Attached files
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EX-31.2 - EXHIBIT 31.2 - HeartWare International, Inc. | c07614exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - HeartWare International, Inc. | c07614exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - HeartWare International, Inc. | c07614exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - HeartWare International, Inc. | c07614exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ________________ to _______________
COMMISSION FILE NUMBER: 001-34256
HEARTWARE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 26-3636023 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
205 Newbury Street, Suite 101
Framingham, Massachusetts 01701
+1 508 739 0950
Framingham, Massachusetts 01701
+1 508 739 0950
(Address of principal executive offices)
(Registrants telephone number, including area code)
(Registrants 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class | Shares Outstanding as of October 29, 2010 | |||
Common Stock, $0.001 Par Value Per Share |
13,869,262 |
Table of Contents
References
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to:
| HeartWare, the Company, HeartWare Group, we, us and our refer to HeartWare International, Inc. and its consolidated subsidiaries, HeartWare Pty. Limited, HeartWare, Inc., HeartWare GmbH and HeartWare (UK) Limited. |
| HeartWare International, Inc. refers to HeartWare International, Inc., a Delaware corporation incorporated on July 29, 2008. |
| HeartWare Pty. Limited refers to HeartWare Pty. Limited (formerly known as HeartWare Limited), an Australian proprietary corporation originally incorporated on November 26, 2004. |
| HeartWare, Inc. refers to HeartWare, Inc., a Delaware corporation incorporated on April 3, 2003. HeartWare, Inc. was acquired by HeartWare Pty. Limited on January 24, 2005. |
| HeartWare GmbH refers to HeartWare GmbH, a German corporation established on February 19, 2010. |
| HeartWare (UK) Limited refers to HeartWare (UK) Limited, a limited liability corporation established in the United Kingdom on February 19, 2010. |
Currency
Unless indicated otherwise in this Quarterly Report on Form 10-Q, all references to $, US$ or
dollars refer to United States dollars, the lawful currency of the United States of America.
References to AU$ refer to Australian dollars, the lawful currency of the Commonwealth of
Australia, and references to , the Euro or Euros means Euros, the single currency of
Participating Member States of the European Union.
Trademarks
HEARTWARE, HVAD and MVAD, KRITON and various company logos are the trademarks of the Company, in
the United States, Australia and other countries. All other trademarks and trade names mentioned in
this Quarterly Report on Form 10-Q are the property of their respective owners.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on our managements beliefs,
assumptions and expectations and on information currently available to our management. Generally,
you can identify forward-looking statements by terms such as may, will, should, could,
would, expects, plans, anticipates, believes, estimates, projects, predicts,
potential and similar expressions intended to identify forward-looking statements, which
generally are not historical in nature. All statements that address operating or financial
performance, events or developments that we expect or anticipate will occur in the future are
forward-looking statements, including without limitation our expectations with respect to
regulatory submissions and approvals, the progress of clinical trials, the commercial success of
our products, possible litigation and expected expense and investment trends. We may not actually
achieve the plans, projections or expectations disclosed in forward-looking statements, and actual
results, developments or events could differ materially from those disclosed in the forward-looking
statements. Our management believes that these forward-looking statements are reasonable as and
when made. However, you should not place undue reliance on forward-looking statements because they
speak only as of the date when made. We do not assume any obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise,
except as may be required by federal securities laws and the rules of the Securities and Exchange
Commission (the SEC). We may not actually achieve the plans, projections or expectations
disclosed in our forward-looking statements, and actual results, developments or events could
differ materially from those disclosed in the forward-looking statements. Forward-looking
statements are subject to a number of risks and uncertainties, including without limitation those
described in Part I, Item 1A. Risk Factors in our Annual
Report on Form 10-K filed with the SEC on February 23, 2010, and those described from time to
time in our future reports filed with the SEC.
3
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 67,498,308 | $ | 50,834,714 | ||||
Short-term investments, net |
21,495,250 | | ||||||
Accounts receivable, net |
8,289,963 | 11,384,647 | ||||||
Inventories, net |
17,218,993 | 8,870,903 | ||||||
Prepaid expenses and other current assets |
2,264,799 | 1,663,157 | ||||||
Total current assets |
116,767,313 | 72,753,421 | ||||||
Property, plant and equipment, net |
6,842,380 | 3,719,415 | ||||||
Long-term investments, net |
4,007,479 | | ||||||
Other intangible assets, net |
1,485,536 | 1,191,917 | ||||||
Restricted cash |
288,429 | 288,429 | ||||||
Total assets |
$ | 129,391,137 | $ | 77,953,182 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 3,142,915 | $ | 3,122,131 | ||||
Accrued expenses and other current liabilities |
7,088,848 | 3,848,086 | ||||||
Total current liabilities |
10,231,763 | 6,970,217 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock $.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding at September 30, 2010 and December
31, 2009 |
| | ||||||
Common stock $.001 par value; 25,000,000
shares authorized; 13,869,262 and 11,786,173
shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively |
13,869 | 11,786 | ||||||
Additional paid-in capital |
247,013,680 | 176,698,329 | ||||||
Accumulated deficit |
(120,242,092 | ) | (97,871,645 | ) | ||||
Accumulated other comprehensive loss |
(7,626,083 | ) | (7,855,505 | ) | ||||
Total stockholders equity |
119,159,374 | 70,982,965 | ||||||
Total liabilities and stockholders equity |
$ | 129,391,137 | $ | 77,953,182 | ||||
The accompanying notes are an integral part of these financial statements.
