$	62	$	5	$	140,960
Long-term:
Corporate debt securities	$	33,384	$	6	$	17	$	33,373
U.S. Treasury and agency debt securities	11,010		2		—		11,012
Long-term available for sale investments	$	44,394	$	8	$	17	$	44,385

Available-for-sale investments that are in an unrealized loss position at September 30, 2013 and December 31, 2012 are detailed as follows (in thousands):



	At September 30, 2013
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	37,670	$	24
U.S. Treasury and agency debt securities	40,992		20
	$	78,662	$	44



	At December 31, 2012
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	46,987	$	22
U.S. Treasury and agency debt securities	—		—
	$	46,987	$	22

Derivative Financial Instruments

Foreign Currency Forward Contracts

We are exposed to foreign currency risks through our global operations, primarily in Japan and Europe, and when we enter into transactions in non-functional currencies. Exchange rate fluctuations between the U.S. dollar and foreign currencies,

primarily the yen and the euro, could adversely affect our financial results. We use derivative financial instruments to mitigate our foreign currency exposures. The purpose of our derivative financial instruments is to mitigate the effect of the exchange rate fluctuations on certain foreign currency denominated revenue, assets and liabilities. We do not enter into derivative instruments for speculative purposes.

Commencing April 2013, we broadened our currency hedging program to hedge forecasted intercompany inventory transactions that are denominated in the yen and the euro. Forward contracts are used to hedge forecasted intercompany inventory transactions over specific time periods. These forward contracts are designated as cash flow hedges and have maturity dates of up to 16 months. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction and record any further gains or losses to exchange rate gain (loss). We evaluate hedge effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.

At September 30, 2013 and December 31, 2012, the notional amount of our outstanding forward contracts was $95.2 million and $64.4 million, respectively, of which $41.3 million and $0, respectively, were designated as cash flow hedges. At September 30, 2013, our outstanding forward contracts mature through January 2015.

As of September 30, 2013, the deferred loss, net of tax, for those derivative contracts that qualified for hedge accounting treatment was $414,000, all of which will be reclassified from accumulated other comprehensive loss into cost of sales at the then-current values over the next twelve months as the underlying hedged transactions are recognized.

The following tables summarize the location and fair values of derivative instruments on our unaudited condensed consolidated balance sheets (in thousands) at September 30, 2013 and December 31, 2012. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not.



	As of September 30, 2013
	Asset Derivatives			Liability Derivatives
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
Derivatives Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	$	8	Other current liabilities	$	407
Foreign exchange forward contracts	Other long-term assets	11		Other long-term liabilities	119
Total Derivatives Designated as Hedging Instruments		19			526

Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	604		Other current liabilities	902
Total Derivatives Not Designated as Hedging Instruments		604			902

Total Derivatives		$	623		$	1,428



	As of December 31, 2012
	Asset Derivatives			Liability Derivatives
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
Derivatives Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	$	—	Other current liabilities	$	—
Foreign exchange forward contracts	Other long-term assets	—		Other long-term liabilities	—
Total Derivatives Designated as Hedging Instruments		—			—

Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	3,886		Other current liabilities	425
Total Derivatives Not Designated as Hedging Instruments		3,886			425

Total Derivatives		$	3,886		$	425

The Company has elected to present the fair value of derivative assets and liabilities within the condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information (in thousands) as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.



	As of September 30, 2013
				Gross Amount Not Offset on the Balance Sheet
	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Cash Collateral (Received) or Pledged	Net Amount
Derivative Assets
Foreign exchange forward contracts	$	623		$	(623	)	—	$	—
Derivative Liabilities
Foreign exchange forward contracts	(1,428		)	623			—	(805		)
Total	$	(805	)	—			—	(805		)

The following table summarizes the effect of our foreign exchange forward contracts on our unaudited Condensed Consolidated Statements of Operations (in thousands).



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Derivatives Designated as Hedging Instruments
Gain (loss) recognized in other comprehensive income on foreign currency forward contracts (effective portion)	$	(727	)	$	—		$	(719	)	$	—
Gain (loss) reclassified from accumulated other comprehensive income into cost of revenue (effective portion)	(44		)	—			(44		)	—
Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)	43			—			11			—

Derivatives Not Designated as Hedging Instruments
Gain (loss) recognized in exchange rate gain (loss), net	$	(996	)	$	(1,243	)	$	4,880		$	517

Options and Warrants Related to Our Convertible Notes

In connection with our convertible debt offering in December 2012, we purchased call options on our common stock. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.8286 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants, which give the purchasers of the warrants the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 per share, subject to certain adjustments. In accordance with the authoritative

guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2017 Notes occur.

In connection with our convertible debt offering in September 2010, we purchased call options on our common stock. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants, which give the purchaser of the warrants the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. In accordance with the authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2015 Notes occur. In December 2012, $90.0 million of the $115.0 million in aggregate principal amount of 2015 Notes were repurchased by the Company and the proportionate call option and warrant related to the convertible notes were also retired. The remaining call options give us the right to purchase up to approximately 850,000 shares of our common stock at $29.64 per share, subject to certain adjustments, and the remaining warrants give the counterparty the right to purchase up to approximately 850,000 shares of our common stock at $34.875 per share, subject to certain adjustments. The remaining call options and warrants continue to be classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2015 Notes occur.

Concentration of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, foreign currency derivative contracts, and trade accounts receivable.

We have established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit related losses.

We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign currency contracts. We currently hold foreign exchange forward contracts with two counterparties. Our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We manage this credit risk by executing foreign currency contracts with counterparties that meet our minimum requirements, and monitoring the credit ratings of our counterparties on a periodic basis. As of September 30, 2013, we have minimal credit exposure from nonperformance of foreign exchange contract counterparties.

In connection with the issuance of our 2015 Notes and our 2017 Notes, we purchased call options from counterparties. Non-performance by the counterparties under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price (in the case of the 2015 Notes and the 2017 Notes).

We purchase integrated circuits and other key components for use in our products. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers cannot be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see “Risk Factors—Our manufacturing operations are dependent upon third party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.”

Fair Value Measurements

Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

•

Level 1—Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of money market funds and U.S. Treasury and agency debt securities.

•

Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of corporate debt securities including commercial paper, corporate bonds, certificates of deposit and foreign currency forward contracts.


•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Our Level 3 liability includes contingent consideration related to the Crux acquisition.

We utilize a third-party pricing service to assist us in obtaining fair value pricing for our investments. Pricing for certain securities is based on proprietary models. Inputs are documented in accordance with the fair value disclosure hierarchy. We also utilize third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts.

Contingent consideration arrangements obligate us to pay former shareholders of an acquired entity if specified future events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. We measure such liabilities using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. We used various key assumptions, such as the probability of achievement of the agreed milestones and the discount rate, in our determination of the fair value of contingent considerations. We monitor the fair value of the contingent considerations and the subsequent revisions are reflected in our Statements of Operations. For a further discussion on the key assumptions used in determining the fair value and the change in the estimated fair value of the contingent consideration during the three and nine months ended September 30, 2013, refer to Note 2, "Acquisitions and Acquisition-Related Items - Crux Acquisition".

In connection with the Sync-Rx acquisition, we recorded a contingent liability related to a government grant received to develop an underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We measure such liability using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. The grant was recorded as other long term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. We monitor the fair value of the contingent liability and the subsequent revisions are reflected in our Statements of Operations. For a further discussion on the key assumptions used in determining the fair value, refer to Note 2, "Acquisitions and Acquisition-Related Items - Sync-Rx Acquisition".

During the three and nine months ended September 30, 2013, no transfers were made into or out of the Level 1, 2, or 3 categories.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below at September 30, 2013 and December 31, 2012 (in thousands):



	Fair Value Measurements at September 30, 2013
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	54,198	$	54,198	$	—	$	—
Money market funds	157,208		157,208		—		—
Corporate debt securities	122,411		—		122,411		—
U.S. Treasury and agency debt securities	66,367		66,367		—		—
Foreign currency forward contracts	612		—		612		—
Non-current:
Corporate debt securities	34,142		—		34,142		—
U.S. Treasury and agency debt securities	55,068		55,068		—		—
Foreign currency forward contracts	11		—		11		—
Total assets measured at fair value	$	490,017	$	332,841	$	157,176	$	—
Liabilities:
Current:
Foreign currency forward contracts	$	1,309	$	—	$	1,309	$	—
Contingent consideration, current portion	2,911		—		—		2,911
Non-current:
Foreign currency forward contracts	119		—		119		—
Other long-term debt	1,207		—		—		$	1,207
Contingent consideration (1)	29,657		—		—		29,657
Total liabilities measured at fair value	$	35,203	$	—	$	1,428	$	33,775


(1)	This amount is reflected net of the fair value of the working capital receivable in the amount of $1.1 million at September 30, 2013.



	Fair Value Measurements at December 31, 2012
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	41,636	$	41,636	$	—	$	—
Money market funds	288,999		288,999		—		—
Corporate debt securities	121,930		—		121,930		—
U.S. Treasury and agency debt securities	19,030		19,030		—		—
Foreign currency forward contracts	3,461		—		3,461		—
Non-current:
Corporate debt securities	33,373		—		33,373		—
U.S. Treasury and agency debt securities	11,012		11,012		—		—
Total assets measured at fair value	$	519,441	$	360,677	$	158,764	$	—
Liabilities:
Current:
Contingent consideration, current portion	$	2,908	$	—	$	—	$	2,908
Non-current:
Other long-term debt	1,088		—		$	—	$	1,088
Contingent consideration (1)	27,323		—		—		27,323
Total liabilities measured at fair value	$	31,319	$	—	$	—	$	31,319


(1)	This amount is reflected net of the fair value of the working capital receivable in the amount of $907,000 at December 31, 2012.

Inventories

Inventories consist of the following (in thousands):



	September 30, 2013		December 31, 2012
Finished goods (1)	$	33,302	$	19,002
Work-in-process	12,022		15,780
Raw materials	21,643		18,029
	$	66,967	$	52,811


(1)	Finished goods inventory includes consigned inventory of $6.5 million and $5.3 million at September 30, 2013 and December 31, 2012, respectively.

Intangible Assets

Intangible assets consisted of the following (in thousands):



	September 30, 2013
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	38,935	$	17,370	$	21,565	10.4
Licenses	7,422		7,090		332		8.0
Customer relationships	4,235		3,934		301		6.1
Patents and trademarks	11,037		2,521		8,516		13.2
Covenant not to compete	300		83		217		3.0
	61,929		30,998		30,931		10.3
Intangible assets not yet subject to amortization
In-process research and development	29,700		—		29,700		n/a
	$	91,629	$	30,998	$	60,631



	December 31, 2012
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	27,051	$	17,408	$	9,643	8.8
Licenses	7,345		6,709		636		10.0
Customer relationships	4,177		3,756		421		6.0
Patents and trademarks	8,029		2,114		5,915		13.2
Covenant not to compete	300		8		292		3.0
	46,902		29,995		16,907		9.4
Intangible assets not yet subject to amortization
In-process research and development	33,750		—		33,750		n/a
	$	80,652	$	29,995	$	50,657


(1)	Weighted average life of intangible assets is presented excluding fully amortized assets.

At September 30, 2013, future amortization expense related to our intangible assets subject to amortization is expected to be as follows (in thousands):




2013	$	1,068
2014	4,066
2015	3,993
2016	3,725
2017	3,212
Thereafter	14,867
	$	30,931

Intangible Assets Impairment

The Company reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset or asset group may not be recoverable. The Company also assesses the impairment of in-process research and development, or IPR&D, assets annually and whenever events or changes in circumstances indicate that the carrying amount may be impaired.

During the third quarter of 2013, $4.6 million of intangible assets, including IPR&D and developed technology, were impaired in connection with a restructuring plan (see Note 3 "Financial Statement Details - Restructuring Activity - Third Quarter of 2013" below).

Restructuring Activity

Second Quarter of 2013

During the second quarter of 2013, our management approved plans to consolidate and transition our manufacturing resources related to the manufacture of disposables to Costa Rica and 27 production employees in our manufacturing facility in California were impacted by this plan in June 2013. One-time benefits to affected employees included a separation agreement including severance payments and continuing medical benefits. Consistent with authoritative guidance, we accrued the costs of one-time termination benefits to employees who were not required to render service beyond a minimum retention period of 60 days. As a result, we recorded approximately $258,000 in restructuring charges in June 2013.

We anticipate more employees in our manufacturing facility in the U.S. will be impacted and we expect to substantially complete this restructuring plan in 2014. We cannot estimate the future restructuring cost at this time as the total number of employees who will be impacted has not yet been determined.

Third Quarter of 2013

During the third quarter of 2013, our management evaluated various development projects, product lines and functional areas in an effort to assess how to better align resources to our key business strategies and improve operating efficiencies. At September 30, 2013, in connection with the preparation of our financial statements, our management concluded that it is more likely than not the Forward-Looking IVUS, or FL.IVUS and Forward-Looking Intra-Cardiac Echo, or FL.ICE, development programs and the commercial sale of the ReFLOW Aspiration Catheter, or ReFLOW, product line will be discontinued. As such, these assets were impaired with the resulting charge recorded in restructuring charges in the statement of operations in the third quarter of 2013. The technologies associated with these programs were acquired in various business combinations and resulted in IPR&D and developed technologies that were capitalized at the time of acquisition with a carrying value of $4.6 million as of September 30, 2013.

Subsequent Event - Fourth Quarter of 2013

During the fourth quarter of 2013, our management further evaluated our development projects and functional areas in an effort to reprioritize and reallocate our resources within our distribution, research and development, and clinical programs to focus on development and commercial efforts that we believe better advance our key strategies, and in November 2013, we made the decision to discontinue our FL.IVUS, FL.ICE, and Optical Coherence Tomography, or OCT, intravascular coronary imaging development programs and discontinue our ReFLOW product line. The key elements under this restructuring plan include the discontinuation of development programs for our FL.IVUS, FL.ICE and OCT intravascular coronary imaging development programs, the termination of the commercial sale of the ReFLOW product line, and a modest reorganization of several functional areas and business units within the Company.

We expect to incur additional restructuring charges of approximately up to $14.9 million in the fourth quarter of 2013 and early 2014 in connection with the discontinuation of our OCT intravascular coronary imaging, FL.IVUS and FL.ICE programs and the discontinuation of our ReFLOW product line, including costs associated from the related reorganization of several areas within the Company, which include employee termination costs of approximately up to $2.9 million, asset impairments of approximately up to $4.1 million and other restructuring related costs of approximately up to $7.9 million. Of the estimated $14.9 million of restructuring charges, we estimate that approximately up to $10.7 million will be comprised of future cash expenditures.

Debt

In December 2012, we issued $460 million aggregate principal amount of 1.75% Convertible Senior Notes due 2017 ("2017 Notes"), in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2013.

In September 2010, we issued $115 million aggregate principal amount of 2.875% Convertible Senior Notes due 2015 ("2015 Notes"), in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on March 1 and September 1, commencing on March 1, 2011. In December 2012, in connection with the issuance of the 2017 Notes, we repurchased $90 million of the $115 million in aggregate principal amount of the 2015 Notes.

The carrying values of the liability and equity components of both the 2017 Notes and the 2015 Notes are reflected in our unaudited condensed consolidated balance sheets as follows (in thousands):



	September 30, 2013			December 31, 2012
Long-term debt:
2.875% Convertible Senior Notes due 2015:
Principal amount	$	25,000		$	25,000
Unamortized discount of liability component	(2,078		)	(2,830		)
Unamortized debt issuance costs	(234		)	(326		)
Carrying value of liability component	22,688			21,844

1.75% Convertible Senior Notes due 2017:
Principal amount	460,000			460,000
Unamortized discount of liability component	(76,914		)	(88,536		)
Unamortized debt issuance costs	(9,563		)	(11,008		)
Carrying value of liability component	373,523			360,456
Total long-term debt	$	396,211		$	382,300

Equity—net carrying value
2.875% Convertible Senior Notes due 2015	$	452		$	452
1.75% Convertible Senior Notes due 2017	89,415			89,415

The fair values of the Notes, which are all Level 2 measurements, are summarized as follows (in thousands):



	September 30, 2013		December 31, 2012
2.875% Convertible Senior Notes due 2015	$	26,693	$	26,950
1.75% Convertible Senior Notes due 2017	479,325		462,850
Total	$	506,018	$	489,800

4. Commitments and Contingencies

Litigation-LightLab

On January 7, 2009, LightLab Imaging, Inc., or LightLab, which was acquired by St. Jude Medical, Inc., or St. Jude, in 2010, filed a complaint against us and our wholly owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk County, seeking injunctive relief and unspecified damages (the Massachusetts Action). The complaint included allegations that Volcano interfered with an agreement between Axsun and Lightlab and with LightLab's advantageous business relationship with Axsun, breach of contract by Axsun, that Axsun and Volcano misappropriated LightLab's confidential information and

trade secrets, and violated Chapter 93A, a Massachusetts statute that provides for recovery of up to three times damages plus attorney's fees (93A).

The Judge ordered that the trial in the Massachusetts Action proceed in four separate phases, with a jury trial first on liability, followed by a jury trial on damages, and then non-jury hearings on liability under 93A and on injunctive relief.

The jury in the trial on liability returned a verdict on February 4, 2010 that included findings that the contract specifications for the lasers Axsun supplies and previously supplied to LightLab are trade secrets of LightLab, that Axsun agreed not to sell any tunable lasers to Volcano for any purpose or to third parties for use in cardiology imaging during the exclusivity period in the contract, and that Axsun breached its contract with LightLab. The jury further found that Volcano intentionally interfered with LightLab's advantageous business relationship with Axsun.

In lieu of conducting a trial on damages, the parties agreed and stipulated in April 2010 that the sum of $200,000 would be treated as if it were the jury's verdict against the defendants for damages (the Stipulation).

The injunctive relief phase of the Massachusetts Action commenced in April 2010. In a ruling issued in October 2010, the Court rejected LightLab's claims for protection of five alleged trade secrets relating to laser technologies, and denied all of LightLab's requests for permanent injunctions with respect to those trade secrets.

In a summary judgment ruling issued January 26, 2011, the Court rejected the remainder of LightLab's claims for protection of its remaining trade secrets, and denied all of LightLab's claims for permanent injunctions with respect to those trade secrets.

In a ruling issued January 28, 2011, the Court found that Volcano and Axsun violated 93A, and awarded LightLab additional damages of $400,000 and reasonable attorneys' fees.

On February 10, 2011, and on April 7, 2011, the Court entered a Final Judgment and an Amended Final Judgment, respectively, in the Massachusetts Action: a) in favor of Volcano and Axsun on LightLab's claims for trade secret misappropriation on items 1-30 on LightLab's list of alleged trade secrets, b) ordered Volcano and Axsun to collectively pay $600,000 in damages and $4.5 million in attorneys' fees, c) in favor of LightLab on its claims against Axsun for breach of contract, breach of implied covenant of good faith and fair dealing, for violation of 93A, and misappropriation of trade secrets for disclosing three particular items to Volcano in December 2008 - the specifications for the two lasers provided by Axsun to LightLab and one Axsun laser prototype made in 2008, d) in favor of LightLab on its claims against Volcano for intentional interference with a contract and advantageous business relationship, unjust enrichment, violation of 93A, and misappropriation of trade secrets for the same three trade secrets described above. In addition, the Court denied a majority of LightLab's requested injunctions, and entered limited injunctive relief, none of which management believes have a material effect upon Volcano. The Final Judgment and Amended Final Judgment are substantially similar. The Amended Final Judgment corrects non-substantive clerical errors.

LightLab has appealed various decisions of the Court including, a) the Court's pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; b) the Court's decisions adverse to LightLab's claims for trade secret misappropriation in items 1-30 of LightLab's alleged list of trade secrets, including various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; c) the Court's post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; and; d) the denial of LightLab's motion to alter or amend the Final Judgment, which motion sought to obtain additional declaratory relief barring Axsun from “supplying” tunable lasers to Volcano. Volcano and Axsun did not cross appeal the Amended Final Judgment, and on July 5, 2011, Volcano and Axsun satisfied their payment obligations under the Amended Final Judgment by making a payment to Lightlab in the amount of approximately $5.4 million. The Massachusetts Supreme Judicial Court has agreed to hear LightLab's appeal. The appeal will be heard on December 2, 2013.

In February 2010, Volcano and Axsun commenced an action in the Delaware Chancery Court, or the Chancery Court Action, against LightLab seeking a declaration of Volcano and Axsun's rights with respect to certain OCT technology, the High Definition Swept Source. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. The 93A counterclaim has been stayed pending further action by the Chancery Court. This case has been stayed until such time as Volcano has achieved certain development and regulatory milestones.

Additionally, on May 24, 2011, LightLab commenced a separate action in Delaware Chancery Court, or the Second Chancery Court Action, against Volcano and Axsun alleging that Axsun is inappropriately assisting Volcano in the development of a third-party laser. The complaint seeks injunctive relief and unspecified damages. After Volcano and Axsun moved to dismiss the Second Chancery Court Action, LightLab filed an amended complaint against Volcano and Axsun, adding additional allegations regarding misappropriation of trade secrets. This case has been stayed indefinitely.

In January 2013, Lightlab filed a motion with the Delaware Chancery Court requesting the Chancery Court lift the stays in the Chancery Court Actions in order for Lightlab to file motions for injunctive relief. In April 2013, the Chancery Court denied this motion.

Litigation - St. Jude Medical

On July 27, 2010, St. Jude Medical filed a lawsuit against Volcano in federal district court in Delaware (collectively, with the counterclaims described below, the Delaware Patent Action), alleging that our pressure guide wire products infringe five patents owned by St. Jude Medical. St. Jude Medical is seeking injunctive relief and monetary damages. This action does not involve OCT technology and is separate from the Massachusetts Action.

On September 20, 2010, Volcano filed its response, in which we denied the allegations that our PrimeWire ^®products infringe any valid claim of St. Jude Medical's asserted patents. In addition, Volcano filed a counterclaim in which we have alleged that St. Jude Medical's PressureWire ^®products and its RadiAnalyzer ^®Xpress product infringe three Volcano patents. In our counterclaim, Volcano is seeking injunctive relief and monetary damages. A trial on the St. Jude Medical patents was scheduled for October 15, 2012 and a trial on Volcano's patents was scheduled for October 22, 2012.

On October 12, 2012, the court entered summary judgment for Volcano with respect to one of St. Jude Medical's asserted patents. On October 19, 2012, a jury found in favor of Volcano on the remaining four St. Jude Medical patents, finding that two of the patents were invalid and that Volcano did not infringe two of the patents. On October 22, 2012, Volcano voluntarily dismissed its claims against St. Jude Medical with respect to one of Volcano's patents. On October 25, 2012, a jury found in favor of St. Jude Medical with respect to Volcano's asserted patents. In conjunction with the trial, St. Jude Medical agreed that previous versions of its PressureWire® products infringed Volcano's 6,976,965 patent (a pressure sensing guide wire patent). Post-trial motions are pending or remain available to the parties in the case. A trial on damages has been scheduled for January 2014.

On April 9, 2012, St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB and St. Jude Medical S.C. filed a sealed complaint in the United States District Court for the District of Delaware alleging that Volcano Corporation infringes United States Patent No. 6,565,514. No trial date has been set in this case.

On April 16, 2013, Volcano filed suit in Federal District Court in Delaware against St. Jude Medical, Cardiovascular and Ablation Technologies Division, Inc., St. Jude Medical, Cardiology Division, Inc., St. Jude Medical, U.S. Division, St. Jude Medical S.C. Inc., and St. Jude Medical Systems AB, (collectively, “St. Jude”) for infringement of Volcano's recently issued United States Patent Nos. 8,419,647 and 8,419,648 both entitled “Ultra Miniature Pressure Sensor.” Volcano's complaint accuses St. Jude's PressureWire™ Certus and PressureWire™ Aeris cardiac pressure sensing guide wire products (the “Accused Guide Wires”) and St. Jude's RadiAnalyzer™ Xpress Measurement System, Ilumien™ PCI Optimization System and Quantien™ Integrated FFR Platform, which are used with the Accused Guide Wires, of infringing the patented methods of United States Patent No. 8,419,647. Volcano's complaint also accuses the Accused Guide Wires of infringing the patented device claims of United States Patent No. 8,419,648. No trial date has been set for this case.

Litigation - CardioSpectra

On March 27, 2012, Christopher E. Banas, et al., filed a lawsuit against Volcano in federal district court in the Northern District of California, alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on Volcano's acquisition of CardioSpectra in 2007. Specifically, plaintiffs assert that Volcano has failed to comply with the terms and the alleged implied obligations of the Merger Agreement relating to potential milestone payments. CardioSpectra was in the business of developing OCT technology; however, this litigation is separate from the Massachusetts Action.

On May 14, 2012, Volcano moved to dismiss the complaint in its entirety. The motion sought to dismiss the breach of fiduciary duty and implied covenant claims without leave for amendment, and to dismiss the breach of contract claim with leave to amend. By order dated August 6, 2012, the Court granted Volcano's motion as to all issues with leave to amend. The plaintiffs filed a Second Amended Complaint on August 20, 2012, which included a single claim for breach of the Merger Agreement. In addition, the plaintiffs identified in the Second Amended Complaint are listed as Christopher E. Banas and Paul Castella in their respective capacities as Shareholder Representatives under the Merger Agreement. Volcano answered the Second Amended Complaint on September 4, 2012, and in the same document Volcano asserted several affirmative defenses. A trial date has been scheduled for May 27, 2014 for this matter.

Litigation - Other

In November 2012, we became aware through newspaper reports in the Italian media that a then-current and a former employee of ours were under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that Volcano Europe B.V.B.A., our wholly-owned subsidiary, had temporarily been prohibited from establishing new contractual

relationships with hospitals that are part of the Italian national health system. Following a court hearing, the temporary prohibition was lifted. The Italian public prosecutor has requested that such prohibition be reinstituted. This request is pending. The Italian public prosecutor is alleging that the approximately €5,000 that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial.

The Company believes the lawsuits and other matter described above are without merit, and intends to vigorously defend against or prosecute, as applicable, the matters described above.

We may also be a party to various other claims in the normal course of business or become aware of allegations involving us or our employees. Legal fees and other costs associated with investigating, assessing and responding to such claims and allegations are expensed as incurred and were not material in any period reported. Additionally, we assess, in conjunction with our legal counsel, the need to record a liability for litigation and contingencies. Reserve estimates are recorded when and if it is determined that a loss related matter is both probable and reasonably estimable. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter. Based on its experience, the Company also believes that the damage amounts claimed in the lawsuits disclosed above are not a meaningful indicator of the Company's potential liability. At this time, we are not able to predict or estimate the ultimate outcome or range of possible losses relating to the lawsuits, claims or counterclaims described above. However, we believe that the ultimate disposition of these matters, individually and in the aggregate, including the lawsuits, claims and counterclaims discussed above, will not have a material impact on our consolidated results of operations, financial position or cash flows. Our evaluation of the likely impact of these matters could change in the future, as litigation is inherently unpredictable, and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on our results of operations, financial position, or cash flows in future periods.

Operating Leases

Rent expense for our facilities leases is being recognized on a straight-line basis over the respective minimum lease terms.

Commitments

We have obligations under non-cancelable purchase commitments. The majority of these obligations related to inventory, primarily raw materials. At September 30, 2013, the future minimum payments under these non-cancelable purchase commitments totaled $29.7 million. Approximately $23.3 million of these commitments will require payment in 12 months, of which $16.4 million of these commitments will require payment prior to December 31, 2013. The remaining amount will require payments on various dates through 2016.

We have commitments to provide funding of $4.6 million to a clinical study conducted by a third-party and at September 30, 2013, we have a remaining obligation of up to $2.1 million. We will be billed as services are performed under the agreement. In addition, we have entered into agreements with other third parties to sponsor clinical studies. Generally, we contract with one or more clinical research sites for a single study and no one agreement is material to our consolidated results of operations or financial condition. We are usually billed as services are performed based on enrollment and are required to make payments over periods ranging from less than one year up to three years. Our actual payments under these agreements will vary based on enrollment.

Indemnification

Our supplier, distributor and collaboration agreements generally include certain provisions for indemnification against liabilities if our products are recalled, infringe a third party’s intellectual property rights or cause bodily injury due to alleged defects in our products. In addition, we have agreements with our present and former directors and executive officers indemnifying them against liabilities arising from service in their respective capacities to Volcano. We maintain directors’ and officers’ insurance policies that may limit our exposure to such liabilities. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the accompanying unaudited condensed consolidated financial statements.

Sole source suppliers

We rely on a number of sole source suppliers to supply transducers, substrates and processing for our scanners used in our catheters. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers and substrates would be available. We are not parties to supply agreements with these suppliers but instead use purchase orders as needed.

5. Stockholders’ Equity

Equity Compensation Plans

Our Amended and Restated 2005 Equity Compensation Plan, or the 2005 Amended Plan provides for an aggregate of 21,572,558 shares of our common stock that may be issued or transferred to our employees, non-employee directors and consultants, including an increase of 5,360,000 shares which was approved by our stockholders on May 15, 2013.

At September 30, 2013, we have granted stock options, RSUs and performance-based RSUs under the 2005 Amended Plan. Stock options previously granted under the 2000 Long Term Incentive Plan that are canceled or expired will increase the shares available for grant under the 2005 Amended Plan. In addition, employees have purchased shares of the Company’s common stock under the 2007 Employee Stock Purchase Plan, or the Purchase Plan. At September 30, 2013, 6,724,993 shares and 55,911 shares remained available to grant under the 2005 Amended Plan and the Purchase Plan, respectively.

Fair Value Assumptions

The fair value of each stock option is estimated on the date of grant using the Black-Scholes model utilizing the following weighted-average assumptions:



	Three Months Ended September 30,							Nine Months Ended September 30,
	2013			2012				2013			2012
Risk-free interest rate	1.3		%	0.7		%		0.8		%	0.8		%
Expected life (years)	4.6			4.1				4.2			4.1
Estimated volatility	41.9		%	46.1		%		39.3		%	47.0		%
Expected dividends	None			None			��	None			None
Weighted-average grant date fair value	$	7.34		$	10.89			$	7.44		$	10.83

The risk-free interest rate for periods within the contractual life of the stock option is based on the implied yield available on U.S. Treasury constant maturity securities with the same or substantially equivalent remaining terms at the time of grant. We use our historical stock option exercise experience to estimate the expected term of our stock options. We utilize the volatility of our own common stock in determining the grant date fair value. We use a zero value of the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

The first offering period under the Purchase Plan commenced in September 2007. The fair value of each purchase option under the Purchase Plan is estimated at the beginning of each purchase period using the Black-Scholes model utilizing the following weighted-average assumptions:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Risk-free interest rate	0.1		%	0.1		%	0.1		%	0.1		%
Expected life (years)	0.5			0.5			0.5			0.5
Estimated volatility	29.6		%	36.8		%	30.0		%	39.1		%
Expected dividends	None			None			None			None
Fair value of purchase right	$	5.53		$	7.07		$	5.21		$	7.32

The computation of the expected volatility assumption used in the Black-Scholes model for purchase rights is based on the trading history of our common stock. The expected life assumption is based on the six-month term of each offering period. The risk-free interest rate is based on the U.S. Treasury constant maturity securities with the same or substantially equivalent remaining term in effect at the beginning of the offering period. We use a zero value for the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

Stock-Based Compensation Expense

The following table sets forth stock-based compensation expense included in our unaudited condensed consolidated statements of operations (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	196	$	202	$	583	$	515
Selling, general and administrative	3,592		3,331		10,152		9,606
Research and development	462		403		1,363		1,307
	$	4,250	$	3,936	$	12,098	$	11,428

6. Segment and Geographic Information

Our chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about segment revenues by product and geographic region for purposes of making operating decisions and assessing financial performance. We have two reporting segments, the first being the medical segment which include the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. In addition we have an industrial segment which includes the discovery, development, manufacture and sale of micro-optical spectrometers and optical channel monitors to telecommunications and other industrial companies.

We do not assess the performance of our segments on other measures of income or expense, such as depreciation and amortization, operating income or net income. We do not produce reports for, or measure the performance of, our segments on any asset-based metrics. Therefore, segment information is presented only for revenues by product.

The following table sets forth our revenues by segment and product (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Medical segment:
Consoles	$	10,964	$	9,679	$	31,469	$	28,529
Single-procedure disposables:
IVUS	46,024		48,574		143,869		153,683
FM	27,869		24,585		83,345		67,652
Other	8,809		7,825		25,725		21,286
Sub-total medical segment	93,666		90,663		284,408		271,150
Industrial segment	2,143		2,993		5,976		8,239
	$	95,809	$	93,656	$	290,384	$	279,389

The following table sets forth our revenues by geography expressed as dollar amounts (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenues (1):
United States	$	46,673	$	44,083	$	139,076	$	130,152
Japan	26,368		29,699		82,292		90,025
Europe, the Middle East and Africa	17,371		13,491		51,512		42,507
Rest of world	5,397		6,383		17,504		16,705
	$	95,809	$	93,656	$	290,384	$	279,389


(1)	Revenues are attributed to geographies based on the location of the customer, except for shipments to original equipment manufacturers, which are attributed to the country of origin of the equipment distributed.

At September 30, 2013, approximately 50% of our long-lived assets, excluding financial assets, are located in the U.S., approximately 38% are located in Costa Rica, approximately 8% are located in Japan, and approximately 4% are located in our remaining geographies. At December 31, 2012, approximately 42% of our long-lived assets, excluding financial assets, were

located in the U.S., approximately 42% were located in Costa Rica, approximately 12% were located in Japan, and approximately 4% were located in our remaining geographies.

At September 30, 2013 and December 31, 2012, goodwill of $53.1 million and $51.6 million has been allocated entirely to our medical segment.

7. Income Taxes

Income taxes are determined using an estimated annual effective tax rate applied against income, and then adjusted for the tax impacts of certain discrete items. The Company recorded an income tax benefit of $10.2 million during the nine months ended September 30, 2013, resulting in an effective benefit rate of 42.0%. We recorded income tax expense of $4.3 million during the nine months ended September 30, 2012, resulting in an income tax expense rate of 43.6%. The Company updates its annual effective income tax rate each quarter and if the estimated effective income tax rate changes, a cumulative adjustment is made.

During the quarter ended March 31, 2013, federal legislation was enacted within the U.S. that retroactively allowed a research and development (R&D) tax credit for all of 2012 and extended the R&D credit through the twelve months ending December 31, 2013. Because this legislation was enacted in 2013, the full benefit of the credit related to 2012's activities was recognized during the nine months ended September 30, 2013. In the absence of the 2012 R&D credit, our effective benefit tax rate for the nine months ended September 30, 2013 would have been 38.0%.