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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues, net |
$ | 13,816,693 | $ | 7,506,209 | $ | 34,276,891 | $ | 11,952,452 | ||||||||
Cost of revenues |
6,002,368 | 4,103,700 | 15,976,258 | 6,401,429 | ||||||||||||
Gross profit |
7,814,325 | 3,402,509 | 18,300,633 | 5,551,023 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
6,993,636 | 3,148,897 | 19,238,437 | 11,720,760 | ||||||||||||
Research and development |
9,312,738 | 3,645,980 | 21,579,617 | 9,994,274 | ||||||||||||
Total operating expenses |
16,306,374 | 6,794,877 | 40,818,054 | 21,715,034 | ||||||||||||
Loss from operations |
(8,492,049 | ) | (3,392,368 | ) | (22,517,421 | ) | (16,164,011 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Foreign exchange gain (loss) |
514,191 | 107,609 | (259,309 | ) | (260,049 | ) | ||||||||||
Interest expense |
| (350,696 | ) | (971 | ) | (350,696 | ) | |||||||||
Interest income, net |
133,775 | 7,278 | 407,254 | 25,827 | ||||||||||||
Change in fair value of derivative
instrument |
| (2,223,759 | ) | | (2,223,759 | ) | ||||||||||
Other, net |
| (22,500 | ) | | (25,187 | ) | ||||||||||
Loss before income taxes |
(7,844,083 | ) | (5,874,436 | ) | (22,370,447 | ) | (18,997,875 | ) | ||||||||
Provision for income taxes |
| | | | ||||||||||||
Net loss |
$ | (7,844,083 | ) | $ | (5,874,436 | ) | $ | (22,370,447 | ) | $ | (18,997,875 | ) | ||||
Net loss per common share basic
and diluted |
$ | (0.57 | ) | $ | (0.60 | ) | $ | (1.66 | ) | $ | (2.07 | ) | ||||
Weighted average shares
outstanding basic and diluted |
13,752,829 | 9,715,577 | 13,467,540 | 9,156,074 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
5
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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (7,844,083 | ) | $ | (5,874,436 | ) | $ | (22,370,447 | ) | $ | (18,997,875 | ) | ||||
Foreign currency translation
adjustments |
261,075 | 55,836 | 198,337 | 810,195 | ||||||||||||
Unrealized gain on investments |
76,209 | | 31,085 | | ||||||||||||
Comprehensive loss |
$ | (7,506,799 | ) | $ | (5,818,600 | ) | $ | (22,141,025 | ) | $ | (18,187,680 | ) | ||||
The accompanying notes are an integral part of these financial statements.
6
Table of Contents
HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
Accumulated | ||||||||||||||||||||||||
Common Shares | Additional | Other | ||||||||||||||||||||||
Shares | Paid-In | Accumulated | Comprehensive | |||||||||||||||||||||
Issued | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
Balance, December 31, 2009 |
11,786,173 | $ | 11,786 | $ | 176,698,329 | $ | (97,871,645 | ) | $ | (7,855,505 | ) | $ | 70,982,965 | |||||||||||
Issuance of common stock
pursuant to public offering,
net of offering costs |
1,767,900 | 1,768 | 58,487,069 | | | 58,488,837 | ||||||||||||||||||
Issuance of common stock
pursuant to share-based awards |
315,189 | 315 | 3,266,364 | | | 3,266,679 | ||||||||||||||||||
Share-based compensation expense |
| | 8,561,918 | | | 8,561,918 | ||||||||||||||||||
Net loss |
| | | (22,370,447 | ) | | (22,370,447 | ) | ||||||||||||||||
Accumulated other comprehensive
loss: |
||||||||||||||||||||||||
Foreign currency translation
adjustment |
| | | | 198,337 | 198,337 | ||||||||||||||||||
Unrealized gain on investments |
| | | | 31,085 | 31,085 | ||||||||||||||||||
Balance, September 30, 2010 |
13,869,262 | $ | 13,869 | $ | 247,013,680 | $ | (120,242,092 | ) | $ | (7,626,083 | ) | $ | 119,159,374 | |||||||||||
The accompanying notes are an integral part of these financial statements.
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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (22,370,447 | ) | $ | (18,997,875 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Depreciation |
958,143 | 672,254 | ||||||
Amortization |
73,339 | 54,641 | ||||||
Share-based compensation expense |
8,561,918 | 1,790,416 | ||||||
Change in fair value of derivative instrument |
| 2,223,759 | ||||||
Other non-cash expenses |
730,506 | 313,418 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
2,763,282 | (5,893,930 | ) | |||||
Inventories |
(8,348,090 | ) | (4,500,341 | ) | ||||
Prepaid expenses and other current assets |
(595,181 | ) | (108,259 | ) | ||||
Accounts payable |
21,787 | 2,710,372 | ||||||
Accrued expenses and other current liabilities |
3,318,705 | (675,832 | ) | |||||
Net cash used in operating activities |
(14,886,038 | ) | (22,411,377 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of investments |
(25,802,150 | ) | | |||||
Additions to property, plant and equipment |
(4,053,433 | ) | (1,002,848 | ) | ||||
Additions to patents |
(366,958 | ) | (348,705 | ) | ||||
Proceeds from dispositions of assets |
| 1,936 | ||||||
Net cash used in investing activities |
(30,222,541 | ) | (1,349,617 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from issuance of common stock |
62,760,450 | 29,497,556 | ||||||
Payment of offering costs |
(4,359,934 | ) | (508,561 | ) | ||||
Proceeds from convertible debt |
| 4,000,000 | ||||||
Proceeds from exercise of stock options |
3,266,679 | 621,384 | ||||||
Net cash provided by financing activities |
61,667,195 | 33,610,379 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
104,978 | 767,832 | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
16,663,594 | 10,617,217 | ||||||
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD |
50,834,714 | 20,803,656 | ||||||
CASH AND CASH EQUIVALENTS END OF PERIOD |
$ | 67,498,308 | $ | 31,420,873 | ||||
Supplemental disclosure of non-cash financing activities: |
||||||||
Recognition of fair value of derivative instrument |
$ | | $ | 3,891,109 | ||||
The accompanying notes are an integral part of these financial statements.
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HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC)
for reporting of interim financial information. Pursuant to such rules and regulations, certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States have been condensed
or omitted. Accordingly, these statements do not include all the disclosures normally required by
accounting principles generally accepted in the United States for annual financial statements and
should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in this report and the audited financial statements and notes
thereto for the year ended December 31, 2009 included in our Annual Report on Form 10-K. The
accompanying condensed consolidated balance sheet as of December 31, 2009 has been derived from our
audited financial statements. The condensed consolidated statements of operations for the three and
nine months ended September 30, 2010 and cash flows for the nine months ended September 30, 2010
are not necessarily indicative of the results or operations or cash flows to be expected for any
future period or for the year ending December 31, 2010.
In the opinion of management, the accompanying unaudited interim condensed consolidated
financial statements contain all adjustments (consisting of only normally recurring adjustments)
necessary to present fairly the financial position and results of operations as of the dates and
for the periods presented.
2. Liquidity
As of September 30, 2010, we had approximately $93.0 million in cash, cash equivalents and
investments. The accompanying condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States, which contemplate
continuation as a going concern. We have sustained substantial losses from operations since our
inception, and such losses have continued through September 30, 2010. At September 30, 2010, we
had an accumulated deficit of approximately $120.2 million.
As discussed in Note 10, in February 2010, we completed a public offering of approximately
1.77 million shares of our common stock, including the underwriters exercise of their
over-allotment option to purchase 230,595 shares, at an offering price of $35.50 per share for
aggregate gross proceeds of approximately $62.8 million. After fees and related expenses, net
proceeds from the offering were approximately $58.5 million.
For the remainder of 2010, our cash and cash equivalents are expected to primarily be used to
fund our ongoing operations, including expanding our sales and marketing capabilities on a global
basis, continuing our US clinical study for destination therapy, or DT, supporting our continued
access protocol US trial for bridge-to-transplant therapy, or BTT, and preparing a pre-market
approval submission to the FDA for BTT, purchases of machinery and equipment, continued product
development, regulatory and other compliance functions as well as for general working capital. We
believe our cash, cash equivalents and investment balances are sufficient to support our planned
operations for at least the next twelve months.
3. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of HeartWare International, Inc.,
and its subsidiaries HeartWare Pty. Limited, HeartWare, Inc., HeartWare (UK) Limited and HeartWare
GmbH. All inter-company balances and transactions have been eliminated in consolidation.
9
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Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States (US GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents are recorded in the consolidated balance sheets at cost, which
approximates fair value. All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Investments
Our investments classified as available-for-sale are stated at fair value with unrealized
gains and losses reported in accumulated other comprehensive loss within stockholders equity. We
classify our available-for-sale investments as short-term if their remaining time to maturity is
beyond three months and less than twenty-four months. Investments with maturities beyond one year
may be classified as short-term based on their highly liquid nature and because such marketable
securities represent the investment of cash that is available for current operations. Interest on
investments classified as available-for-sale is included in interest income, net. Premiums paid on
our short-term investments are amortized over the remaining term of the investment and are included
in interest income, net.
Receivables
Accounts receivable consists of amounts due from the sale of our HeartWare Ventricular Assist
System (the HeartWare System) to our customers, which are primarily hospitals and health research
institutions. As of September 30, 2010, two customers had an accounts receivable balance greater
than 10% of total accounts receivable, in aggregate representing approximately 24% of our total
accounts receivable. As of December 31, 2009, one customer had an accounts receivable balance
representing approximately 16% of our total accounts receivable. As of September 30, 2010, we had
recorded an allowance for doubtful accounts of $400,000 and there was no allowance for returns. As
of December 31, 2009, there was no allowance for doubtful accounts and no allowance for returns.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using a first-in,
first-out, or FIFO, method. Work-in-process and finished goods includes direct and indirect labor
and manufacturing overhead. Finished goods includes product which is ready-for-use and which is
held by us or by our customers on a consignment basis. We review our inventory for excess or
obsolete inventory and write-down obsolete or otherwise unmarketable inventory to its estimated net
realizable value.
Product Warranty
Certain patient accessories sold with the HeartWare System are covered by a limited warranty
ranging from one to two years. Estimated contractual warranty obligations are recorded as an
expense when the related revenue is recognized and are included in Cost of revenues on our
condensed consolidated statements of operations. Factors that affect estimated warranty liability
include the number of units sold, historical and anticipated rates of warranty claims, cost per
claim, and vendor supported warranty programs. We periodically assess the adequacy of our recorded
warranty liabilities and adjust the amounts as necessary.
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The amount of the reserve recorded is equal to the estimated costs to repair or otherwise
satisfy claims made by customers. Accrued warranty expense is included as a component of accrued
expenses and other current liabilities on the condensed consolidated balance sheet.
The costs to repair or replace products associated with product recalls and voluntary service
campaigns are recorded when they are determined to be probable and reasonably estimable as a cost
of revenues and are not included in product warranty liability.
The following table summarizes the change in our warranty reserve for the nine months ended
September 30, 2010 and 2009:
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Beginning balance |
$ | 99,169 | $ | | ||||
Accrual for warranties |
229,422 | | ||||||
Warranty costs incurred during the period |
(97,961 | ) | | |||||
Ending balance |
$ | 230,630 | $ | | ||||
Fair Value Measurements
The carrying amounts reported in the condensed consolidated balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses and other current
liabilities approximate their fair value based on the short-term maturity of these instruments.
Investments are considered available-for-sale as of September 30, 2010 and are carried at fair
value. See Note 5, Fair Value Measurements for more information.
Vendor Concentration
For the three and nine months ended September 30, 2010, we purchased approximately 69.2% and
64.3% of our inventory components and supplies from three vendors. In addition, one of the three
vendors supplies consulting services and material used in research and development activities. As
of September 30, 2010, the amounts due to these vendors totaled approximately $2.0 million.
Concentration of Credit Risk
Financial instruments that potentially expose us to concentrations of credit risk consist
primarily of cash and cash equivalents, investments and trade accounts receivable. Cash and cash
equivalents are primarily on deposit with financial institutions in the United States and these
deposits generally exceed the amount of insurance provided by the Federal Deposit Insurance
Corporation. The Company has not experienced any historical losses on its deposits of cash and cash
equivalents. Our investments consist of investment grade rated corporate and government agency
debt.
Concentration of credit risk with respect to our trade accounts receivable from our customers
is primarily limited to hospitals and health research institutions. Credit is extended to our
customers, based on an evaluation of a customers financial condition and collateral is not
required. To date, we have not experienced any credit losses, but have established an allowance for
doubtful accounts of $400,000 at September 30, 2010.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software
Elements (a consensus of the FASB Emerging Issues Task Force). ASU No. 2009-14 amends ASC 985-605,
Software: Revenue Recognition, such that tangible products, containing both software and
non-software components that function together to deliver the tangible products essential
functionality, are no longer within the scope of ASC
985-605. It also amends the determination of how arrangement consideration should be allocated
to deliverables in a multiple-deliverable revenue arrangement. ASU No. 2009-14 will become
effective for us for revenue arrangements entered into or materially modified after our fiscal year
ending December 31, 2010. Earlier application is permitted with required transition disclosures
based on the period of adoption. Adoption of the provisions of ASU No. 2009-14 is not expected to
have a material effect on our consolidated financial position, results of operations or cash flows.
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In January 2010, the FASB issued ASU No. 2010-6, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements. This update requires new
disclosures for fair value measurements and provides clarification for existing disclosures
requirements. The majority of the new disclosure requirements became effective for us on January 1,
2010. Certain of the disclosure requirements will be effective for us on January 1, 2011. As ASU
No. 2010-6 only requires enhanced disclosures, the adoption of ASU No. 2010-6 did not have a
material effect on our consolidated financial position, results of operations or cash flows and did
not materially expand our financial statement footnote disclosures.
In April 2010, the FASB issued ASU No. 2010-13, Compensation-Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades. ASU No. 2010-13 clarifies that an employee
share-based payment award with an exercise price denominated in the currency of a market in which a
substantial portion of the entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an entity would not
classify such an award as a liability if it otherwise qualifies as equity. The provisions of ASU
No. 2010-13 will be effective for us on January 1, 2011. Early adoption is permitted. Adoption of
the provisions of ASU No. 2010-13 is not expected to have a material effect on our consolidated
financial position, results of operations or cash flows.