The annual effective income tax rate for 2013, exclusive of the impact of the R&D tax credit discussed above, is expected to be higher than the U.S. federal statutory rate of 35.0% primarily due to state income taxes, net of federal benefit, estimates for certain non-deductible expenses and foreign rate differentials.

The Company evaluates the realizability of the deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes guidance requires that a valuation allowance be established when it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. As part of the evaluation, the Company reviews both positive and negative evidence to determine if a valuation allowance is needed.

The Company's review of positive evidence included the review of in-process tax planning strategies, favorable historical results and forecasted pre-tax income. Negative evidence includes a forecasted current year loss and near-term industry challenges. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely-than-not realizable, the Company establishes a valuation allowance. The Company determined that there was sufficient evidence to establish that the Company’s current recorded valuation allowance against certain deferred tax assets remains reasonable. The Company will monitor the need for additional valuation allowances at each quarter in the future and if the negative evidence outweighs the positive evidence an allowance will be recorded.



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

Forward-looking statements: This quarterly report on Form 10-Q ("Quarterly Report”) contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” "could," “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” "intends" or “continues” or the negative of those words and other comparable words. Forward-looking statements include, but are not limited to, statements about:


•	our intentions, beliefs and expectations regarding our expenses, restructuring charges, sales, operations and future financial performance;


•	our operating results;


•	our plans for future products and enhancements of existing products;


•	anticipated growth and trends in our business;


•	the timing of and our ability to maintain and obtain regulatory clearances or approvals;


•	our belief that our cash and cash equivalents and available-for-sale investments will be sufficient to satisfy our anticipated cash requirements;


•	our expectations regarding our revenues, customers and distributors;


•	our beliefs and expectations regarding our market penetration and expansion efforts;


•	our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;


•	our anticipated trends and challenges in the markets in which we operate; and


•	our expectations and beliefs regarding and the impact of investigations, claims and litigation.

These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed here. For a detailed discussion of the risks and uncertainties that could contribute to such differences see the “Risk Factors” section in Part II, Item 1A of this Quarterly Report. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.

Overview

We design, develop, manufacture and commercialize a broad suite of precision guided therapy tools including intravascular imaging, or IVI, comprised largely of intravascular ultrasound, or IVUS, and fractional flow reserve, or FFR, products. We believe that these products enhance the diagnosis and treatment of vascular heart disease by improving the efficiency and efficacy of existing diagnostic angiograms and percutaneous interventional, or PCI, therapy procedures in the coronary arteries or peripheral arteries and veins. We are facilitating the adoption of functional PCI, in which our FFR technology is used to determine whether or not a stent is necessary, and IVUS is used to guide stent placement and optimization. We market our products to physicians, nurses and technicians who perform a variety of endovascular based coronary and peripheral interventional procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals.

Our products consist of multi-modality consoles that are marketed as stand-alone units or as customized units that can be integrated into a variety of hospital-based interventional surgical suites called catheterization laboratories, or cath labs. We have developed customized cath lab versions of these consoles and are developing additional functionality options as part of our cath lab integration initiative. Our consoles have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, FFR pressure wires, image-guided therapy catheters and Pioneer Plus^TMre-entry device acquired from Medtronic on August 30, 2013.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters, and additional functionality options such as Virtual Histology, or VH®, IVUS tissue characterization and ChromaFlo stent apposition analysis. Our FFR offerings can be accessed through our multi-modality platforms, and we also provide FFR-only consoles. Our FFR disposables are single-procedure disposable pressure and flow guide wires used to measure the pressure and flow characteristics of blood around plaque enabling physicians to gauge the plaque's physiological impact on blood flow and pressure. We are developing additional offerings for integration into the platform, including adenosine-free Instant Wave-Free Ratio FFR, or iFR and high resolution Focal Acoustic Computed Tomography, or FACT, catheters. We are also developing advanced software applications that will optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. Through the acquisition of the Pioneer Plus^TM diagnostic ultrasound transducer and percutaneous catheter, or Pioneer, from Medtronic, Inc., or Medtronic, during the third quarter of 2013, we started to offer the Pioneer re-entry catheter product, which is an interventional

medical device designed to enable the crossing of sub-total, total and chronic total occlusions within the peripheral vasculature, potentially eliminating the need for surgery.

Through Axsun Technologies, Inc., or Axsun, one of our wholly-owned subsidiaries, we also develop and manufacture laser and non-laser light sources, optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors with applications in telecommunications, pharmaceutical manufacturing, high-speed industrial process control, and chemical and petrochemical processing, medical diagnostics, and scientific discovery. Other medical device products include the recent acquisition of a FDA approved Inferior Vena Cava, or IVC, filter technology which is under development for the vascular, cardiovascular and interventional radiology markets.

We have infrastructure in the U.S., Europe, Japan, Costa Rica and Israel. Our corporate office is located in California, U.S. Our manufacturing operations are located in the U.S. and Costa Rica. We have research and development facilities in the U.S. and Israel. We have sales and distribution offices in the U.S., Japan, Europe and South Africa.

We have focused on building our domestic and international sales and marketing infrastructure to market our products to physicians and technicians who perform PCI procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals. We sell our products directly to customers in the U.S., Japan, certain European markets and South Africa. We utilize distributors in other geographic areas, who are also involved in product launch planning, education and training, physician support and clinical trial management.

At September 30, 2013, we had a worldwide installed base of over approximately 6,800 consoles, excluding our legacy In-Vision Gold systems. We intend to grow and leverage this installed base to drive recurring sales of our single-procedure disposable catheters and guide wires. In the nine months ended September 30, 2013, the sale of our single-procedure disposable catheters and guide wires accounted for $227.2 million, or 79.9% of our medical segment revenues, a $5.9 million, or 2.7% increase from the nine months ended September 30, 2012, in which the sale of our single-procedure disposable catheters and guide wires accounted for $221.3 million, or 81.6% of our medical segment revenues.

In the nine months ended September 30, 2013 and 2012, 44.8% and 46.1%, respectively, of our revenues and 20.4% and 23.1%, respectively, of our operating expenses were denominated in various non-U.S. dollar currencies, primarily the Japanese yen and the euro. We expect that a significant portion of our revenue and operating expenses will continue to be denominated in non-U.S. dollar currencies. As a result, we are subject to risks related to fluctuations in foreign currency exchange rates, which could affect our operating results in the future. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen increased 20.5% from 79.1 in the nine months ended September 30, 2012 to 95.3 in the nine months ended September 30, 2013, which resulted in a net negative impact to our operating results for the nine months ended September 30, 2013 in the amount of approximately $10.2 million as compared to the prior year. The average exchange rate of one euro to U.S. dollar remained consistent in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012.

We use third-party manufacturing partners to produce circuit boards and mechanical sub-assemblies used in the manufacture of our consoles. We also use third-party manufacturing partners for certain proprietary components used in the manufacture of our single-procedure disposable products. We perform incoming inspection on these circuit boards, mechanical sub-assemblies and components, assemble them into finished products, and test the final product to assure quality control. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers, substrates and subassemblies would be available.

External Factors

In September 2009, published findings from the Fractional Flow Reserve versus Angiography for Multivessel Evaluation, or FAME, study demonstrated that patients in the study with multi-vessel coronary artery disease who were treated by FFR guidance had a 34% reduction in death and myocardial infarction (heart attack) compared to angiographic guidance alone. In August 2012, the results of the Fractional Flow Reserve-Guided PCI vs. Medical Therapy in Stable Coronary Disease, or FAME 2, study were published in the New England Journal of Medicine. FAME 2 showed that patients receiving PCI with proven ischemia by FFR had 66% fewer primary endpoint events including death, myocardial infarction and urgent revascularization's (e.g. coronary bypass) than those patients treated with optimal medical therapy alone. We believe these findings will continue to drive the growth and adoption of our disposable FFR wire products.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. on March 23, 2010. The legislation imposes on medical device manufacturers a 2.3% excise tax on U.S. sales of

Class I, II and III medical devices beginning January 1, 2013. The Company's effective rate for this excise tax is less than the statutory rate which is primarily due to international sales. We expect our medical device excise taxes to be approximately 0.5% to 1.0% of our total revenues for 2013.

The economic conditions in many countries and regions where we generate our revenues remain uncertain. If our customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by any deterioration in national and worldwide economic conditions, this could result in reductions in the sales of our products, longer sales cycles and slower adoption of new technologies by our customers, which would materially and adversely affect our business. In addition, our customers’ and suppliers’ liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect our ability to collect on our outstanding invoices and lengthen our collection cycles, or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

In addition, the political unrest in certain regions of the world may have adverse consequences to the global economy or to our customers in certain regions, which could negatively impact our business. Uncertainty about future economic conditions may make it more difficult for us to forecast operating results and to make decisions about future investments. For further discussion, see “Risk Factors—General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.”

Financial Operations Overview

The following is a description of the primary components of our revenue and expenses.

Revenues. We derive our revenues from two reportable segments: medical and industrial. Our medical segment represents our core business, in which we derive revenues primarily from the sale of our consoles and single-procedure disposables. Our industrial segment derives revenues related to the sales of Axsun’s micro-optical spectrometers and optical channel monitors to telecommunication and other industrial companies. In the nine months ended September 30, 2013, we generated $290.4 million of revenues which is comprised of $284.4 million from our medical segment and $6.0 million from our industrial segment. We experienced increases in revenues related to consoles and FFR single-procedure disposables and decrease in revenues related to IVUS single-procedure disposables in the nine months ended September 30, 2013 compared with the same period in the prior year. In the nine months ended September 30, 2013, 11.1% of our medical segment revenues were derived from the sale of our consoles, 50.6% from IVUS single-procedure disposables and 29.3% from FFR single-procedure disposables as compared with 10.5% from consoles, 56.7% from IVUS single-procedure disposables and 25.0% from FFR single-procedure disposables in the same period in prior year. Other revenues consist primarily of service and maintenance revenues, shipping and handling revenues, sales of distributed products, sales of medical products manufactured by our Axsun subsidiary, spare parts sales, and license fees.

We expect to experience variability in our quarterly revenues from console sales due in part to the timing of hospital capital equipment purchasing decisions. Further, we expect variability of our revenues based on the timing of our new product introductions, which may cause our customers to delay their purchasing decisions until the new products are commercially available.

Our medical segment sales are generated by our direct sales representatives or through independent distributors and are shipped throughout the world from facilities in the United States, Belgium, Japan and South Africa. Our industrial segment sales are generated by our direct sales representatives or through independent distributors and these products are shipped primarily to telecommunications and industrial companies domestically and abroad from the United States.

Cost of Revenues. Cost of revenues consists primarily of material costs for the products that we sell and other costs associated with our manufacturing process, such as personnel costs, rent, depreciation related to our manufacturing equipment and utilities. In addition, cost of revenues includes depreciation of company-owned consoles, royalty expenses for licensed technologies included in our products, service costs, provisions for warranty, distribution, freight and packaging costs and stock-based compensation expense related to manufacturing employees. We expect a trend of improvement in our gross margin for IVUS and FFR products if we are successful in our ongoing efforts to streamline and improve our manufacturing processes, increase production volumes and transition certain manufacturing operations to Costa Rica.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and other related costs for personnel serving the sales, administrative and marketing functions. Other costs include stock-based compensation expense, professional fees for legal and accounting service, travel and entertainment expenses, facility costs, trade show, training and other promotional expenses. Due to ongoing litigation, legal expenses tend to be somewhat unpredictable in their timing and amount. We expect that our selling, general and administrative expenses will increase as we continue to expand our sales force and marketing efforts and invest in the necessary infrastructure to support our continued growth.

Included in selling, general and administrative expense is the new U.S. medical device excise tax on the sale of medical devices that was effective January 1, 2013. The statutory rate of the medical device excise tax is 2.3% of revenues on initial sales of finished medical products sold in the United States. The Company's effective rate for this excise tax is less than the statutory rate which is primarily due to international sales. We expect our medical device excise taxes to be approximately 0.5% to 1.0% of our total revenues for 2013.

Research and Development. Research and development expenses consist primarily of salaries and related expenses for personnel, consultants, prototype materials, clinical studies, depreciation, regulatory filing fees, certain legal costs related to our intellectual property and stock-based compensation expense. We expense research and development costs as incurred. Due to product development timelines, research and development costs tend to be distributed unevenly between the periods. We expect our research and development expenses to increase as we continue to develop our products and technologies.

Amortization of Intangibles. We amortize intangible assets, consisting of our developed technology, licenses, customer relationships, patents and trademarks, and covenant-not-to-compete, using the straight-line method over their estimated useful lives of up to 20 years. These assets are regularly tested for impairment and abandonment.

Acquisition-Related Items. Acquisition-related items consists of acquisition transaction costs, subsequent accretion of and revision, if any, to the contingent consideration related to acquisitions and other expenses directly associated with acquisitions.

Restructuring Charges. Restructuring charges consist of employee termination benefits, asset impairments and other related charges associated with restructuring activities.

Interest Income. Interest income is comprised of interest income earned from our cash and cash equivalents and our short-term and long-term available-for-sale investments.

Interest Expense. Interest expense is comprised of interest expense related to our convertible senior notes, including coupon interest, accretion of debt discount, and amortization of issuance costs, and interest expense related to long term debt acquired with Sync-Rx, offset by interest capitalization related to the Costa Rica plant construction, before the plant was placed into service in the second quarter of 2012, and our global Enterprise Resource Planning, or ERP, system implementation.

Exchange Rate Gain (Loss). Exchange rate gain (loss) is comprised of foreign currency transaction and remeasurement gains and losses, and the effect of changes in value and net settlements of certain of our foreign exchange forward contracts.

Provision for Income Taxes. Our effective tax rate is a blended rate resulting from the composition of taxable income in the global jurisdictions in which we conduct business. We apply the “with and without method—direct effects only”, in accordance with authoritative guidance, with respect to recognition of stock option excess tax benefits within stockholders equity (additional paid in capital). Therefore, the provision for domestic income taxes is determined utilizing projected federal and state taxable income before the application of deductible excess tax benefits attributable to stock option exercises.

Results of Operations

The following table sets forth items derived from our unaudited condensed consolidated statements of operations for the three months ended September 30, 2013 and 2012, presented as a percentage of revenues, with the dollar and percentage change year over year (in thousands except for percentage):



	Three Months Ended September 30,										Changes
	2013					2012					$			%
Revenues	$	95,809		100.0	%	$	93,656		100.0	%	$	2,153		2.3	%
Cost of revenues, excluding amortization of intangibles	33,458			34.9		33,248			35.5		210			0.6
Gross profit	62,351			65.1		60,408			64.5		1,943			3.2
Operating expenses:
Selling, general and administrative	45,479			47.5		40,699			43.5		4,780			11.7
Research and development	16,609			17.3		13,032			13.9		3,577			27.4
Amortization of intangibles	834			0.9		710			0.8		124			17.5
Acquisition-related items	1,253			1.3		—			—		1,253			—
Restructuring charges	4,616			4.8		—			—		4,616			—
Total operating expenses	68,791			71.8		54,441			58.2		14,350			26.4
Operating income	(6,440		)	(6.7	)	5,967			6.4		(12,407		)	(207.9	)
Interest income	327			0.3		223			0.2		104			46.6
Interest expense	(6,756		)	(7.1	)	(1,844		)	(2.0	)	(4,912		)	266.4
Exchange rate (loss) gain	54			0.1		(218		)	(0.2	)	272			(124.8	)
Other, net	(33		)	—		(23		)	—		(10		)	43.5
(Loss) income before income tax	(12,848		)	(13.4	)	4,105			4.4		(16,953		)	(413.0	)
Income tax (benefit) expense	(4,392		)	(4.6	)	2,130			2.3		(6,522		)	(306.2	)
Net (loss) income	$	(8,456	)	(8.8	)%	$	1,975		2.1	%	$	(10,431	)	(528.2	)%

The following table sets forth items derived from our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2013 and 2012, presented as a percentage of revenues, with the dollar and percentage change year over year (in thousands except for percentage):



	Nine Months Ended September 30,										Changes
	2013					2012					$			%
Revenues	$	290,384		100.0	%	$	279,389		100.0	%	$	10,995		3.9	%
Cost of revenues, excluding amortization of intangibles	102,624			35.3		94,797			33.9		7,827			8.3
Gross profit	187,760			64.7		184,592			66.1		3,168			1.7
Operating expenses:
Selling, general and administrative	134,784			46.4		127,035			45.5		7,749			6.1
Research and development	50,214			17.3		40,560			14.5		9,654			23.8
Amortization of intangibles	2,488			0.9		2,470			0.9		18			0.7
Acquisition-related items	3,742			1.3		—			—		3,742			—
Restructuring charges	4,874			1.7		—			—		4,874			—
Total operating expenses	196,102			67.5		170,065			60.9		26,037			15.3
Operating (loss) income	(8,342		)	(2.9	)	14,527			5.2		(22,869		)	(157.4	)
Interest income	970			0.3		656			0.2		314			47.9
Interest expense	(19,908		)	(6.9	)	(4,993		)	(1.8	)	(14,915		)	298.7
Exchange rate loss	(1,025		)	(0.4	)	(319		)	(0.1	)	(706		)	221.3
Other, net	4,144			1.4		(31		)	—		4,175			(13,467.7	)
(Loss) income before income tax	(24,161		)	(8.3	)	9,840			3.5		(34,001		)	(345.5	)
Income tax (benefit) expense	(10,156		)	(3.5	)	4,295			1.5		(14,451		)	(336.5	)
Net (loss) income	$	(14,005	)	(4.8	)%	$	5,545		2.0	%	$	(19,550	)	(352.6	)%

The following table sets forth our revenues by segment and product (in thousands) and the changes in revenues between the specified periods:



	Three Months Ended September 30,				Changes					Nine Months Ended September 30,				Changes
	2013		2012		$			%		2013		2012		$			%
Medical segment:
Consoles	$	10,964	$	9,679	$	1,285		13.3	%	$	31,469	$	28,529	$	2,940		10.3	%
Single-procedure disposables:
IVUS	46,024		48,574		(2,550		)	(5.2	)%	143,869		153,683		(9,814		)	(6.4	)%
FFR	27,869		24,585		3,284			13.4	%	83,345		67,652		15,693			23.2	%
Other	8,809		7,825		984			12.6	%	25,725		21,286		4,439			20.9	%
Sub-total medical segment	93,666		90,663		3,003			3.3	%	284,408		271,150		13,258			4.9	%
Industrial segment	2,143		2,993		(850		)	(28.4	)%	5,976		8,239		(2,263		)	(27.5	)%
	$	95,809	$	93,656	$	2,153		2.3	%	$	290,384	$	279,389	$	10,995		3.9	%

The following table sets forth our revenues by geographic area (in thousands) and the changes in revenues in the specified periods:



	Three Months Ended September 30,				Changes					Nine Months Ended September 30,				Changes
	2013		2012		$			%		2013		2012		$			%
Revenue (1):
United States	$	46,673	$	44,083	$	2,590		5.9	%	$	139,076	$	130,152	$	8,924		6.9	%
Japan	26,368		29,699		(3,331		)	(11.2	)%	82,292		90,025		(7,733		)	(8.6	)%
Europe, the Middle East and Africa	17,371		13,491		3,880			28.8	%	51,512		42,507		9,005			21.2	%
Rest of world	5,397		6,383		(986		)	(15.4	)%	17,504		16,705		799			4.8	%
	$	95,809	$	93,656	$	2,153		2.3	%	$	290,384	$	279,389	10,995			3.9	%


(1)	Revenues are attributed to geographies based on the location of the customer, except for shipments to original equipment manufacturers, which are attributed to the country of origin of the equipment distributed.