4. Investments
We have cash investment policies that limit investments to investment grade securities. At
September 30, 2010, all of our investments were classified as available-for-sale and are carried at
fair value. Our short-term investments had maturity dates of less than twenty-four months, while
our long-term investments matured beyond twenty-four months, but
within thirty months of the date of this report. Such investments consist of corporate
debt and US government agency debt securities.
The amortized cost and fair value of our investments, with gross unrealized gains and losses,
at September 30, 2010 is as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Aggregate | |||||||||||||
Cost Basis | Gains | Losses | Fair Value | |||||||||||||
Short-term investments: |
||||||||||||||||
Corporate debt |
$ | 21,464,091 | $ | 31,159 | $ | | $ | 21,495,250 | ||||||||
Total short-term investments |
$ | 21,464,091 | $ | 31,159 | $ | | $ | 21,495,250 | ||||||||
Long-term investments: |
||||||||||||||||
US government agency debt |
$ | 4,007,553 | $ | | $ | (74 | ) | $ | 4,007,479 | |||||||
Total long-term investments |
$ | 4,007,553 | $ | | $ | (74 | ) | $ | 4,007,479 | |||||||
In the three and nine month periods ended September 30, 2010 and 2009 we did not have any
realized gains or losses on our investments.
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5. Fair Value Measurements
FASB ASC 820 Fair Value Measurements and Disclosures, defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. FASB ASC 820 requires disclosures about the
fair value of all financial instruments, whether or not recognized, for financial statement
purposes. Disclosures about the fair value of financial instruments are based on pertinent
information available to us as of September 30, 2010 and December 31, 2009. Accordingly, the
estimates presented in these condensed consolidated financial statements are not necessarily
indicative of the amounts that could be realized on disposition of the financial instruments.
FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to
those valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect market assumptions. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3
measurement).
The three levels of the fair value hierarchy are as follows:
Level 1 Quoted prices for identical instruments in active markets.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are observable.
Level 3 Instruments with primarily unobservable value drivers.
Investments
The fair values of our investments at September 30, 2010, based on the level of inputs are
summarized below:
Fair Value Measurements at the Reporting Date Using | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Short-term
investments
Corporate debt |
$ | 21,495,250 | $ | | $ | 21,495,250 | $ | | ||||||||
Long-term
investments US
government agency
debt |
$ | 4,007,479 | $ | | $ | 4,007,479 | $ | |
The fair value of our investments was determined using quoted prices for identical or similar
instruments in markets that are not active.
Derivative Instrument
On February 12, 2009, we entered into a loan agreement (Loan Agreement) concurrent with the
Agreement and Plan of Merger (Merger Agreement) with Thoratec Corporation (Thoratec). On July
31, 2009, HeartWare and Thoratec agreed to terminate the Merger Agreement. The Loan Agreement
survived the termination of the Merger Agreement and as of July 31, 2009, we were able to borrow up
to $20.0 million under the Loan Agreement. The funds were deposited into an escrow account which
was controlled by an independent third party. During the quarter ended September 30, 2009, we
borrowed $4.0 million under the Loan Agreement, all of which was outstanding at September 30, 2009.
During the quarter ended December 31, 2009, all amounts outstanding under the Loan Agreement were
repaid, and the Loan Agreement was terminated.
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Beginning July 31, 2009, the date the Merger Agreement was terminated, Thoratec became
entitled to convert any funds held in escrow and any loans to us under the Loan Agreement in whole
or in part into shares of HeartWare International common stock at any time prior to termination of
the Loan Agreement. The number of shares to be issued upon conversion was to be determined by
dividing the amount of funds held in escrow by the US dollar equivalent of AU$35.00 at the time of
the conversion. The terms and conditions of this conversion provision were evaluated and determined
to result in an embedded derivative within the host contract Loan Agreement. We computed the fair
value of the embedded derivative at July 31, 2009, the initial measurement date, and at September
30, 2009. Fair value was determined using a valuation model with observable market inputs (Level 2)
to determine relevant assumptions including interest rates and stock and foreign currency
volatilities. Changes in fair values of derivatives that are not designated as hedges are
recognized in the statement of operations.
The $3.9 million initial value of the derivative was capitalized as a deferred financing cost
and was being amortized over the contractual term of the Loan Agreement. The amount of amortization
for the three and nine months ended September 30, 2009 was approximately $288,000 and was included
in interest expense on our consolidated statements of operations. The change in the fair value of
the derivative instrument between July 31, 2009 and September 30, 2009 resulted in an unrealized
loss of approximately $2.2 million in the three and nine months ended September 30, 2009, which is
presented as a separate line item on our consolidated statements of operations.
6. Inventories, Net
Components of Inventories, net are as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Raw material |
$ | 5,291,840 | $ | 2,984,486 | ||||
Work-in-process |
2,910,600 | 1,497,591 | ||||||
Finished goods |
9,016,553 | 4,388,826 | ||||||
$ | 17,218,993 | $ | 8,870,903 | |||||
Finished goods inventories includes inventory held on consignment at customer sites of
approximately $4.6 million and $3.8 million, at September 30, 2010 and December 31, 2009,
respectively.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
Estimated | September 30, | December 31, | ||||||||
Useful Lives | 2010 | 2009 | ||||||||
Machinery and equipment |
5 to 7 years | $ | 8,144,056 | $ | 5,295,217 | |||||
Leasehold improvements |
3 to 7 years | 253,024 | 210,570 | |||||||
Office equipment, furniture
and fixtures |
5 to 7 years | 362,545 | 278,587 | |||||||
Purchased software |
5 to 7 years | 1,601,674 | 487,388 | |||||||
10,361,299 | 6,271,762 | |||||||||
Less: accumulated depreciation |
(3,518,919 | ) | (2,552,347 | ) | ||||||
$ | 6,842,380 | $ | 3,719,415 | |||||||
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8. Other Intangible Assets, Net
The gross carrying amount of intangible assets and the related accumulated amortization for
intangible assets subject to amortization are as follows:
September 30, 2010 | December 31, 2009 | |||||||||||||||||||
Weighted Average Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
Amortizable Intangible Assets | (Years) | Amount | Amortization | Amount | Amortization | |||||||||||||||
Patents |
15 | $ | 1,723,603 | $ | (238,067 | ) | $ | 1,356,645 | $ | (164,728 | ) |
Amortization expense for the three months ended September 30, 2010 and 2009 was $25,477 and
$19,856, respectively. Amortization expense for the nine months ended September 30, 2010 and 2009
was $73,339 and $54,641, respectively.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Accrued payroll and other employee costs |
$ | 3,403,416 | $ | 2,487,066 | ||||
Accrued VAT taxes |
1,588,253 | 42,256 | ||||||
Accrued material purchases |
749,564 | 370,226 | ||||||
Accrued professional fees |
459,802 | 347,063 | ||||||
Accrued research and development expenses |
376,532 | 344,256 | ||||||
Other accrued expenses |
511,281 | 257,219 | ||||||
$ | 7,088,848 | $ | 3,848,086 | |||||
Accrued payroll and other employee costs included estimated year-end employee bonuses of
approximately $2.0 million at September 30, 2010 and $1.7 million of actual year-end employee
bonuses at December 31, 2009.