Comparison of Three Months Ended September 30, 2013 and 2012

Revenues. Overall, the increase in the medical segment revenue in the three months ended September 30, 2013 compared with the three months ended September 30, 2012 was driven by increased demand for our consoles and disposable products, partially offset by the unfavorable impacts of foreign exchange rates to the yen. The increases in FFR disposable revenues were primarily due to the increased adoption of the technology based on clinical study data. The decrease in IVUS disposable revenues was due to the unfavorable impact of approximately $4.6 million of foreign currency exchange related to the yen, partially offset by increased demand and $618,000 in revenue from the Pioneer Plus re-entry catheter product line acquired from Medtronic on August 30, 2013. The increase in other revenues is primarily due to higher sales of third-party products, higher service contract and rental revenues.

We recognized year-over-year increases in revenues across all our key geographic markets except for Japan. The decrease in Japan is due to the unfavorable impact of approximately $6.3 million of foreign currency exchange related to the yen.

We have experienced a decline in the number of PCI procedures performed in the United States. We believe the decline is in part due to concerns by clinicians and payers regarding the appropriateness of conducting PCI procedures, concerns regarding the efficacy of therapeutic treatment options, the long-term efficacy of drug-eluting stents, economic constraints, and reduced rates of restenosis. If the number of PCI procedures continues to decline, it may adversely impact our operating results and our business prospects.

Cost of Revenues. The increase in the cost of revenues in the three months ended September 30, 2013 compared with the three months ended September 30, 2012 was primarily due to higher sales volume. Gross margin was 65.1% of revenues in three months ended September 30, 2013, increasing from 64.5% of revenues in the three months ended September 30, 2012. This favorable change in gross margin was primarily the result of product mix and favorable production variances, offset by unfavorable impacts of foreign exchange rates related to the yen.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the three months ended September 30, 2013 as compared with the three months ended September 30, 2012 was primarily due to the higher variable costs

for U.S. sales driven by higher sales volumes, increased expense related to corporate compliance analysis, and increased information technology and infrastructure expenses to support company growth. In addition, medical device excise taxes for the third quarter of 2013 totaled $687,000, or 0.72% of revenue. This new U.S. tax on the sale of medical devices was effective January 1, 2013, thus there was no corresponding amount for the third quarter of 2012.

Research and Development. The increase in research and development expenses in the three months ended September 30, 2013 compared with the three months ended September 30, 2012 was primarily due to increased spending on various product development projects and activities supporting other acquired technologies.

Amortization of Intangibles. The increase in amortization of intangibles in the three months ended September 30, 2013 as compared with the three months ended September 30, 2012 was primarily due to increased intangible assets acquired with the Crux, Sync-Rx and Pioneer transactions.

Acquisition-Related Items. Acquisition-related items during the three months ended September 30, 2013 consisted primarily of the change in fair value of the contingent consideration related to the Crux acquisition primarily as a result of the passage of time and transaction costs related to the Pioneer acquisition.

Restructuring Charges. Restructuring charges during the three months ended September 30, 2013 consisted of the impairment of intangible assets (in process research and development and developed technology) relating to the discontinuation of an in-process research and development project and termination of a product line.

Interest Income. The increase in interest income for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily due to the increase in our available-for-sale investment balance resulting from the proceeds of our convertible debt offering discussed in Note 3 of our unaudited condensed consolidated financial statements "Financial Statement Details - Debt".

Interest Expense. Interest expense during the three months ended September 30, 2013 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in December 2012 ($460 million aggregate principal amount during the three months ended September 30, 2013) and the convertible debt issued in September 2010 ($25 million aggregate principal amount during the three months ended September 30, 2013). Interest expense during the three months ended September 30, 2012 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in September 2010 ($115 million aggregate principal amount during the three months ended September 30, 2012).

Exchange Rate Gain (Loss). During the three months ended September 30, 2013 and 2012, the impact of fluctuations in exchange rates was somewhat mitigated by our hedging practices. Through our hedging program, we are able to reduce the volatility of our exchange rate gains and losses resulting from the remeasurement of our intercompany receivable balances and non-functional currency transactions at current exchange rates.

Other. During the three months ended September 30, 2013, the Company's other income (expense) was minimal and remained consistent with the three months ended September 30, 2012.

Income Tax (Benefit) Expense. During the three months ended September 30, 2013, we recognized income tax benefit of $4.4 million compared to an income tax expense of $2.1 million during the three months ended September 30, 2012.

Comparison of Nine Months Ended September 30, 2013 and 2012

Revenues. Overall, the increase in medical segment revenue in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012 was driven by increased demand for our consoles and disposable products, partially offset by the unfavorable impacts of foreign exchange rates to the yen. The increases in FFR disposable revenues were primarily due to the increased adoption of the technology based on clinical study data. The decrease in IVUS disposable revenues was due to the unfavorable impact of approximately $12.2 million of foreign currency exchange related to the yen and the unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan, partially offset by increased demand and $618,000 in revenue from the Pioneer Plus re-entry catheter product line acquired from Medtronic on August 30, 2013. The increase in other revenues is primarily due to higher sales of third-party products, higher service contract and rental revenues.

We recognized increases in revenues across all our key geographic markets except for Japan. The decrease in Japan is primarily due to the unfavorable impact of approximately $16.2 million of foreign currency exchange related to the yen and the unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan that became effective in the second quarter of 2012.

restenosis. If the number of PCI procedures continues to decline, it may adversely impact our operating results and our business prospects.

Cost of Revenues. The increase in cost of revenues in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012 was primarily due to higher sales volume. Gross margin was 64.7% of revenues in nine months ended September 30, 2013, decreasing from 66.1% of revenues in the nine months ended September 30, 2012. This unfavorable change in gross margin was primarily the result of the unfavorable impacts of foreign exchange rates related to the yen, product mix, duplicate costs related to the transition of certain manufacturing operations to Costa Rica, and unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan that became effective in the second quarter of 2012.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the nine months ended September 30, 2013 as compared with the nine months ended September 30, 2012 was primarily due to the higher variable costs for U.S. sales driven by higher sales volumes, expansion of our Japanese and European sales and marketing organizations, including continued growth in our Japanese and European operations to support our direct sales efforts there, expansion of our peripheral marketing programs, increased information technology and infrastructure expenses to support company growth and increased expense related to corporate compliance programs. The increase was partially offset by not incurring Costa Rica start up expense in the first quarter of 2013, while we did incur such expense during the pre-production phase of our Costa Rica operation in the first quarter of 2012. In addition, medical device excise taxes for the nine months ended September 30, 2013 totaled $2.1 million, or 0.72% of revenue. This new U.S. tax on the sale of medical devices was effective January 1, 2013, thus there was no corresponding amount for the nine months ended September 30, 2012.

Research and Development. The increase in research and development expenses in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012 was primarily due to increased spending on various product development projects and activities supporting other acquired technologies.

Amortization of Intangibles. Amortization of intangibles in the nine months ended September 30, 2013 as compared with the nine months ended September 30, 2012 remained consistent.

Acquisition-Related Items. Acquisition-related items during the nine months ended September 30, 2013 consist of transaction costs related to the various acquisitions and the change in fair value of the contingent consideration related to the Crux acquisition primarily as a result of the passage of time.

Restructuring Charges. Restructuring charges during the nine months ended September 30, 2013 consisted of $4.6 million for the impairment of certain intangible assets (in process research and development and developed technology) relating to the discontinuation of an in-process research and development project and termination of a product line, and $258,000 employee termination costs related to the restructuring activities during the second quarter of 2013.

Interest Income. The increase in interest income for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 was primarily due to the increase in our available-for-sale investment balance resulting from the proceeds of our convertible debt offering discussed in Note 3 of our unaudited condensed consolidated financial statements "Financial Statement Details - Debt".

Interest Expense. Interest expense during the nine months ended September 30, 2013 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in December 2012 ($460 million aggregate principal amount during the nine months ended September 30, 2013) and the convertible debt issued in September 2010 ($25 million aggregate principal amount during the nine months ended September 30, 2013). Interest expense during the nine months ended September 30, 2012 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in September 2010 ($115 million aggregate principal amount during the nine months ended September 30, 2012).

Exchange Rate Gain (Loss). During the nine months ended September 30, 2013 and 2012, the impact of fluctuations in exchange rates was somewhat mitigated by our hedging practices. Through our hedging program, we are able to reduce the volatility of our exchange rate gains and losses resulting from the remeasurement of non-functional currency transactions at current exchange rates.

Other. During the nine months ended September 30, 2013, the Company recognized $4.1 million of gains in connection with the liquidation of a long term investment, which had been accounted for using the cost method.

Income Tax (Benefit) Expense. During the nine months ended September 30, 2013, we recognized income tax benefit of $10.2 million compared to an income tax expense of $4.3 million during the nine months ended September 30, 2012. During the first quarter of 2013, federal legislation was enacted within the U.S. that retroactively allowed a research and development (R&D) tax credit for all of 2012 and extended the R&D credit through the twelve months ending December 31, 2013. Because this

legislation was enacted in 2013, the full benefit of the credit related to 2012's activities was recognized during the nine months ended September 30, 2013.

Liquidity and Capital Resources

Sources of Liquidity

Historically, our sources of cash have included:


•	issuance of equity and debt securities, including underwritten public offerings of our common stock and convertible bonds, cash generated from the exercise of stock options and participation in our employee stock purchase plan;


•	cash generated from operations, primarily from product sales; and


•	interest income.

Our historical cash outflows have primarily been associated with:


•	cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs;


•	expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency;


•	capital expenditures related to the acquisition of equipment that we own and place at our customer premises and other fixed assets;


•	cash used to repay our debt obligations and related interest expense; and


•	cash used for acquisitions.

Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows.

On September 20, 2010, we issued $115.0 million principal amount of 2.875% Notes due 2015, or the 2015 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2015 Notes, we purchased call options on our common stock. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants. We received proceeds of $100.5 million from issuance of the 2015 Notes, net of issuance costs ($4.5 million) and net payments related to our hedge transactions ($10.0 million).

On December 5, 2012, we issued $460.0 million principal amount of 1.75% Notes due 2017, or the 2017 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2017 Notes, we purchased call options on our common stock. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants. We received proceeds of $409.3 million from the issuance of the 2017 Notes, net of issuance costs ($14.6 million) and net payments related to our hedge transactions ($36.1 million).

Concurrently with the issuance of the 2017 Notes, we retired $90.0 million of the 2015 Notes and retired the proportionate portion of the warrants and call options related to the 2015 Notes. We paid $104.9 million to repurchase the $90.0 million face value of the 2015 Notes and received a net amount of $3.6 million related to the retirement of the proportionate warrants and call options associated with the 2015 Notes.

At September 30, 2013, our cash and cash equivalents and available-for-sale investments totaled $489.4 million. We invest our excess funds in U.S. government securities, corporate fixed income securities, commercial paper, certificates of deposit and money market funds.

At September 30, 2013, our accumulated deficit was $95.9 million. During the nine months ended September 30, 2013, our business generated approximately $9.0 million in cash related to operating activities. During the nine months ended September 30, 2012, our business generated approximately $37.3 million in cash flows from operating activities.

Cash Flows (in thousands)



	Nine Months Ended September 30,
	2013			2012
Net cash provided by operating activities	$	9,041		$	37,284
Net cash used in investing activities	(133,181		)	(87,837		)
Net cash provided by financing activities	5,757			12,220
Effect of exchange rate changes on cash and cash equivalents	(846		)	24
Net change in cash and cash equivalents	$	(119,229	)	$	(38,309	)

Cash Flows from Operating Activities. Cash provided by operating activities of $9.0 million for the nine months ended September 30, 2013 reflected our net loss of $14.0 million, adjusted for non-cash expenses, consisting primarily of $21.0 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $12.1 million of stock-based compensation expense, $14.1 million of accretion of debt discount on convertible notes and other long term liabilities, $2.5 million for the accretion of the contingent consideration related to the Crux acquisition and $4.6 million of asset impairment related to restructuring activities. Uses of cash included an increase of accounts receivable of $3.2 million, an increase of prepaid expenses and other assets of $16.8 million, an increase in inventories of $13.2 million related to our expected sales demand and decreases in accounts payable of $2.6 million.

Cash provided by operating activities of $37.3 million for the nine months ended September 30, 2012 reflected our net income of $5.5 million, adjusted for non-cash expenses of $19.5 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $11.4 million of stock-based compensation expense and $3.7 million of accretion of debt discount on convertible notes. Additional sources of cash included an increase of accrued expenses and other liabilities of $6.1 million and deferred revenue of $2.1 million. Uses of cash primarily included an increase of accounts receivable of $2.1 million related to increased sales and an increase of inventories of $7.5 million related to increased forecasted sales demand, increased prepaid expenses and other assets of $1.8 million and a decrease in accounts payable and accrued compensation of $2.1 million.

Cash Flows from Investing Activities. Cash used in investing activities was $133.2 million in the nine months ended September 30, 2013, resulting from approximately $342.7 million used to purchase short-term and long-term available-for-sale securities, $15 million used for the Pioneer acquisition, and $28.5 million used for capital expenditures, including purchases of medical diagnostic equipment, manufacturing equipment and information technology systems. These purchases were partially offset by $247.8 million from the sale or maturity of investments.

Cash used in investing activities was $87.8 million in the nine months ended September 30, 2012, resulting from approximately $237.7 million used to purchase investments, $36.6 million used for capital expenditures, including construction of our Costa Rica plant, capital expenditures for medical diagnostic equipment, manufacturing equipment and information technology systems, and $3.1 million used for acquisition of intangible assets, including developed technologies and patents. Sources of cash included the sale or maturity of investments of $188.6 million.

Cash Flows from Financing Activities. Cash provided by financing activities in the nine months ended September 30, 2013 consisted primarily of $2.2 million from exercises of common stock options and $3.6 million from the sale of common stock under our employee stock purchase plan.

Cash provided by financing activities was $12.2 million in the nine months ended September 30, 2012, resulting primarily from proceeds of $8.4 million from exercises of common stock options and $3.9 million from the issuance of stock under our employee stock purchase plan.

Future Liquidity Needs

At September 30, 2013, we believe our current cash and cash equivalents and our available-for-sale investments will be sufficient to fund working capital requirements, debt service requirements, capital expenditures and operations for at least the next 12 months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future.

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, the extent to which we engage in acquisitions or other strategic transactions in which we use cash as consideration, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment and cash that may be required to settle our foreign currency contracts.

Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control—See “Risk Factors—We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.” Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2012.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification to business partners and customers for losses suffered or incurred for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is unlimited. At September 30, 2013, we have not incurred any costs to defend lawsuits or settle claims related to these indemnification arrangements.

Contractual Obligations

At September 30, 2013, there were no additional material contractual obligations other than the items detailed in Note 4 - “Commitments and Contingencies–Purchase Commitments” and those disclosed in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" of our annual report on Form 10-K for the year ended December 31, 2012.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are exposed to interest rate and foreign exchange risk. Fluctuations in interest rates and the rate of exchange between the U.S. dollar and foreign currencies, primarily the euro and yen, could adversely affect our financial results.

We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers, substrates and subassemblies would be available.

Interest Rate Risk

Our exposure to interest rate risk at September 30, 2013 is related to the investment of our excess cash into highly liquid financial investments as well as our convertible debt which has a fixed rate. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates.

At September 30, 2013, we held $489.4 million in cash and cash equivalents and available-for-sale investments of which $400.2 million consisted of highly liquid financial investments with original final maturities of one year or less and the

remaining amount was long-term available-for-sale investments with original final maturities over one year. If interest rates were to increase instantaneously and uniformly by 10 basis points, compared to interest rates as of September 30, 2013, the fair market value of our investment portfolio would decrease by approximately $234,000.

We invest in cash and cash equivalents and available-for-sale investments in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields consistent with our tolerance for investment risk. Our investment policy specifies credit quality standards for our investments. We do not hold mortgage-backed securities.

Foreign Currency Exchange Risk

We are exposed to foreign currency risks through our global operations, primarily in Japan and Europe, and when we enter into transactions in non-functional currencies. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the yen and the euro, could adversely affect our financial results. During the nine months ended September 30, 2013, 27.4% and 17.4% of our revenues were denominated in the yen and the euro, respectively, and 11.1% and 9.3% of our operating expenses were denominated in the yen and the euro, respectively. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen increased 20.5% from 79.1 in the nine months ended September 30, 2012 to 95.3 in the nine months ended September 30, 2013, which resulted in a net negative impact to our operating results for the nine months ended September 30, 2013 in the amount of approximately $10.2 million as compared to the prior year. The average exchange rate of one euro to U.S. dollar remained consistent in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012.

We enter into derivative financial instruments, principally forward contracts, to manage a portion of the foreign currency risk related to transactions in non-functional currencies. We record derivative financial instruments as either assets or liabilities in our unaudited condensed consolidated balance sheets and measure them at fair value. Certain of the derivative instruments we use to mitigate this exposure are not designated for hedge accounting treatment, and as a result, changes in their fair values are recorded in exchange rate gain (loss) in the unaudited condensed consolidated statement of operations. These contracts contain net settlement features. If we experience unfavorable changes in foreign exchange rates, we may be required to use significant amounts of cash to settle the transactions which may adversely affect the operating results that we report with respect to the corresponding period.

Commencing April 2013, we broadened our currency hedging program to hedge forecasted intercompany inventory transactions that are denominated in the yen and the euro. Forward contracts are used to hedge forecasted intercompany inventory transactions over specific time periods. These forward contracts are designated as cash flow hedges and have maturity dates of up to 16 months. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction and record any further gains or losses to exchange rate gain (loss). We evaluate effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.

Market Price Sensitive Instruments

In order to reduce the potential equity dilution that would result upon conversion of our convertible senior notes, we entered into convertible note hedge transactions (the Hedge) entitling us to purchase up to 14 million shares of our common stock at an initial strike price of $32.83 per share and 850,000 shares of common stock at an initial strike price of $29.64 per share, subject to adjustments. Upon conversion of the convertible senior notes, the Hedge is expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the Hedge. We also entered into warrant transactions with the counterparties of the Hedge entitling them to acquire up to 14 million shares of our common stock at an initial strike price of $37.59 and 850,000 shares of our common stock at an initial strike price of

$34.88 per share, subject to adjustments. The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) at maturity of the warrants exceeds the strike price of the warrants. In addition, non-performance by the counterparties under the Hedge would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 “Financial Statement Details—Debt” for additional information.



Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, at September 30, 2013, our disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Changes In Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

The information set forth under Note 4 “Commitments and Contingencies – Litigation” to our unaudited condensed consolidated financial statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.



Item 1A.	Risk Factors

The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors previously disclosed in Item 1A to our annual report on Form 10-K.

Risks Related to Our Business and Industry

* We are dependent on the success of our consoles and catheters and cannot be certain that IVUS and FFR technology or our IVUS and FFR products will achieve the broad acceptance necessary for us to sustain a profitable business.

Our revenues are primarily derived from sales of our IVUS and FFR products, which include our multi-modality consoles and our single-procedure disposable catheters and fractional flow reserve wires. IVUS technology is widely used in Japan for determining the placement of stents in patients with coronary disease but the penetration rate in the United States and Europe for the same type of procedure is relatively low. Our wires are used to measure the pressure and flow characteristics of blood around plaque, enabling physicians to gauge the physiological impact of blood flow and pressure. We expect that sales of our IVUS and FFR products will continue to account for a majority of our revenues for the foreseeable future, however it is difficult to predict the penetration and future growth rate (if any) or size of the market for IVUS and FFR technology. The expansion of the IVUS and FFR markets depends on a number of factors, such as:


•	physicians accepting the benefits of the use of IVUS and FFR in conjunction with angiography;


•	physician experience with IVUS and FFR products either used alone or jointly used in a single percutaneous coronary intervention, or PCI;


•	the availability of training necessary for proficient use of IVUS and FFR products, as well as willingness by physicians to participate in such training;


•	the additional procedure time required for use of IVUS and FFR compared to the perceived benefits;


•	the perceived risks generally associated with the use of our products and procedures, especially our new products and procedures;


•	the placement of our products in treatment guidelines published by leading medical organizations;


•	the availability of alternative treatments or procedures that are perceived to be or are more effective, safer, easier to use or less costly than IVUS and FFR technology;


•	hospitals' willingness, and having sufficient budgets, to purchase our IVUS and FFR products;


•	the size and growth rate of the PCI market in the major geographies in which we operate;


•	the availability of adequate reimbursement in the United States and other countries; and


•	the success of our marketing efforts and publicity regarding IVUS and FFR technology.

Even if IVUS and FFR technology gain wide market acceptance, our IVUS and FFR products may not adequately address market requirements and may not continue to gain or maintain market acceptance among physicians, healthcare payors and the medical community due to factors such as:


•	the lack of perceived benefit from information related to plaque composition available to the physician through use of our IVUS products, including the ability to identify calcified and other forms of plaque;


•	the lack of perceived benefit from information related to pressure and flow characteristics of blood around plaque available to the physician through the use of our FFR products;


•	the actual and perceived ease of use of our IVUS and FFR products;


•	the quality of the images rendered by our IVUS products;


•	the quality of the measurements provided by our FFR products;


•	the cost, performance, benefits and reliability of our IVUS and FFR products relative to competing products and services;


•	the lack of perceived benefit of integration of our IVUS and FFR products into the cath lab; and


•	the extent and timing of technological advances.

If IVUS and FFR technology generally, or our IVUS and FFR products specifically, do not gain or continue to gain wide market acceptance, we may not be able to achieve our anticipated growth, revenues or profitability and our results of operations would suffer.

* The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

We derive, and anticipate that we will continue to derive, a significant portion of our revenues from operations in Japan and Europe. As we expand internationally, we will need to hire, train and retain qualified personnel for our manufacturing and direct sales efforts, retain distributors and train their and our manufacturing, sales and other personnel in countries where language, cultural or regulatory impediments may exist. We cannot ensure that distributors, physicians, regulators or other government agencies outside the United States will accept our products, services and business practices. Further, we purchase and manufacture some components in foreign markets. The manufacture, sale and shipment of our products and services across international borders, as well as the purchase of components from non-U.S. sources, subject us to extensive U.S. and foreign governmental trade regulations. Current or future trade, social and environmental regulations or political issues could restrict the supply of resources used in production or increase our costs. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations in connection with our international operations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations in connection with our international operations could result in the disruption of our manufacturing, shipping and sales activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:


•	our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required export or import licenses or approvals;


•	changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff barriers to trade;


•	burdens of complying with a wide variety of foreign laws and regulations related to healthcare products;


•	costs of localizing product and service offerings for foreign markets;


•	business practices favoring local companies;


•	longer payment cycles and difficulties collecting receivables or otherwise exercising remedies (including by foreclosing on the applicable products sold) against defaulting counterparties through foreign legal systems;


•	difficulties in enforcing or defending agreements and intellectual property rights;


•	differing local product preferences, including as a result of differing reimbursement practices;

•

possible failure to comply with anti-bribery laws such as the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, even though non-compliance could be inadvertent (see, for example, the discussion under “-Risks related to government regulation-We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.”);


•	fluctuations in foreign currency exchange rates and their impact on our operating results; and


•	changes in foreign political or economic conditions.

In addition, we face risks associated with potential increased costs associated with overlapping tax structures, including the tax costs associated with repatriating cash. For example, President Obama's administration has announced legislative proposals to tax profits of U.S. companies earned abroad. We derive a significant portion of our revenues from our international operations, and while it is impossible for us to predict whether these and other proposals will be implemented, or how they will ultimately impact us, they may materially impact our results of operations if, for example, any future potential profits earned abroad are subject to U.S. income tax, or we are otherwise disallowed deductions as a result of any such profits.

We cannot ensure that one or more of these factors will not harm our business. Any material decrease in our international revenues or inability to expand our international operations would adversely impact our revenues, results of operations and financial condition.

* Declines in the number of PCI procedures performed for any reason may adversely impact our business.

Our IVUS and FFR products are used in connection with procedures. Physicians may choose to perform fewer PCI procedures. For example, recently the number of PCI procedures declined in the United States and Japan, in part due to concerns regarding the efficacy of therapeutic treatment options, the long-term efficacy of drug-eluting stents, economic constraints, reduced rates of restenosis and concerns by clinicians and payers regarding the appropriateness of conducting PCI procedures. If the number of PCI procedures continues to decline, the need for IVUS and FFR procedures could also decline, which would adversely impact our operating results and our business prospects.

* We have a limited operating history and have only achieved profitability in 2010, 2011 and 2012. We do not expect to be profitable in 2013 and cannot assure you that we will achieve and sustain profitability in future periods.

We were formed in January 2000 and have been profitable, on a full-year basis, only in 2010, 2011 and 2012. We do not expect to be profitable in 2013. To the extent that we are able to increase revenues, we expect our operating expenses will also increase as we expand our business to meet anticipated growing demand for our products, devote resources to our sales, marketing and research and development activities and satisfy our debt service obligations. If we are unable to reduce our cost of revenues and our operating expenses, we may not achieve profitability in future. We expect to experience quarterly fluctuations in our revenues due to the timing of capital purchases by our customers and to a lesser degree the seasonality of disposable consumption by our customers. Additionally, expenses will fluctuate as we make future investments in research and development, selling and marketing and general and administrative activities, including as a result of new product introductions, transitioning from distributor arrangements to a direct sales force in different markets, satisfying our debt service obligations, and fund our litigation costs. This will cause us to experience variability in our reported earnings and losses in future periods. You should not rely on our operating results for any prior quarterly or annual period as an indication of our future operating performance.

We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.

We have a significant amount of indebtedness, including $485.0 million in aggregate principal amount of indebtedness under our 2.875% Convertible Senior Notes due 2015, or the 2015 Notes ($25.0 million), and our 1.75% Convertible Notes due 2017, or the 2017 Notes ($460.0 million). Our ability to make payments on, and to refinance, our indebtedness, including the 2015 Notes and the 2017 Notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of the 2015 Notes and the 2017 Notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the 2015 Notes or the 2017 Notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the 2015 Notes and 2017 Notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions. In addition, in the event of a default under the 2015 Notes or the 2017 Notes, the holders and/or the trustee under the indenture governing the 2015 Notes or the 2017 Notes, as applicable, may accelerate our payment obligations under the applicable notes, which could have a material adverse effect on our business, financial condition and results of operations. Any such acceleration may also trigger an event of default under the other series of notes. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.

In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:


•	make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;


•	limit our flexibility in planning for, or reacting to, changes in our business and our industry;


•	place us at a competitive disadvantage compared to our competitors who have less debt; and


•	limit our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, which we are not prohibited from doing under the terms of the indentures governing the 2015 Notes and the 2017 Notes, the risks related to our business and our ability to service our indebtedness would increase.

Competition from companies, particularly those that have longer operating histories and greater resources than us, may harm our business.

The medical device industry, including the market for IVUS and FFR products, is highly competitive, subject to rapid technological change and significantly affected by new product introductions and market activities of other participants. As a result, even if the size of the IVUS and FFR market increases, we can make no assurance that our revenues will increase. In addition, as the markets for medical devices, including IVUS and FFR products, develop, additional competitors could enter the market. To compete effectively, we will need to continue to demonstrate that our products are attractive relative to alternative devices and treatments. We believe that our continued success depends on our ability to:


•	innovate and maintain scientifically advanced technology;


•	apply our technology across products and markets;


•	successfully market our products;


•	develop proprietary products;


•	successfully conduct clinical studies that expand our markets;


•	obtain and maintain patent protection for our products;


•	secure and preserve regulatory approvals;


•	achieve manufacturing efficiencies;


•	attract and retain skilled personnel; and


•	successfully add complementary offerings and technology through acquisitions, licensing agreements and strategic partnerships.

With respect to our IVUS products, our primary competitor is Boston Scientific, Inc., or Boston Scientific. Our FFR products compete with the products of St. Jude Medical, Inc., or St. Jude. We also compete in Japan with respect to IVUS products with Terumo Corporation, or Terumo. Boston Scientific, St. Jude, Terumo and other potential competitors who are or may be substantially larger than us may enjoy competitive advantages, including:


•	more established distribution networks;


•	entrenched relationships with physicians;


•	products and procedures that are less expensive;


•	broader ranges of products and services that may be sold in bundled arrangements;


•	greater experience in launching, marketing, distributing and selling products;


•	greater experience in obtaining and maintaining FDA and other regulatory clearances and approvals;


•	established relationships with healthcare providers and payors; and


•	greater financial and other resources for product development, sales and marketing, acquisitions of products and companies, and intellectual property protection.

For these and other reasons, we may not be able to compete successfully against our current or potential future competitors, and sales of our IVUS and FFR products may decline.

*Failure to innovate may adversely impact our competitive position and may adversely impact our ability to drive price increases for our products and our product revenues.

Our future success will depend upon our ability to innovate new products and introduce enhancements to our existing products in order to address the changing needs of the marketplace. We also rely on new products and product enhancements to attempt to drive price increases for our products in our markets. Frequently, product development programs require assessments to be made of future clinical need and commercial feasibility, which are difficult to predict. Customers may forego purchases of our products and purchase our competitors' products as a result of delays in introduction of our new products and enhancements, failure to choose correctly among technical alternatives or failure to offer innovative products or enhancements at competitive prices and in a timely manner. In addition, announcements of new products may result in a delay in or cancellation of purchasing decisions in anticipation of such new products. We may not have adequate resources to introduce new products in time to effectively compete in the marketplace. Any delays in product releases may negatively affect our business.

We also compete with new and existing alternative technologies that are being used to penetrate the worldwide vascular imaging market without using IVUS technology. These products, procedures or solutions could prove to be more effective, faster, safer or less costly than our IVUS products. Technologies such as angiography, angioscopy, multi-slice computed tomography, intravascular magnetic resonance imaging, or MRI, electron beam computed tomography, and MRI with contrast agents are being used in lieu of or for imaging the vascular system.

We also develop and manufacture laser and non-laser light sources, optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors with applications in telecommunications, pharmaceutical manufacturing, high-speed industrial process control, and chemical and petrochemical processing, medical diagnostics, and scientific discovery. Products developed by competitors based on tunable filter technology could compete on the basis of lower cost and other factors. In addition, customers may build similar functionality directly into their products, which in turn could decrease the demand for our products.

The introduction of new products, procedures or clinical solutions by competitors may result in price reductions, reduced margins, loss of market share and may render our products obsolete. We cannot guarantee that these alternative technologies will not be commercialized and become viable alternatives to our products in the future, and we cannot guarantee that we will be able to compete successfully against them if they are commercialized.

The successful continuing development of our existing and new products depends on us maintaining strong relationships with physicians.

The research, development, marketing and sales of our products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, our existing and new products may not be developed and marketed in line with the needs and expectations of the professionals who use or would use and support our products and the development and marketing of our products could suffer, which could have a material adverse effect on our business and results of operations.

*Delays or failures in planned product introductions may adversely affect our business and negatively impact future revenues.

We are currently developing new products as well as product enhancements with respect to our existing products. We have in the past experienced, and may again in the future experience, delays and failures in various phases of product development and commercial launch, including during research and development, manufacturing, limited release testing, marketing and customer education efforts. In particular, developing and integrating products and technologies of acquired businesses is time consuming and has in the past resulted, and may again in the future result, in longer developmental timelines than we initially anticipated or our discontinuing our development or commercialization efforts with respect to the acquired products and technologies. Any delays in our product launches or our discontinuing our development or commercialization efforts with respect to any product candidates or products may significantly impede our ability to successfully compete in our markets and may reduce our revenues.

We and our present and future collaborators may fail to develop or effectively commercialize products covered by our present and future collaborations if:


•	our collaborators become competitors of ours or enter into agreements with our competitors;


•	we do not achieve our objectives under our collaboration agreements;


•	we are unable to manage multiple simultaneous product discovery and development collaborations;


•	we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;


•	we or our collaborators are unable to obtain patent protection for the products or proprietary technologies we develop in our collaborations; or


•	we or our collaborators encounter regulatory hurdles that prevent commercialization of our products.

In addition, conflicts may arise with our collaborators, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with our existing or future collaborators, they may act in their self-interest, which may be adverse to our best interest.

If we or our collaborators are unable to develop or commercialize products, or if conflicts arise with our collaborators, we will be delayed or prevented from developing and commercializing products, which will harm our business and financial results.

If the clinical studies that we sponsor or co-sponsor are unsuccessful, or clinical data from studies conducted by other industry participants are negative, we may not be able to develop or increase penetration in identified markets and our business prospects may suffer.