10. Stockholders Equity
In February 2010, we completed a public offering of approximately 1.77 million shares of our
common stock, including the underwriters exercise of their overallotment to purchase 230,595
shares, at an offering price of $35.50 per share for aggregate gross proceeds of approximately
$62.8 million. The underwriters for the transaction received a fee of 6% of the gross proceeds.
After fees and related expenses, net proceeds from the offering were approximately $58.5 million.
The offering was completed pursuant to a prospectus supplement, dated January 27, 2010, to a
shelf registration statement on Form S-3 that was previously filed with the SEC and which was
declared effective on January 20, 2010. This shelf registration statement allows us to offer and
sell from time to time, in one or more series or issuances and on terms that we will determine at
the time of the offering, any combination of the securities described in the prospectus, up to an
aggregate amount of $100 million.
In the nine months ended September 30, 2010, we issued an aggregate of 121,981 shares of our
common stock upon the exercise of stock options and an aggregate of 193,208 shares of our common
stock upon the vesting of restricted stock units.
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11. Share-Based Compensation
We recognize share-based compensation expense for the portion of awards that are ultimately
expected to vest using an accelerated accrual method over the vesting period from the date of
grant. We estimate forfeitures at the time of grant. We have applied a forfeiture rate of
approximately 12.5% to all unvested share-based awards as of September 30, 2010, which represents
the portion that we expect will be forfeited over the vesting period. We reevaluate this analysis
periodically and adjust the forfeiture rate as necessary. Vesting of share-based awards issued with
performance-based vesting criteria must be probable before we begin recording share-based
compensation expense. At each reporting period, we review the likelihood that these awards will
vest and if the vesting is deemed probable, we begin to recognize compensation expense at that
time. If ultimately performance goals are not met, for any awards where vesting was previously
deemed probable, previously recognized compensation cost will be reversed.
We allocate share-based compensation expense to cost of revenues, selling, general and
administrative expense and research and development expense based on the award holders employment
function. For the three and nine months ended September 30, 2010 and 2009, we recorded share-based
compensation expense as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of revenues |
$ | 257,536 | $ | 290,980 | $ | 733,456 | $ | 370,635 | ||||||||
Selling, general and administrative |
1,768,618 | 632,349 | 6,248,595 | 853,599 | ||||||||||||
Research and development |
536,802 | 366,487 | 1,579,867 | 566,182 | ||||||||||||
$ | 2,562,956 | $ | 1,289,816 | $ | 8,561,918 | $ | 1,790,416 | |||||||||
For the three and nine months ended September 30, 2010, we experienced an increase in
share-based compensation expense due primarily to an annual grant of equity awards to a large group
of our employees in September 2009. In addition, in the nine months ended September 30, 2010, we
recognized approximately $1.2 million of share-based compensation expense resulting from an equity
award that would have begun vesting in September 2009 but was subject to stockholder approval.
Stockholder approval was obtained at our annual meeting of stockholders in the second quarter of
2010 resulting in a true-up of share-based compensation expense to coincide with the vesting
period.
No tax benefits were attributed to our share-based compensation expense recorded in the
accompanying condensed consolidated financial statements because we are in a net operating loss
position and a full valuation allowance is maintained for all net deferred tax assets. We receive a
tax deduction for certain stock option exercises during the period the options are exercised, and
for the vesting of restricted stock units during the period the restricted stock units vest. For
stock options, the amount of the tax deduction is generally for the excess of the fair market value
of our shares of common stock over the exercise price of the stock options at the date of exercise.
For restricted stock units, the amount of the tax deduction is generally for the fair market value
of our shares of common stock at the vesting date. Excess tax benefits are not included in the
accompanying condensed consolidated financial statements because we are in a net operating loss
position and a full valuation allowance is maintained for all net deferred tax assets.
Equity Plans
We have issued share-based awards to employees, non-executive directors and outside
consultants through various approved plans and outside of any formal plan. New shares are issued
upon the exercise of share-based awards.
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On August 5, 2008, we adopted the HeartWare International, Inc. 2008 Stock Incentive Plan
(2008 SIP). The 2008 SIP allows for the issuance of share-based awards to employees, directors
and consultants. We have issued options and restricted stock units (RSUs) to employees and
directors under the 2008 SIP. The plan allows for the issuance of share-based awards representing
up to 13% of the prior fiscal years weighted average shares outstanding, less share-based awards
outstanding under our other equity plans. At September 30, 2010, there were approximately 335,000
shares available for future awards under the 2008 SIP. Future share-based awards will only be made
from the 2008 SIP.
Stock Options
Each option allows the holder to subscribe for and be issued one share of our common stock at
a specified price, which is generally the quoted market value of our common stock on the date the
option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance
date within four years of the date the option is issued. Options may be exercised after they have
vested and prior to the specified expiry date provided applicable exercise conditions are met, if
any. The expiry date can be for periods of up to ten years from the date the option is issued.
In 2007 and 2008, we granted options with performance-based vesting criteria. These
performance-based options vest in four equal tranches contingent upon the achievement of
pre-determined corporate milestones related primarily to the development of our products and the
achievement of certain prescribed clinical and regulatory objectives. Any performance-based options
that have not vested after five years from the date of grant automatically expire.
The fair value of each option is estimated on the date of grant using the Black-Scholes option
pricing model using the assumptions established at that time. The following table includes the
weighted average assumptions used for the periods noted.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected volatility |
60.26 | % | 60.50 | % | 60.94 | % | 60.50 | % | ||||||||
Risk-free interest rate |
2.05 | % | 2.80 | % | 2.71 | % | 2.80 | % | ||||||||
Estimated holding period (years) |
6.25 | 6.25 | 6.25 | 6.25 |
Information related to options granted under all of our plans at September 30, 2010 and
activity in the nine months then ended is as follows (certain amounts in US$ were converted from
AU$ at the then period-end spot rate):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Exercise | Contractual Life | Aggregate | ||||||||||||||
Shares | Price | (Years) | Intrinsic Value | |||||||||||||
Outstanding at
December 31, 2009 |
520,835 | $ | 27.96 | |||||||||||||
Granted |
34,250 | 48.57 | ||||||||||||||
Exercised |
(121,981 | ) | 26.78 | |||||||||||||
Forfeited |
(6,501 | ) | 27.19 | |||||||||||||
Expired |
(9,563 | ) | 41.32 | |||||||||||||
Outstanding at
September 30, 2010 |
417,040 | $ | 31.60 | 6.96 | $ | 15,496,480 | ||||||||||
Exercisable at
September 30, 2010 |
260,674 | $ | 32.73 | 6.18 | $ | 9,391,503 | ||||||||||
The aggregate intrinsic values at September 30, 2010 noted in the table above represent the
closing price of our common stock traded on NASDAQ, less the weighted average exercise price at
period end multiplied by the number of options outstanding and exercisable.