We sponsor or co-sponsor several clinical studies to demonstrate the benefits of our products in current markets where we are trying to increase use of our products and in new markets. Implementing a study is time consuming and expensive, and the outcome is uncertain. The completion of any of these studies may be delayed or halted for numerous reasons, including, but not limited to, the following:


•	the death of one or more patients during a clinical study for reasons that may or may not be related to our products, including the advanced stage of their disease or other medical problems;


•	regulatory inspections of manufacturing facilities, which may, among other things, require us or a co-sponsor to undertake corrective action or suspend the clinical studies;


•	changes in governmental regulations or administrative actions;


•	adverse side effects in patients, including adverse side effects from our or a co-sponsor's drug candidate or device;


•	the FDA institutional review boards or other regulatory authorities do not approve a clinical study protocol or place a clinical study on hold;


•	patients do not enroll in a clinical study or do not follow up at the expected rate;


•	our co-sponsors do not perform their obligations in relation to the clinical study or terminate the study;


•	third-party clinical investigators do not perform the clinical studies on the anticipated schedule or consistent with the clinical study protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner; and


•	the interim results of the clinical study are inconclusive or negative, and the study design, although approved and completed, is inadequate to demonstrate safety and efficacy of our products.

Some of the studies that we co-sponsor are designed to study the efficacy of a third-party's drug candidate or device. Such studies are designed and controlled by the third party and the results of such studies will largely depend upon the success of the third-party's drug candidate or device. These studies may be terminated before completion for reasons beyond our control such as adverse events associated with a third-party drug candidate or device. A failure in such a study may have an adverse impact on our business by either the attribution of the study's failure to our technology or our inability to leverage publicity for proper functionality of our products as part of a failed study.

Clinical studies may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the study protocol, the proximity of patients to clinical sites, eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical studies if the applicable protocol requires them to undergo extensive post-treatment procedures or if they are persuaded to participate in different contemporaneous studies conducted by other parties. Delays in patient enrollment or failure of patients to continue to participate in a study may result in an increase in costs, delays or the failure of the study. Such events may have a negative impact on our business by making it difficult to penetrate or expand certain identified markets. Further, if we are forced to contribute greater financial and clinical resources to a study, valuable resources will be diverted from other areas of our business.

Negative results from clinical studies conducted by other industry participants could harm our results.

Divestitures of any of our businesses or product lines may materially adversely affect our business, results of operations and financial condition.

We continue to evaluate the performance of all of our businesses and may sell a business or product line. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a business or product line.

*In connection with our recent acquisitions we may experience difficulty with integration, and if we choose to acquire any new businesses, products or technologies, we may experience difficulty in the identification or integration of any such acquisition, and our business may suffer.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies. Accordingly, we have acquired, and may in the future acquire, complementary businesses, products or technologies instead of developing them ourselves. We recently acquired Sync-Rx, Ltd., or Sync-Rx, and Crux Biomedical, Inc., or Crux, as well as the Pioneer Plus^TM re-entry catheter product line from Medtronic, Inc., or Pioneer. We can provide no assurance that the expected benefits of the Sync-Rx, Crux or Pioneer acquisitions will be realized. Furthermore, we have agreed in the merger agreement with Crux that, in the event that we have not achieved the applicable commercial launch for one of the Crux products by June 30, 2016 (which date may be extended upon a specified payment by us to June 30, 2017), we will license back to the former Crux stockholders certain intellectual property rights relating to that product, which could adversely affect our business. We do not know if we will identify or complete any additional acquisitions, or whether we will be able to successfully integrate any acquired business, product or technology or retain key employees, including in connection with our acquisitions of Sync-Rx and Crux, or Pioneer. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will suffer. We have entered, and may in the future enter, markets through our acquisitions that we are not familiar with and have no experience managing. If we fail to integrate these operations into our business, our resources may be diverted from our core business and this could have a material adverse effect on our business, financial condition and results of operations.

Our business has become more decentralized geographically through our acquisitions and this may expose us to operating inefficiencies across these diverse locations, including difficulties and unanticipated expenses related to the integration of departments, information technology systems, and accounting records and maintaining uniform standards, such as internal controls, procedures and policies. In addition, we have, and in the future may increase, our exposure to risks related to business operations outside the United States due to our acquisitions.

We may also encounter risks, costs and expenses associated with any undisclosed or other unanticipated liabilities, use more cash and other financial resources on integration and implementation activities than we expect or incur significant costs and expenses related to litigation with counterparties to such transactions, such as the lawsuit filed against us in federal district court on March 27, 2012 alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on our acquisition of CardioSpectra, Inc. in 2007. In addition, any amortization or other charges resulting from acquisitions, including write-offs relating to goodwill and other intangible assets, could negatively impact our operating results.

If our products and technologies are unable to adequately identify the plaque that is most likely to rupture and cause a coronary event, we may not be able to develop a market for our vulnerable plaque products or expand the market for existing products.

We are utilizing substantial resources in the development of products and technologies to aid in the identification, diagnosis and treatment of the plaque that is most likely to rupture and cause a coronary event, or vulnerable plaque. The PROSPECT study demonstrated the ability of IVUS and VH to stratify lesions according to risk. However, no randomized controlled trial has been performed to assess the benefit of treating or deferring treatment in these stratified lesions. If we are unable to develop products or technologies that can identify vulnerable plaque, a market for products to identify vulnerable plaque may not materialize and our business may suffer.

* Fluctuations in foreign currency exchange rates could result in declines in our reported revenues and earnings.

Even though we engage in foreign currency hedging arrangements for certain of our revenues and operating expenses, foreign currency fluctuations may adversely affect our revenues and earnings. During the nine months ended September 30, 2013, 17.4% and 27.4% of our revenues were denominated in the euro and yen, respectively, and 9.3% and 11.1% of our operating expenses were denominated in the euro and the yen, respectively. We use foreign currency forward contracts to

manage a portion of the foreign currency risk related to our intercompany receivable balances with our foreign subsidiaries whose functional currencies are the euro and yen. Commencing April 2013, we initiated a hedging program that broadened our use of foreign currency forward contracts to manage portions of our foreign currency risk related to our intercompany inventory transactions with our foreign subsidiaries and other non-functional currency transactions worldwide. We cannot be assured our hedges will be effective or that the costs of the hedges will not exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the euro and the yen, could result in material amounts of cash being required to settle the hedge transactions or could adversely affect our financial results. In periods of a strengthening U.S. dollar relative to the yen or the euro, we would record less revenue and our results of operations could be negatively impacted.

*General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.

Our operations and performance depend significantly on national and worldwide economic conditions and the resulting impact on purchasing decisions and the level of spending on our products by customers in the geographic markets in which our IVUS and FFR and other products are sold or distributed. These economic conditions remain challenging in many countries and regions, including without limitation the United States, Japan, Europe, the Middle East and Africa, where we have generated most of our revenues. In the United States, the recovery from the recent recession has been below historic averages and the unemployment rate is expected to remain high for some time. The challenging global economic conditions have also led to concerns over the solvency of certain European Union member states, including Greece, Ireland, Italy, Portugal and Spain. On August 5, 2011, Standard & Poor's downgraded the U.S. credit rating to AA+ from its top rank of AAA, and the current U.S. debt ceiling and budget deficit concerns have increased the possibility of other credit-rating agency downgrades that could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. Likewise, the political unrest in the Middle East may have adverse consequences to the global economy or to our customers in the Middle East, which could negatively impact our business. In any event, uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. If our customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by the deterioration in national and worldwide economic conditions, this could result in reductions in the sales of our products, longer sales cycles and slower adoption of new technologies by our customers, which would materially and adversely affect our business. We experienced declines in the number of PCI procedures performed in the U.S. and in sales of our non-medical products to telecommunications and industrial companies during 2012 and continuing during 2013 due to, in part, the then-prevailing economic conditions. In addition, our customers', distributors' and suppliers' liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect our ability to collect on our outstanding invoices or lengthen our collection cycles or otherwise exercise remedies (including by foreclosing on the applicable products sold) against a defaulting customer or distributor, adversely affect our ability to distribute our products or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

We have invested a portion of our excess cash in money market funds and corporate debt securities issued by banks and corporations. The interest paid on these types of investments and the value of certain securities may decline. While our investment portfolio has experienced reduced yields, we have not yet experienced a deterioration of the credit quality of our holdings or other material adverse effects. There can be no assurances that our investment portfolio will not experience any such deterioration in credit quality or other material adverse effects in future periods, or that national and worldwide economic conditions will not worsen.

Our transition to a direct sales force in Japan may not be successful or may cause us to incur additional expenses sooner than initially planned and experience reduced revenues. If we are not successful or incur such additional expenses sooner than expected, then our business and results of operations may be materially and adversely affected.

Historically, a significant portion of our annual revenues have been derived from sales to our Japanese distributors. In 2011, we completed the termination of our distributor relationships in Japan and fully transitioned to a direct sales force in Japan. There is no assurance that we will be successful in our transition to a direct sales force in Japan and that we will be able to continue to successfully place, sell and service our products in Japan through a direct sales force or to successfully insure the growth of our direct sales force that may be needed in the future. Our challenges and potential risks in connection with expanding our direct sales force in Japan include, but are not limited to, (a) the successful retention and servicing of current dealers and customers in Japan, (b) strong market adoption of our technology in Japan, (c) the achievement of our growth and market development strategies in Japan, (d) our ability to recruit, train and retain an expanded direct sales force in Japan, and (e) the effect of the 2011 earthquake, tsunami and nuclear power plant meltdown in Japan on operating conditions as well as end-user demand. In addition, we may incur significant additional expenses and reduced revenues. Our efforts to successfully expand our direct sales strategy in Japan or the failure to achieve our sales objectives in Japan may adversely impact our

revenues, results of operations and financial condition and negatively impact our ability to sustain and grow our business in Japan.

Quality problems with our processes and products could harm our reputation for producing high-quality products and erode our competitive advantage, sales and market share.

The manufacture of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Failure to manufacture our products in accordance with product specifications could result in increased costs, lost revenues, field corrective actions, customer dissatisfaction or voluntary product recalls, any of which could harm our profitability and commercial reputation. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors. Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our products. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality devices will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.

Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.

Our reliance on these sole source suppliers subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:


•	inability to obtain adequate supply in a timely manner or on commercially reasonable terms;


•	interruption or delayed delivery of supply resulting from our suppliers' difficulty in accessing financial or credit markets or otherwise securing cash and capital resources;


•	interruption of supply resulting from modifications to, or discontinuation of, a supplier's operations;


•	delays in product shipments resulting from uncorrected defects, reliability issues or a supplier's variation in a component;


•	uncorrected quality and reliability defects that impact performance, efficacy and safety of products from replacement suppliers;


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


•	difficulty identifying and qualifying alternative suppliers for components in a timely manner;


•	production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and


•	delays in delivery by our suppliers due to changes in demand from us or their other customers.

In addition, because we do not have long term supply agreements with some of our suppliers, we are subjected to the following risks:


•	unscheduled price increases;


•	lack of notice when the materials used to manufacture are not available; and


•	lack of notice of discontinued operations or manufacturing.

We also utilize lean manufacturing processes that attempt to optimize the timing of our inventory purchases and supply levels of our inventories. Any significant delay or interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner or to plan for sufficient inventory, could impair our ability to manufacture our products or meet the demand of our customers and harm our business. Identifying and qualifying additional or replacement suppliers for any of the components or materials used in our products, or obtaining additional inventory, if required, may not be accomplished quickly or at all and could involve significant

additional costs. Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components or materials used to manufacture our products or sufficient inventory would limit our ability to manufacture our products and could therefore have a material adverse effect on our business, financial condition and results of operations.

*We may encounter a number of challenges relating to the management and operation of our newly constructed Costa Rica facilities, and the expansion has and will continue to increase our fixed costs, which may have a negative impact on our financial results and condition.

In 2010, we, through a wholly owned subsidiary, entered into a series of agreements to acquire real property and design and build manufacturing facilities in Costa Rica. We have never operated manufacturing facilities outside the United States, and cannot assure you that we will be able to successfully operate these facilities in an efficient or profitable manner, or at all. In addition, we are continuing to transfer our manufacturing processes, technology and know-how to our Costa Rica facilities. If we are unable to operate these facilities or successfully transfer our manufacturing processes, technology and know-how in a timely and cost-effective manner, or at all, then we may experience disruptions in our operations, which could negatively impact our business and financial results.

During 2012, we received regulatory approval to ship product from our Costa Rica facility to the United States, Japan and certain countries in Europe. We will need to obtain a number of additional regulatory approvals prior, and subsequent, to shipping products from this facility to other geographies. Our ability to obtain these approvals may be subject to additional costs and possible delays beyond what we initially plan for. In addition, our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory requirements. Failure of our manufacturing facilities to comply with regulatory and quality requirements would harm our business and our results of operations.

Our ability to operate this facility successfully will greatly depend on our ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills. We will compete with several other medical device companies with manufacturing facilities in Costa Rica to hire these skilled employees. Should we be unable to hire such employees, and an adequate number of them, our business and financial results could be negatively impacted.

The expansion of the manufacturing facilities has and will continue to increase our fixed costs. If we experience a demand in our products that exceeds our manufacturing capacity, we may not have sufficient inventory to meet our customers' demands, which would negatively impact our revenues. If the demand for our products decreases or if we do not produce the output we plan or anticipate after the facilities are operational, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per unit fixed cost, which would have a negative impact on our financial condition and results of operations.

We also face particular commercial, jurisdictional and legal risks associated with our proposed expansion in Costa Rica. The success of this relationship and our activities in Costa Rica in general are subject to the economic, political and legal conditions or developments in Costa Rica.

Disruptions or other adverse developments during the operations of our Costa Rica facilities could materially adversely affect our business. If our Costa Rica operations are disrupted for any reason, we may be forced to locate alternative manufacturing facilities, including facilities operated by third parties. Disruptions may include, but are not limited to: changes in the legal and regulatory environment in Costa Rica; slowdowns or work stoppages within the Costa Rican customs authorities; acts of God (including but not limited to potential disruptive effects from an active volcano near the facility or earthquakes, hurricanes and other natural disasters); and other issues associated with significant operations that are remote from our headquarters and operations centers. Additionally, continued growth in product sales could outpace the ability of our Costa Rican operation to supply products on a timely basis or cause us to take actions within our manufacturing operations, which increase costs, complexity and timing. Locating alternative facilities would be time-consuming, would disrupt our production and cause shipment delays and could result in damage to our reputation and profitability. Additionally, we cannot assure you that alternative manufacturing facilities would offer the same cost structure as our Costa Rica facility.

If our facilities or systems are damaged or destroyed, we may experience delays that could negatively impact our revenues or have other adverse effects.

Our facilities may be affected by natural or man-made disasters. If one of our facilities were affected by a disaster, we would be forced to rely on third-party manufacturers or to shift production to another manufacturing facility. In such an event, we would face significant delays in manufacturing which would prevent us from being able to sell our products. In addition, our insurance may not be sufficient to cover all of the potential losses and may not continue to be available to us on acceptable terms, or at all. Furthermore, although our computer and communications systems are protected through physical and software safeguards, they are still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events, and any failure of these systems to perform for any reason and for any period of time could adversely impact our ability to operate our business.

We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents and short-term and long-term available-for-sale investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to act on opportunities to acquire or invest in complementary businesses, products or technologies. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:


•	market acceptance of our products;


•	the revenues generated by our products;


•	the need to adapt to changing technologies and technical requirements, and the costs related thereto;


•	the costs associated with expanding our manufacturing, marketing, sales and distribution efforts;


•	the existence and timing of opportunities for expansion, including acquisitions and strategic transactions; and


•	costs and fees associated with defending existing or potential litigation.

In addition, we are required to make periodic interest payments to the holders of the 2015 Notes and the 2017 Notes and to make payments of principal upon conversion or maturity. We may also be required to purchase the 2015 Notes or the 2017 Notes for cash upon the occurrence of a change of control or certain other fundamental changes involving us. If our capital resources are insufficient to satisfy our debt service or liquidity requirements, we may seek to sell additional equity or debt securities or to obtain debt financing. The sale of additional equity or debt securities, or the use of our stock in an acquisition or strategic transaction, would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and our significant historical losses and the current national and global financial conditions may prevent us from obtaining additional funds on favorable terms, if at all.

We are dependent on our collaborations, and events involving these collaborations or any future collaborations could delay or prevent us from developing or commercializing products.

The success of our current business strategy and our near- and long-term viability will depend on our ability to execute successfully on existing strategic collaborations and to establish new strategic collaborations. Collaborations allow us to leverage our resources and technologies and to access markets that are compatible with our own core areas of expertise. To penetrate our target markets, we may need to enter into additional collaborative agreements to assist in the development and commercialization of future products. Establishing strategic collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position or our internal capabilities. Our discussions with potential collaborators may not lead to the establishment of new collaborations on favorable terms or at all.

We have collaborations with a number of entities, including Medtronic, Inc., The Cleveland Clinic Foundation, Siemens AG, and Philips Medical Systems Nederland B.V. In each collaboration, we combine our technology or core capabilities with those of the third party to permit either greater penetration into markets or to enhance the functionality of our current and planned products. We have limited control over the amount and timing of resources that our current collaborators or any future collaborators devote to our collaborations or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. Moreover, in the event of termination of a collaboration agreement, we may not realize the intended benefits or we may not be able to replace the arrangement on comparable terms or at all.

If the third-party distributors that we rely on to market and sell our products are not successful, we may be unable to increase or maintain our level of revenues.

A portion of our revenue is generated by our third-party distributors, especially in international markets. If these distributors cease or limit operations or experience a disruption of their business operations, or are not successful in selling our products, we may be unable to increase or maintain our level of revenues, and any such developments could negatively affect our international sales strategy. Over the long term, we intend to grow our business internationally, and to do so we will need to attract additional distributors to expand the territories in which we do not directly sell our products. Our distributors may not commit the necessary resources to market and sell our products. If current or future distributors do not continue to distribute our products or do not perform adequately or if we are unable to locate distributors in particular geographic areas, we may not realize revenue growth internationally.

Our reported or future financial results could be adversely affected by the application of existing or future accounting standards.

U.S. generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could have a significant adverse effect on our financial results. For example, the accounting for convertible debt securities, and the accounting for the convertible note hedge transactions and the warrant transactions we entered into in connection with the offerings of the 2015 Notes and the 2017 Notes, is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or when any such change could be made, and any such change could have an adverse impact on our reported or future financial results. In addition, in the event the conversion features of the 2015 Notes or the 2017 Notes are triggered, we could be required under applicable accounting standards to reclassify all or a portion of the outstanding principal of the 2015 Notes or the 2017 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

We cannot assure you that our net operating loss carryforwards will be available to reduce our tax liability.

Our ability to use our net operating loss carryforwards to reduce future income tax obligations may be limited or reduced. Generally, a change of more than 50 percentage points in the ownership of our shares, by value, over the three-year period ending on the date the shares were acquired constitutes an ownership change and may limit our ability to use our net operating loss carryforwards. Should additional ownership changes occur in the future, our ability to utilize our net operating loss carryforwards could be limited. In addition, with respect to any entity that we have acquired or may in the future acquire, the ability of those entities to use net operating loss carryforwards, if any, to reduce future income tax obligations may be limited or reduced due to changes in ownership of such entities occurring prior to or as a result of our acquisition of such entities.

If we fail to properly manage our anticipated growth, our business could suffer.

Rapid growth of our business is likely to continue to place a significant strain on our managerial, operational and financial resources and systems. To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively. We anticipate hiring additional personnel to assist in the commercialization of our current products and in the development of future products. We will be dependent on our personnel and third parties to effectively market and sell our products to an increasing number of customers. We will also depend on our personnel to develop and manufacture in anticipated increased volumes our existing products, as well as new products and product enhancements. Further, our anticipated growth will place additional strain on our suppliers resulting in increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.

*Issues arising from the implementation of our new enterprise resource planning system could adversely affect our operating results and ability to manage our business effectively.

We recently completed our company-wide implementation of a new enterprise resource planning, or ERP, system to further enhance operating efficiencies and provide more effective management of our business operations. Implementing a new ERP system is costly and involves risks inherent in the conversion to a new computer system, including loss of information, disruption to our normal operations, changes in accounting procedures and internal control over financial reporting, as well as problems achieving accuracy in the conversion of electronic data. Failure to properly or adequately address these issues could result in increased costs, the diversion of management's and employees' attention and resources and could materially adversely affect our operating results, internal controls over financial reporting and ability to manage our business effectively. While the ERP system is intended to further improve and enhance our information systems, large scale implementation of a new information system exposes us to the risks of starting up the new system and integrating that system with our existing systems and processes, including possible disruption of our financial reporting, which could lead to a failure to make required filings under the federal securities laws on a timely basis.

*Any defects or malfunctions in the computer hardware or software we utilize in our products could cause severe performance failures in such products, which would harm our reputation and adversely affect our results of operations and financial condition.

Our existing and new products depend and will depend on the continuous, effective and reliable operation of computer hardware and software. For example, our IVUS products utilize sophisticated software that analyzes in real-time plaque composition and identifies lumen and vessel borders, which are then displayed in three-dimensional, color-coded images on a computer screen. Although we update the computer software utilized in our products on a regular basis, there can be no guarantee that defects do not or will not in the future exist or that unforeseen malfunctions, whether within our control or otherwise, will not occur. In addition, our devices may be targeted and/or adversely affected by cybersecurity attacks, including malware. Although we have implemented various safeguards to prevent unauthorized access or modification to our products, we cannot assure you that these safeguards are or will continue to be effective. Any defect, malfunction or other failing in the

computer hardware or software utilized by our IVUS or other products, including products we develop in the future, could result in inaccurate readings, misinterpretations of data, or other performance failures that could render our products unreliable or ineffective and could lead to decreased confidence in our products, damage to our reputation, reduction in our sales and product liability claims, the occurrence of any of which could have a material adverse effect on our results of operations and financial condition. Furthermore, as a result of cybersecurity vulnerabilities and incidents that could directly impact medical devices, in June 2013 the FDA issued draft guidance which may result in additional regulation in the medical device industry, which could, among other things, impact our ability to obtain regulatory approval of new products.

* If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team, in particular our President and Chief Executive Officer, R. Scott Huennekens, could harm our business. We have entered into employment contracts or similar agreements with R. Scott Huennekens; our Chief Financial Officer, John T. Dahldorf and our President, Commercial U.S. & APLAC Sales, Jorge J. Quinoy, but these agreements do not guarantee that they will remain employed by us in the future. The announcement of the loss of one of our key employees could negatively affect our stock price. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including clinical, technical, sales and marketing. This could delay new product development and commercialization, and hinder our marketing and sales efforts, which would adversely impact our competitiveness and financial results.

The expense and potential unavailability of insurance coverage for our company, customers or products may have an adverse effect on our financial position and results of operations.

While we currently have insurance for our business, property, directors and officers, and product liability, insurance is increasingly costly and the scope of coverage is narrower, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to cover the amounts outside of or in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant costs associated with loss or damage that could have an adverse effect on our financial position and results of operations. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all. We do not have the financial resources to self-insure, and it is unlikely that we will have these financial resources in the foreseeable future.

Our product liability insurance covers our products and business operations, but we may need to increase and expand this coverage commensurate with our expanding business. Any product liability claims brought against us, with or without merit, could result in:


•	substantial costs of related litigation or regulatory action;


•	substantial monetary penalties or awards;


•	decreased demand for our products;


•	reduced revenue or market penetration;


•	injury to our reputation;


•	withdrawal of clinical study participants;


•	an inability to establish new strategic relationships;


•	increased product liability insurance rates; and


•	an inability to secure continuing coverage.

Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain regions or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and potential customers may opt against purchasing our products due to the cost or inability to procure insurance coverage.

Compliance with changing corporate governance and public disclosure regulations may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and Nasdaq Global Select Market rules, are creating uncertainty for companies such as ours. To maintain high standards of corporate governance and public disclosure, we have invested, and intend to continue to invest, in reasonably necessary resources to comply with

evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities and may continue to do so in the future.

Risks Related to Government Regulation

*If we fail to obtain or maintain, or experience significant delays in obtaining, regulatory clearances or approvals for our products or product enhancements, our ability to commercially distribute and market our products could suffer.

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. Our failure to comply with such regulations or to make adequate, timely corrections, could lead to the imposition of injunctions, suspensions or loss of marketing clearances or approvals, product recalls, manufacturing cessation, termination of distribution, product seizures, civil penalties, or some combination of such actions. The process of obtaining regulatory authorizations to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such authorizations will be granted on a timely basis, if at all. If regulatory clearance or approvals are received, additional delays may occur related to manufacturing, distribution or product labeling. In addition, we cannot assure you that any new or modified medical devices we develop will be eligible for the shorter 510(k) clearance process as opposed to the PMA process. We have no experience in obtaining PMA approvals. For example, the FDA has been reviewing its 510(k) process and could change the criteria to obtain clearance, which could affect our ability to obtain timely reviews and increase the resources needed to meet new criteria. FDA has also issued, and may in the future issue, draft guidance documents that, if implemented, will likely entail additional regulatory burdens. These additional regulatory burdens could delay our ability to obtain new clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. Such changes could adversely affect our business.

In the member states of the European Economic Area, or EEA, our medical devices are required to comply with the essential requirements of the EU Medical Devices Directives before they can be marketed. Our products, including their design and manufacture, have been certified by the British Standards Institute, or BSI, a United Kingdom Notified Body, as being compliant with the requirements of the Medical Devices Directives. Consequently, we are entitled to affix a CE mark to our products and their packaging and this gives us the right to sell them in the EEA. If we fail to maintain compliance with the Medical Devices Directives, our products will no longer qualify for the CE mark and the relevant devices would not be eligible for marketing in the EEA.

We currently market our IVUS and FFR products in Japan under two types of regulatory approval known as a SHONIN and a NINSHO. As the holder of the SHONINs, we have the authority to import and sell those products for which we have the SHONINs as well as those products for which we have obtained a NINSHO. Responsibility for Japanese regulatory filings and future compliance resides with us. We cannot guarantee that we will be able to adequately meet Japanese regulatory requirements. Non-compliance with Japanese regulations may result in action to prohibit further importation and sale of our products in Japan, a significant market for our products. If we are unable to sell our IVUS and FFR products in Japan, we will lose a significant part of our annual revenues, and our business will be substantially impacted.

Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent, and to the extent we continue to market and sell our products in foreign countries, we will be subject to rigorous regulation in the future. In such circumstances, where we utilize distributors in foreign countries to market and sell our products, we would rely significantly on our distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. Regulatory delays or failures to obtain and maintain marketing authorizations, including 510(k) clearances and PMA approvals, could disrupt our business, harm our reputation, and adversely affect our sales.

Modifications to our products may require new regulatory clearances or approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained.

Modifications to our products may require the submission of new 510(k) notifications or PMA applications. If a modification is implemented to address a safety concern, we may also need to initiate a recall or cease distribution of the affected device. In addition, if the modified devices require the submission of a 510(k) or PMA and we distribute such modified devices without a new 510(k) clearance or PMA approval, we may be required to recall or cease distributing the devices. The FDA can review a manufacturer's decision not to submit a modification and may disagree. The FDA may also on its own initiative determine that clearance of a new 510(k) or approval of a new PMA submission is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require clearance of a new 510(k) or approval of a new PMA. If we begin manufacture and distribution of the modified devices and the FDA later disagrees with our determination and requires the submission of a new 510(k) or PMA for the modifications, we may also be required to recall the distributed modified devices and to stop distribution of the modified devices, which could have an adverse effect on our business. If the FDA does not clear or approve the modified devices, we may need to redesign the devices, which could also harm our business. When a device is marketed without a required clearance or approval, the FDA has

the authority to bring an enforcement action, including injunction, seizure and criminal prosecution. The FDA considers such additional actions generally when there is a serious risk to public health or safety and the company's corrective and preventive actions are inadequate to address the FDA's concerns.

Where we determine that modifications to our products require clearance of a new 510(k) or approval of a new PMA or PMA supplement, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the EEA, we must notify BSI, our EEA Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

If we or our suppliers fail to comply with the FDA's Quality System Regulation or ISO Quality Management Systems, manufacturing of our products could be negatively impacted and sales of our products could suffer.

Our manufacturing practices must be in compliance with the FDA's 21 CFR Part 820 Quality System Regulation, or QSR, which governs the facilities, methods, controls, procedures, and records of the design, manufacture, packaging, labeling, storage, shipping, installation, and servicing of our products intended for human use. We are also subject to similar state and foreign requirements and licenses, including the MDD-93/42/EEC and the ISO 13485 Quality Management Systems, or QMS, standard applicable to medical devices. In addition, we must engage in regulatory reporting in the case of potential patient safety risks and must make available our manufacturing facilities, procedures, and records for periodic inspections and audits by governmental agencies, including the FDA, state authorities and comparable foreign agencies. If we fail to comply with the QSR, QMS, or other applicable regulations and standards, our operations could be disrupted and our manufacturing interrupted, and we may be subject to enforcement actions if our corrective and preventive actions are not adequate to ensure compliance.

Failure to take adequate corrective action in response to inspectional observations or any notice of deficiencies from a regulatory inspection or audit could result in partial or total shut-down of our manufacturing operations unless and until adequate corrections are implemented, voluntary or FDA-ordered recall, FDA seizure of affected devices, court-ordered injunction or consent decree that could impose additional regulatory oversight and significant requirements and limitations on our manufacturing operations, significant fines, suspension or withdrawal of marketing clearances and approvals, and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our products and cause our revenue to decline.

The FDA, BSI, Japan's Pharmaceutical & Medical Device Administration and other regulatory agencies and bodies have previously imposed inspections and audits on us, and may in the future impose additional inspections or audits at any time, which may conclude that our quality system is noncompliant with applicable regulations and standards. Such findings could potentially disrupt our business, harm our reputation and adversely affect our sales.

Our products may in the future be subject to product recalls or voluntary market withdrawals that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found or suspected. For example, in 2010 we recalled our Xtract catheter in circumstances where no patient safety incident was reported but where we had evidence that the device's integrity could be compromised under certain storage conditions. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include corrections as well as removals, of any of our products would divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve expected revenues.

We are required to comply with medical device reporting, or MDR, requirements and must report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA MDR regulations, medical device manufacturers are required to submit information to the FDA when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the EEA are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the Competent Authority in whose jurisdiction the incident occurred. Were this to happen to us, the relevant Competent Authority would file an initial report, and there would then be a further inspection

or assessment if there were particular issues. This would be carried out either by the Competent Authority or it could require that the BSI, as the Notified Body, carry out the inspection or assessment.

Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. Malfunctions have been reported to us in the past, and, while we investigated each of the incidents and believe we have taken the necessary corrective and preventive actions, we cannot guarantee that similar or different malfunctions will not occur in the future. If malfunctions do occur, we cannot guarantee that we will be able to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected devices, initiate voluntary recalls, and redesign the devices; nor can we ensure that regulatory authorities will not take actions against us, such as ordering recalls, imposing fines, or seizing the affected devices. If someone is harmed by a malfunction or by product mishandling, we may be subject to product liability claims. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

* We are subject to federal, state and foreign healthcare laws and regulations and implementation or changes to such healthcare laws and regulations could adversely affect our business and results of operations.

In an effort to contain rising healthcare costs, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, PPACA, which may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs. PPACA includes, among other things, the following measures:


•	a deductible 2.3% excise tax, with limited exceptions, on the sale of certain medical devices after December 31, 2012 by the manufacturer, producer, or importer of the device in an amount equal to 2.3% of the sale price;


•	a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research;

•

new requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year, with data collection to be required no earlier than January 1, 2013 and reporting to be required at a later date yet to be specified;


•	payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models, beginning on or before January 1, 2013;


•	expansion of federal health care fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for noncompliance; and


•	an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

On June 28, 2012, the United States Supreme Court upheld the constitutionality of PPACA, excepting certain provisions that would have required states to expand their Medicaid programs or risk losing all of the state's Medicaid funding. At this time, it remains unclear whether there will be any further changes made to PPACA, whether in part or in its entirety. We are unable to predict at this time the impact of such recently enacted federal healthcare reform legislation on the medical device industry in general, or on us in particular, and what, if any, additional legislation or regulation relating to the medical device industry may be enacted in the future. An expansion in the government's role in the U.S. healthcare industry may cause general downward pressure on the prices of medical device products, lower reimbursements for procedures using our products, reduce medical procedure volumes and adversely affect our business and results of operations. Although we cannot predict the many ways that the federal healthcare reform laws might affect our business, sales of certain of our products became subject to the 2.3% excise tax beginning in 2013. It is unclear whether and to what extent, if at all, other anticipated developments resulting from the federal healthcare reform legislation, such as an increase in the number of people with health insurance and an increased focus on preventive medicine, may provide us additional revenue to offset this excise tax. If additional revenue does not materialize, or if our efforts to offset the excise tax through spending cuts or other actions are unsuccessful, the increased tax burden would adversely affect our financial performance, which in turn could cause the price of our stock to decline. In addition, a number of foreign governments are also considering or have adopted proposals to reform their healthcare systems. Because a significant portion of our revenues from our operations is derived internationally, if significant reforms are made to the healthcare systems in other jurisdictions, our sales and results of operations may be materially and adversely impacted.

We intend to market our products in a number of international markets. Although certain of our IVUS products have been approved for commercialization in Japan and in the EEA, in order to market our products in other foreign jurisdictions, we have had to, and will need to in the future, obtain separate regulatory approvals. The approval procedure varies among jurisdictions and can involve substantial additional testing. Approval or clearance of a device by the FDA does not ensure approval by regulatory authorities in other jurisdictions, and approval by one foreign regulatory authority does not ensure marketing authorization by regulatory authorities in other foreign jurisdictions or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required to obtain foreign approval may differ from that required to obtain FDA approval, and we may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market other than in the EEA and Japan.

We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.

Our operations may be directly or indirectly affected by various broad federal, state or foreign healthcare fraud and abuse laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between device manufacturers on one hand and prescribers and purchasers on the other. For example, the government has sought to apply the Anti-Kickback Statute to device manufacturers' financial relationships with physician consultants. Among other theories, the government has alleged that such relationships are payments to induce the consultants to arrange for or recommend the ordering, purchasing or leasing of the manufacturers' products by the hospitals, medical institutions and other entities with whom they are affiliated. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and arrangements that involve remuneration that could induce prescribing, purchases, or recommendations may be subject to government scrutiny if they do not qualify for an exemption or a safe harbor. We are also subject to the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters, and federal “sunshine” requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations.

Also, the federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

In addition, several states have adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers as well as laws that restrict our marketing activities with physicians, and require us to report consulting and other payments to physicians. Some states, such as California, Connecticut, Massachusetts and Nevada, mandate implementation of commercial compliance programs to ensure compliance with these laws.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the recently enacted PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Further, we expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. We also are

subject to foreign fraud and abuse laws, which vary by country. For instance, in the European Union, legislation on inducements offered to physicians and other healthcare workers or hospitals differ from country to country. Breach of the laws relating to such inducements may expose us to the imposition of criminal sanctions. It may also harm our reputation, which could in turn affect sales.