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At September 30, 2010, 36,076 of the 156,366 options outstanding that are not yet exercisable
are subject to performance-based vesting criteria as described above.
The weighted average grant date fair value per share of options granted in the nine months
ended September 30, 2010 and 2009 was $28.62 and $16.50, respectively.
The total intrinsic value of options exercised in the nine months ended September 30, 2010 was
approximately $3.5 million. Cash received from options exercised in the nine months ended September
30, 2010 was approximately $3.3 million. The total intrinsic value of options exercised in the nine
months ended September 30, 2009 was approximately $1.5 million. Cash received from options
exercised in the nine months ended September 30, 2009 was approximately $621,000.
At September 30, 2010, there was approximately $1.7 million of unrecognized compensation cost
related to non-vested option awards, including performance-based options not yet deemed probable of
vesting. The expense is expected to be recognized over a weighted average period of 1.7 years.
Restricted Stock Units
RSUs issued under the plans vest on a pro-rata basis on each anniversary of the issuance date
over three or four years or vest in accordance with performance-based criteria. The RSUs with
performance-based vesting criteria vest in tranches contingent upon the achievement of
pre-determined corporate milestones. RSUs with performance-based vesting criteria not vested after
five years from the date of grant automatically expire. There is no consideration payable on the
vesting or exercise of RSUs issued under the plans. Upon vesting, the RSUs are exercised
automatically and settled in one share of our common stock.
Information related to RSUs at September 30, 2010 and activity in the nine months then ended
is as follows:
Weighted | ||||||||||||
Average | ||||||||||||
Remaining | ||||||||||||
Contractual | ||||||||||||
Number of | Life | Aggregate | ||||||||||
Units | (Years) | Intrinsic Value | ||||||||||
Outstanding at December 31, 2009 |
413,135 | |||||||||||
Granted |
154,375 | |||||||||||
Vested/Exercised |
(193,208 | ) | ||||||||||
Forfeited |
(5,107 | ) | ||||||||||
Expired |
| |||||||||||
Outstanding at September 30, 2010 |
369,195 | 8.73 | $ | 25,385,848 | ||||||||
Exercisable at September 30, 2010 |
| | $ | | ||||||||
The aggregate intrinsic value at September 30, 2010 noted in the table above represents the
closing price of our common stock traded on NASDAQ, multiplied by the number of RSUs outstanding.
At September 30, 2010, 58,937 of the 369,195 RSUs outstanding that are not yet exercisable
are subject to performance-based vesting criteria as described above.
The total intrinsic value of RSUs vested in the nine months ended September 30, 2010 and 2009
was approximately $11.6 million and $445,000, respectively.
The fair value of each RSU award equals the quoted market value of our common stock on the
date of grant. The weighted average grant date fair value per share of RSUs granted in the nine
months ended September 30, 2010 and 2009 was $55.99 and $27.21, respectively.
At September 30, 2010, there was approximately $6.9 million of unrecognized compensation cost
related to non-vested RSU awards, including awards not yet deemed probable of vesting. The expense
is expected to be recognized over a weighted average period of 1.5 years.
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12. Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss for the period by the
weighted-average number of common shares outstanding during the period. Diluted loss per common
share adjusts basic loss per common share for the dilutive effects of convertible securities,
options and other potentially dilutive instruments only in the periods in which such effect is
dilutive. Due to our net loss for all periods presented, all potentially dilutive instruments were
excluded because their inclusion would have been anti-dilutive. The following instruments have been
excluded from the calculation of diluted net loss per common share, as their effect would be
anti-dilutive:
Three and Nine Months | ||||||||
Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Common shares issuable upon: |
||||||||
Exercise of share-based awards |
786,235 | 1,032,569 | ||||||
Conversion of convertible debt |
| 129,855 | ||||||
Conversion of escrow balance |
| 519,421 |
At September 30, 2009, we had borrowed $4.0 million under the Loan Agreement discussed in Note
5. In addition, $16.0 million remained in escrow and was available for borrowing under the Loan
Agreement. Based on the conversion rate at September 30, 2009, the outstanding loan balance and
funds held in escrow could have been converted into an aggregate of approximately 649,000 shares of
HeartWare International common stock.
13. Business Segment, Geographic Areas and Major Customers
For financial reporting purposes, we have one reportable segment which designs, manufactures
and markets medical devices for the treatment of advanced heart failure. Products are sold to
customers located in the US through our clinical trials, as commercial products to customers in
Europe and under special access in Australia and Canada.
Product sales by geographic location are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Domestic |
$ | 3,880 | $ | 2,763 | $ | 8,427 | $ | 5,691 | ||||||||
International |
9,937 | 4,743 | 25,850 | 6,261 | ||||||||||||
$ | 13,817 | $ | 7,506 | $ | 34,277 | $ | 11,952 | |||||||||
For the three and nine months ended September 30, 2010, one customer exceeded 10% of product
sales individually and accounted for approximately 18% of product sales in the aggregate for both
periods. For the three months ended September 30, 2009, three customers exceeded 10% of product
sales individually and accounted for approximately 43% of product sales in the aggregate. For the
nine months ended September 30, 2009, two customers exceeded 10% of product sales individually and
accounted for approximately 28% of product sales in the aggregate.
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As the majority of our revenue is generated outside of the US, we are dependent on favorable
economic and regulatory environments for our products in Europe and other countries outside of the
US. The lower proportion of US-based revenue in 2010 is due to the completion of enrollment in our
bridge-to-transplant clinical trial in the US in February 2010. In April 2010, the FDA approved an
Investigational Device Exemption Supplement that allowed us to enroll up to an additional 54
patients under a Continued Access Protocol for our bridge-to-transplant clinical trial. In August
2010, we completed enrollment of this initial allotment of 54 patients and in September 2010, the
FDA granted a second allotment of 54 patients. While we commenced enrollment of our destination
therapy clinical trial in the US in August 2010, the revenue impact in the three and nine months
ended September 30, 2010 was not material as enrollment was in the early stages at September 30,
2010.
14. Commitments and Contingencies
The following contingent liabilities and commitments resulting from the 2003 acquisition by
HeartWare, Inc. of a business that previously held our technology exist as of September 30, 2010:
a milestone payment of $1,250,000 within 6 months of the date when the first circulatory
assist device is approved for sale in the United States, provided that we have at least $25,000,000
in cash on hand and, if we do not have $25,000,000 at that time, then the payment is deferred until
such time that we have $25,000,000 in cash on hand; and
a special payment of up to $500,000 upon a sale of our HeartWare, Inc. subsidiary if such
sale generates proceeds in excess of the aggregate liquidation preferences of all of HeartWare,
Inc.s then outstanding preferred stock.
We will record the effect of these payment obligations when and if these events occur or are
deemed probable of occurring.
At September 30, 2010, we had purchase order commitments of approximately $11.0 million
related to product costs and property, plant and equipment purchases. Many of our materials and
supplies require long lead times and as such purchase order commitments reflect materials that may
be received up to one year from the date of order.
In addition to the above, we have entered into employment agreements with all of our executive
officers, including the Chief Executive Officer and the Chief Financial Officer who is also the
Chief Operating Officer. These contracts do not have a fixed term and are constructed on an at
will basis. Some of these contracts provide executives with the right to receive certain
additional payments and benefits if their employment is terminated after a change of control, as
defined in such agreements.
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The taxation and
customs requirements, together with other applicable laws and regulations of
certain foreign jurisdictions, can be inherently complex and subject to
differing interpretation by local authorities. We are subject to the risk that
either we have misinterpreted applicable laws and regulations, or that foreign
authorities may take inconsistent, unclear or changing positions on local law,
customs practices or rules. In the event that we have misinterpreted
any of the above, or that foreign authorities take positions contrary to
ours, we may incur liabilities that may differ materially from the amounts
accrued in the accompanying condensed consolidated financial statements.
From time to time we may be involved in litigation arising out of claims in the ordinary
course of business. Except as set forth below, and based on the information presently available,
management believes that there are no claims or actions pending or threatened against us, the
ultimate resolution of which will have a material adverse effect on our financial position,
liquidity or results of operations, although the results of litigation are inherently uncertain and
adverse outcomes are possible.
We received a letter from Abiomed, Inc. in September 2009 in which Abiomed suggested that we
may be interested in licensing Abiomeds technology as it relates to an Abiomed patent concerning
bearingless blood pumps. Further, in a subsequent letter received in February 2010, it was stated
that Abiomed was concerned that HeartWares left ventricular assist rotary blood pump infringes
one or more claims of an Abiomed patent. We have had communications with Abiomed, Inc. since
receipt of the initial letter. The patent referenced by these letters relates to technology that is
potentially material to our business and any litigation in this regard, irrespective of the
outcome, may have a material adverse effect on our financial position, liquidity or results of
operations. We believe the HeartWare System does not infringe this patent.
On February 24, 2010 we received a letter from two holders of Series A Preferred Stock in
HeartWare, Inc., an indirect subsidiary of HeartWare International, Inc., requesting various
financial and other information regarding HeartWare, Inc. for the purposes of determining the
Companys compliance with their rights as Series A Preferred stockholders, including whether a
liquidation event has occurred since inception in 2003. HeartWare, Inc. issued Series A-1 and
Series A-2 Preferred Stock to certain creditors of Kriton Medical, Inc. when HeartWare, Inc.
purchased substantially all of the assets of Kriton in July 2003. The Series A-1 and Series A-2
Preferred Stock do not have voting or dividend rights but entitle the holders thereof to receive,
upon certain liquidation events of HeartWare, Inc. (but not the liquidation of or change of control
of HeartWare International, Inc.), an amount equal to $10 per share of Series A-1 and an amount
equal to $21 per share of Series A-2, which currently represent an aggregate liquidation preference
of approximately $15 million. We do not believe we have abrogated the rights, or in any way failed
to satisfy obligations owed to any of our stockholders, including holders of Series A Preferred
Stock in HeartWare, Inc. There have been no further communications.
There can be no certainty that litigation will not arise in relation to the above matters or,
if it does arise, whether or not it will be determined in a manner which is favorable to us. As at
the date of this report, we are not able to determine the amount, if any, of any costs or damages
that could be associated with either of the above matters.
15. Subsequent Events
We have evaluated events and transactions that occurred subsequent to September 30, 2010
through the date the financial statements were issued, for potential recognition or disclosure in
the accompanying condensed consolidated financial statements.
We did not identify any events or transactions that should be recognized or disclosed in the
accompanying condensed consolidated financial statements.
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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read together with our unaudited interim condensed consolidated financial statements and
related notes appearing elsewhere in this Quarterly Report on Form 10-Q.
Overview
HeartWare is a medical device company focused on the development and sale of implantable blood
pumps for the treatment of advanced heart failure.
The HeartWare Ventricular Assist System (the HeartWare System), which includes a left
ventricular assist device, or blood pump, patient accessories and surgical tools, is designed to
provide circulatory support for patients with advanced heart failure. The core of the HeartWare
System is a proprietary continuous flow blood pump, the HVAD Pump, which is a full-output device
capable of pumping up to 10 liters of blood per minute.
In January 2009, the HeartWare System received Conformite Europenne (CE) Marking approval,
which allows us to market and sell the device in Europe. Our first commercial sale in Europe
occurred in March 2009. The HeartWare System is also sold to customers located in the US through
our clinical trials and under special access in Australia and Canada.
In April 2008, we received conditional Investigational Device Exemption (IDE) approval from
the United States Food and Drug Administration (FDA) to enroll 150 patients in a
bridge-to-transplant clinical study in the United States (called ADVANCE). Full IDE approval for
the HeartWare System was received from the FDA in September 2008 and, in October 2009 we received
FDA approval to expand the number of participating sites from 28 to 40 centers.
In August 2008, our first US patient received the HeartWare System at the Washington Hospital
Center in Washington, DC, marking the commencement of our ADVANCE trial. In February 2010, we
completed enrollment in this trial with 140 patients receiving the HeartWare System. The remaining
10 patients were enrolled but did not receive an implant of the HeartWare System because they
failed to meet the trials inclusion and exclusion criteria after being enrolled.
In April 2010, the FDA approved an IDE Supplement that allowed us to enroll up to an
additional 54 patients in our ADVANCE trial under a Continued Access Protocol (CAP). In August
2010, we completed enrollment of this initial allotment of 54 patients and in September 2010, the
FDA granted a second allotment of 54 patients. The CAP makes the HeartWare System available to
patients and clinicians while also providing additional data for the FDA to evaluate prior to
determining whether or not to approve the HeartWare System. The CAP patients will be enrolled and
followed under a modified protocol of the ADVANCE trial. We currently anticipate submission to the
FDA of the Premarket Approval application, or PMA, seeking approval of the HeartWare System for the
bridge-to-transplant indication by the end of 2010.