In November 2012, we became aware through newspaper reports in the Italian media that a then-current and a former employee of ours were under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that we had temporarily been prohibited from establishing new contractual relationships with hospitals that are part of the Italian national health system. Following a court hearing, the temporary prohibition was lifted, but such prohibition may be reinstituted in the future. The Italian public prosecutor is alleging that the approximately 5,000 euro that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial. Although we dispute these allegations, if we are unsuccessful in our defense, we may be faced with fines, penalties and a debarment from creating new contractual relationships with hospitals that are part of the Italian national health system. As a result, we cannot assure you that the outcome of this investigation would not have material adverse effects to our business in Italy, or harm our reputation in Europe generally, which could negatively affect our sales.

If our customers are unable to obtain coverage of or sufficient reimbursement for procedures performed with our products, it is unlikely that our products will be widely used.

Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payors. Healthcare providers that purchase medical devices for treatment of their patients generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices. Both public and private insurance coverage and reimbursement plans are central to new product acceptance. Customers are unlikely to use our products if they do not receive reimbursement adequate to cover the cost of our products and related procedures.

To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Coverage, reimbursement, and healthcare payment systems in international markets vary significantly by country, and by region in some countries, and include both government-sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international coverage or reimbursement approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

To date, our products have generally been covered as part of procedures for which reimbursement has been available. However, in the United States, as well as in foreign countries, government-funded programs (such as Medicare and Medicaid) or private insurance programs, together commonly known as third-party payors, pay the cost of a significant portion of a patient's medical expenses. Coverage of and reimbursement for medical technology can differ significantly from payor to payor.

All third-party coverage and reimbursement programs, whether government funded or insured commercially, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. Such cost-containment programs adopted by third-party payors, including legislative and regulatory changes to coverage and reimbursement policies, could potentially limit the amount which healthcare providers are willing to pay for medical devices, which could adversely impact our business. The Centers for Medicare & Medicaid Services recently announced a three-year demonstration project to allow Medicare recovery auditors to audit Medicare payments for procedures prior to Medicare making payment for the procedure, versus following Medicare payment for the procedure as has historically been Medicare's process. The demonstration project includes 11 states that cover a large percentage of the U.S. populace, and different states are expected to be more or less aggressive in their performance of pre-payment audits, including with respect to the types of procedures for which Medicare payments may be audited on a pre-payment basis and the percentage of those procedures that are in fact so audited. Certain procedures that use our products will be subject to such Medicare pre-payment audits, which could induce healthcare providers to be less willing to perform those procedures due to increased reimbursement concerns owing to such pre-payment, rather than post-payment, audits, and any such reduction in procedure volumes could adversely affect our business and results of operations.

We believe that future coverage of and reimbursement for our products may be subject to increased restrictions both in the U.S. and in international markets. For example, on August 2, 2011, President Obama signed the Budget Control Act of 2011, which imposes significant cuts in federal spending over the next decade. Such cuts in federal spending could impact entitlement programs such as Medicare and aid to states for Medicaid programs. Third-party reimbursement and coverage for our products may not be available or adequate in either the U.S. or international markets. Future legislation, regulations, coverage or reimbursement policies adopted by third-party payors may adversely affect the growth of the markets for our products, reduce the demand for our existing products or our products currently under development and limit our ability to sell our products on a profitable basis.

We may be subject to health information privacy and security standards that include penalties for noncompliance.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations safeguard the privacy and security of individually-identifiable health information. Certain of our operations may be subject to these requirements. Penalties for noncompliance with these rules include both criminal and civil penalties. In addition, the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, expanded federal health information privacy and security protections. Among other things, HITECH makes certain of HIPAA's privacy and security standards directly applicable to “business associates”-independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also set forth new notification requirements for health data security breaches, increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to enforce HIPAA and seek attorney's fees and costs associated with pursuing federal civil actions. While we do not believe we are a covered entity or a business associate under HIPAA, occasionally our field service representatives enter into “field service agreements” which obligate us to protect any protected health information that we may receive in the field in accordance with HIPAA and HITECH.

* Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.

We use hazardous materials in our research and development and manufacturing processes, including specifically the sterilization processes conducted at our Costa Rica facility. We are subject to foreign, federal, state and local regulations governing use, storage, handling and disposal of these materials and associated waste products. We are currently licensed to handle such materials, but there can be no assurance that we will be able to retain these licenses in the future or obtain licenses under new regulations if and when they are required by governing authorities. We cannot completely eliminate the risk of contamination, injury, or even death resulting from such hazardous materials, and we may incur liability as a result of any such contamination, injury or death. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources and any applicable insurance. We have also incurred and may continue to incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant negative impact on our business, financial condition and results of operations. Further, we cannot assure that the cost of compliance with these laws and regulations will not materially increase in the future. We may also incur expenses related to ensuring that our operations comply with environmental laws related to our operations, and those of prior owners or operators of our properties, at current or former manufacturing sites where operations have previously resulted in spills, discharges or other releases of hazardous substances into the environment. We could be held strictly liable under U.S. environmental laws for contamination of property that we currently or formerly owned or operated without regard to fault or whether our actions were in compliance with law at the time. Our liability could also increase if other responsible parties, including prior owners or operators of our facilities, fail to complete their clean-up obligations or satisfy indemnification obligations to us. Similarly, if we fail to ensure compliance with applicable environmental laws in foreign jurisdictions in which we operate, we may not be able to offer our products and may be subject to civil or criminal liabilities.

The use, misuse or off-label use of our products may result in injuries that could lead to product liability suits, which could be costly to our business.

Our currently marketed products have been cleared by the relevant regulatory authority in each jurisdiction where we market them. There may be increased risk of injury if physicians attempt to use our products in procedures outside of those indications cleared or approved for use, known as off-label use. Our sales force is trained according to company policy not to promote our products for off-label uses, and in our instructions for use in all markets we specify that our products are not intended for use outside of those indications cleared for use. However, we cannot prevent a physician from using our products for off-label applications. Our catheters and guide wires are intended to be single-procedure products. In spite of clear labeling and instructions against reuse, we are aware that certain physicians have elected to reuse our products. Reuse of our catheters and guide wires may increase the risk of product liability claims. Reuse may also subject the party reusing the product to regulatory authority inspection and enforcement action. Physicians may also misuse our product if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management's attention from our core business, be expensive to defend and result in sizable damage awards against us.

Risks Related to our Intellectual Property and Litigation

Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.

Our success depends significantly on our ability to protect our intellectual property and proprietary technologies. Our policy is to obtain and protect our intellectual property rights. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our

proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain may be challenged by re-examination, inter partes review, opposition or other administrative proceeding, or in litigation. Such challenges could result in a determination that the patent is invalid. Some of our older patents have expired or will expire in the near future. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, we are exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our competitors' products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In addition, changes in U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law, including the transition from a “first-to-invent” system to a “first-to-file” system and changes to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote to patent application filing and prosecution. The U.S. Patent and Trademark Office is currently developing regulations and procedures to administer the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the “first-to-file” system, we will have to allocate significant additional resources, including additional personnel, to the establishment and maintenance of a new patent application process designed to be more streamlined and competitive in the context of the new “first-to-file” system, which would divert valuable resources from other areas of our business.

In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.

The medical device industry is characterized by patent and other intellectual property litigation, and we could become subject to litigation that could be costly, result in the diversion of our management's time and efforts, require us to pay damages or prevent us from selling our products.

The medical device industry is characterized by extensive litigation and interference and other administrative proceedings over patent and other intellectual property rights. Whether or not a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that they own U.S. or foreign patents containing claims that cover our products, their components or the methods we employ in the manufacture or use of our products. For example, we are currently involved with St. Jude Medical in patent litigation regarding our FFR products and whether these products infringe a St. Jude Medical patent. Because patent applications can take many years to issue and in many instances at least 18 months to publish, there may be applications now pending of which we are unaware, which may later result in issued patents that contain claims that cover our products. There could also be existing patents, of which we are unaware, that contain claims that cover one or more components of our products. As the number of participants in our industry increases, the possibility of patent infringement claims against us also increases.

Any interference proceeding, litigation or other assertion of claims against us, including our current patent litigation with St. Jude Medical, may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of our management from our core business and harm our reputation. If the relevant patents asserted against us were upheld as valid and enforceable and were found to be infringed, we could be required to pay substantial damages and/or royalties and could be prevented from selling our products unless we could obtain a license or were able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may be unable to make, use, sell or

otherwise commercialize one or more of our products in the affected country. In addition, if we are found to infringe willfully, we could be required to pay treble damages and attorney fees, among other penalties.

We expect to enter new product fields in the future. Entering such additional fields may subject us to claims of infringement. Defending any infringement claims would be expensive and time consuming.

We are aware of certain third-party U.S. patents in fields that we are targeting for development. We do not have licenses to these patents nor do we believe that such licenses are required to develop, commercialize or sell our products in these areas. However, the owners of these patents may initiate a lawsuit alleging infringement of one or more of these or other patents. If they do, we may be required to incur substantial costs related to patent litigation, which could place a significant strain on our financial resources and divert the attention of management from our business and harm our reputation. Adverse determinations in such litigation could cause us to redesign or prevent us from manufacturing or selling our products in these areas, which would have an adverse effect on our business by limiting our ability to generate revenues through the sale of these products.

From time to time in the ordinary course of business, we receive letters from third parties advising us of third-party patents that may relate to our business. The letters do not explicitly seek any particular action or relief from us. Although these letters do not threaten legal action, these letters may be deemed to put us on notice that continued operation of our business might infringe intellectual property rights of third parties. We do not believe we are infringing any such third-party rights, and, other than the matters described in Note 4 "Commitments and Contingencies - Litigation" to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we are unaware of any litigation or other proceedings having been commenced against us asserting such infringement. We cannot assure you that such litigation or other proceedings asserting infringement by us may not be commenced against us in the future.

Our rights to a worldwide license of certain IVUS patents owned or licensed by Boston Scientific may be challenged.

The marketing and sale of our current rotational IVUS catheters and pullback products depend on a license for IVUS-related patents owned or licensed by Boston Scientific. Boston Scientific was required to transfer the related intellectual property rights pursuant to a 1995 order of the Federal Trade Commission. We obtained rights to the license in 2003 through our former wholly-owned subsidiary, Pacific Rim Medical Ventures, which merged into us on December 30, 2004. In the event Boston Scientific disputes our rights to the license or seeks to terminate the license, we may be required to expend significant time and resources defending our rights. An adverse determination could cause us to redesign or prevent us from manufacturing or selling our rotational IVUS catheters and pullback products, which would have an adverse effect on our business. Additionally, in the event that the chain of title from the 1995 transfer of rights from Boston Scientific through the 2003 transfer to us is successfully challenged, we may have fewer rights to the technology than our business requires which will negatively impact our ability to continue our development of rotational IVUS catheters and pullback products or subject us to disputes with Boston Scientific or others with respect to the incorporation of this intellectual property into our products.

Our VH IVUS business depends on a license from The Cleveland Clinic Foundation, the loss of which would severely impact our business.

The marketing and sale of our VH IVUS functionality for IVUS depends on an exclusive license to patents owned by The Cleveland Clinic Foundation, the license to which we obtained in April 2002. We are aware that maintenance of the license depends upon certain provisions being met by us including payment of royalties, commercialization of the licensed technology and obtaining regulatory clearances or approvals. If The Cleveland Clinic Foundation were to claim that we committed a material breach or default of these provisions and we were not able to cure such breach or default, The Cleveland Clinic Foundation would have a right to terminate the agreement. The loss of the rights granted under the agreement could require us to redesign our VH IVUS functionality or prevent us from manufacturing or selling our IVUS products containing VH IVUS in countries covered by these patents. In addition, our exclusive license will become non-exclusive if we fail to obtain regulatory clearances or approvals to commercialize the licensed technology within a proscribed time period. The cost of redesigning or an inability to sell our VH IVUS products would have a negative impact on our ability to grow our business and achieve our expected revenues.

Risks Related to our Common Stock

* We expect that the price of our common stock will fluctuate substantially.

The market price of our common stock could be subject to significant fluctuation. Factors that could cause volatility in the market price of our common stock include the following:


•	changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' earnings estimates;


•	changes in foreign currency exchange rates;


•	quarterly variations in our or our competitors' results of operations;


•	changes in governmental regulations or in the status of our regulatory clearance or approvals;


•	changes in availability of third-party reimbursement in the United States or other countries;


•	the announcement of new products or product enhancements by us or our competitors or other developments involving our respective products;


•	the announcement of an acquisition or other business combination or strategic transaction;


•	possible sales of our common stock by investors who view the 2015 Notes and the 2017 Notes as a more attractive means of equity participation in us;


•	the conversion of some or all of the 2015 Notes or the 2017 Notes and any sales in the public market of shares of our common stock issued upon conversion of the 2015 Notes or the 2017 Notes;


•	hedging or arbitrage trading activity that may develop involving our common stock, including in connection with the convertible note hedge transactions and warrant transactions we entered into in connection with the offerings of our 2015 Notes and 2017 Notes, and arbitrage strategies employed or that may be employed by investors in our 2015 Notes and 2017 Notes;


•	announcements related to patents issued to us or our competitors;


•	the announcement of pending or threatened litigation and developments in litigation involving us;


•	sales of large blocks of our common stock, including sales by our executive officers and directors; and


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

These factors may materially and adversely affect the market price of our common stock.

Additional equity issuances or a sale of a substantial number of shares of our common stock may cause the market price of our common stock to decline.

If our existing stockholders sell a substantial number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline. In addition, sales of a substantial number of shares of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. Because we may need to raise additional capital in the future to continue to expand our business and develop new products, we may, among other things, conduct additional equity offerings. These future equity issuances, together with any additional shares of our common stock issued or issuable in connection with past or any future acquisitions, would result in further dilution to investors and could depress the market price of our common stock.

No prediction can be made regarding the number of shares of our common stock that may be issued or the effect that the future sales of shares of our common stock will have on the market price of our shares.

*Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

As of October 31, 2013, our directors, officers and principal stockholders (those holding more than 5% of our common stock) collectively controlled a significant portion of our outstanding common stock. To the extent our directors, officers and principal stockholders continue to hold a significant portion of our outstanding common stock, these stockholders, if they act together, would be able to exert significant influence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock and may not be in the best interests of our other stockholders.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and other agreements and in Delaware law could discourage a takeover.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. These provisions include:


•	a classified board of directors;


•	advance notice requirements to stockholders for matters to be brought at stockholder meetings;


•	a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and


•	the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law that, in general, prohibit any business combination or merger with a beneficial owner of 15% or more of our common stock unless the holder's acquisition of our stock was approved in advance by our board of directors. These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

We have adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Under the rights plan:


•	the rights will become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 20% of our outstanding common stock by a person or group, with limited exceptions;


•	each right will entitle the holder, other than an acquiring person, to acquire shares of our common stock at a discount to the then prevailing market price;


•	our board of directors may redeem outstanding rights at any time prior to a person becoming an acquiring person at a minimal price per right; and


•	prior to a person becoming an acquiring person, the terms of the rights may be amended by our board of directors without the approval of the holders of the rights.

In addition, the terms of our 2015 Notes and 2017 Notes may require us to purchase those notes for cash in the event of a takeover of our company. The indentures governing the Notes also prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under such notes. These and other provisions applicable to the 2015 Notes and 2017 Notes may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to our stockholders

We have not paid dividends in the past and do not expect to pay dividends in the future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in our current and future debt agreements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on our common stock will only occur if our stock price appreciates.



Item 5.	Other Information

During the third quarter of 2013, our management evaluated various development projects, product lines and functional areas in an effort to assess how to better align resources to our key business strategies and improve operating efficiencies. At September 30, 2013, in connection with the preparation of our financial statements, our management concluded that it is more likely than not the Forward-Looking IVUS, or FL.IVUS and Forward-Looking Intra-Cardiac Echo, or FL.ICE, development programs and the commercial sale of the ReFLOW Aspiration Catheter, or ReFLOW, product line will be discontinued. As such, these assets were impaired with the resulting charge recorded in restructuring charges in the statement of operations in the third quarter of 2013. The technologies associated with these programs were acquired in various business combinations and resulted in in-process research and development, or IPR&D, and developed technologies that were capitalized at the time of acquisition with a carrying value of $4.6 million as of September 30, 2013.

development programs, the termination of the commercial sale of the ReFLOW product line, and a modest reorganization of several functional areas and business units within the Company.



Item 6.	Exhibits



Exhibit Number		Description

2.1		Amendment to Merger Agreement, dated July 1, 2013, by and among the Registrant, Crux Biomedical, Inc. and Shareholder Representative Services LLC (filed as Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant, as revised (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.

4.2		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

4.3		Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
4.5		Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.6		Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).

4.7		Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1**		Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***		XBRL Instance Document.

101.SCH***		XBRL Taxonomy Extension Schema Document.



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.



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.



***	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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.



Signature	Title	Date

/s/ John T. Dahldorf	Chief Financial Officer (principal financial officer, principal accounting officer and duly authorized officer)	November 7, 2013
John T. Dahldorf		November 7, 2013

EXHIBIT INDEX



Exhibit Number		Description

2.1		Amendment to Merger Agreement, dated July 1, 2013, by and among the Registrant, Crux Biomedical, Inc. and Shareholder Representative Services LLC (filed as Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant, as revised (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.

4.2		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

4.3		Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
4.5		Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.6		Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).

4.7		Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1**		Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***		XBRL Instance Document.



101.SCH***		XBRL Taxonomy Extension Schema Document.

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.



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.



***	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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