In June 2010, we received conditional IDE approval from the FDA to begin enrollment in our
destination therapy clinical study for the HeartWare System. Designed to enroll up to 450 patients
at 50 US hospitals, the non-inferiority study, which is named ENDURANCE, is a randomized,
controlled, unblinded, multi-center clinical trial to evaluate the use of the HeartWare System as a
destination therapy in advanced heart failure patients. The study population will be selected from
patients with end-stage heart failure who have not responded to standard medical management and who
are ineligible for cardiac transplantation. Patients in the study will be randomly selected to
receive either the HeartWare System or, as part of a control group they will be implanted with any
alternative LVAD approved by the FDA for destination therapy, in a 2:1 ratio. Each
patient receiving the HeartWare System or control LVAD will be followed to the primary
endpoint at two years, with a subsequent follow-up period extending to five years post implant. In
August 2010, our first patient was implanted as part of the ENDURANCE trial and we received full
IDE approval from the FDA in September 2010.
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Beyond the HeartWare System, we are also evaluating our new miniaturized device, known as the
MVAD. The MVAD is based on the same technology platform as the HeartWare System but adopts an
axial flow, rather than a centrifugal flow, configuration and is being developed in multiple
configurations. The MVAD designs are currently at the preclinical stage and undergoing animal
studies focused on less invasive implantation techniques. Each of the MVAD configurations is
approximately one-third the size of the HVAD Pump. We believe that the MVAD designs will be
implantable by surgical techniques that are even less invasive than those required to implant the
HVAD Pump.
We began generating revenue from sales of the HeartWare System in August 2008 and have
incurred net losses in each year since our inception. We expect our losses to continue as we
advance and expand our clinical trial activities in the United States, continue to develop
commercial markets outside of the United States and expand our research and development into next
generation products including the MVAD.
We have financed our operations primarily through the issuance of shares of our common stock.
Most recently, in February 2010, we completed a public offering of approximately 1.77 million
shares of our common stock, including the underwriters exercise of their over-allotment option to
purchase 230,595 shares, at an offering price of $35.50 per share for aggregate gross proceeds of
approximately $62.8 million. After fees and related expenses, net proceeds from the offering were
approximately $58.5 million.
We are headquartered in Framingham, Massachusetts. We have an operations and manufacturing
facility in Miami Lakes, Florida, a small development and operations facility in Sydney, Australia
and a small distribution and customer service facility in Hannover, Germany. As of September 30,
2010, we had 196 employees worldwide.
Critical Accounting Policies and Estimates
We have adopted various accounting policies in preparing the consolidated financial statements
in accordance with accounting principles generally accepted in the United States. Our significant
accounting policies are disclosed in Note 3 to the Consolidated Financial Statements included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (2009 Annual Report on
Form 10-K) filed with the Securities and Exchange Commission on February 23, 2010.
Preparation of our consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to adopt various accounting policies and to
make estimates and assumptions that affect the reported amounts in the financial statements and
accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions, including those
related to the accounts receivable allowance for doubtful accounts; inventory reserves; warranty
liabilities and stock-based compensation. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the circumstances, and the
results form the basis for making judgments about the reported values of assets, liabilities,
revenues and expenses. Actual results may differ from these estimates. There have been no material
changes to our critical accounting policies and estimates from the information provided in Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
included in our 2009 Annual Report on Form 10-K.
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Results of Operations
Three and nine months ended September 30, 2010 and 2009
Revenues, net
Revenues are derived from product sales in connection with our clinical trials in the United
States and commercial sales outside of the United States. For the three months ended September 30,
2010, we generated net revenue of approximately $13.8 million compared to $7.5 million for the
three months ended September 30, 2009. The increase in revenues is primarily due to increased
volume related to the continued commercial expansion outside of the United States. For the three
months ended September 30, 2010, approximately 72% of our product sales were derived from
commercial sales outside of the United States, predominantly in Europe, compared to approximately
63% for the three months ended September 30, 2009.
For the nine months ended September 30, 2010, we generated net revenue of approximately $34.3
million compared to $12.0 million for the nine months ended September 30, 2009. The increase in
revenues is primarily due to increased volume related to the continued commercial expansion outside
of the United States. For the nine months ended September 30, 2010, approximately 75% of our
product sales were derived from commercial sales outside of the United States, predominantly in
Europe, compared to approximately 52% for the nine months ended September 30, 2009.
The increase in the portion of our revenues derived from outside of the United States is due
to the continued commercial rollout of the HeartWare System in Europe and other jurisdictions
outside the US and the addition of new sites. In the three and nine months ended September 30,
2009, revenues consisted of a lower number of unit sales compared to the same periods in 2010 as we
were in the early stages of generating commercial revenue in Europe subsequent to receipt of CE
Marking approval for our HeartWare System in January 2009. In addition, due to completion of
enrollment in our US bridge-to-transplant clinical trial in February 2010, US-based revenues ceased
temporarily. Revenues from US sales recommenced in the second half of the second quarter of 2010
subsequent to FDA approval of a CAP to continue to enroll up to an additional 54 patients in the
ADVANCE trial. In August 2010, we completed enrollment of this initial allotment of 54 patients and
in September 2010, the FDA granted a second allotment of 54 patients. While we commenced enrollment
of our destination therapy clinical trial in the US in August 2010, the revenue impact in the three
and nine months ended September 30, 2010 was not material as enrollment was in the early stages at
September 30, 2010. We expect to generate incremental revenue from our destination therapy clinical
trial as trial sites increase their rate of enrollment. Our revenue may continue to be variable
based on timing factors such as the completion and rate of enrollment of our different clinical
trials and FDA approvals.
Cost of Revenues
Cost of revenues consists of costs associated with the manufacture of our products including
labor, material and overhead costs. Cost of revenues totaled approximately $6.0 million and $4.1
million in the three months ended September 30, 2010 and 2009, respectively. Cost of revenues
totaled approximately $16.0 million and $6.4 million in the nine months ended September 30, 2010
and 2009, respectively.
Gross profit and gross margin percentage are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Gross profit (in thousands) |
$ | 7,814 | $ | 3,403 | $ | 18,301 | $ | 5,551 | ||||||||
Gross margin % |
57 | % | 45 | % | 53 | % | 46 | % |
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Gross margins for the three and nine months ended September 30, 2010 increased compared to the
same periods in 2009 as a result of lower per unit costs primarily due to increased production
volume and improved efficiencies in our manufacturing processes.
We use a standard costing method for determining costs of inventory based on limited
historical data, therefore, our actual results may differ from standards. As a result, gross
margins have been and may continue to be inconsistent from quarter to quarter.
Selling, General and Administrative
Selling, general and administrative expenses include costs associated with selling and
marketing our products and the general corporate administration of the Company. These costs are
primarily related to salaries and wages and related employee costs, depreciation of fixed assets,
travel, external consultants and contractors, legal and accounting fees and general infrastructure
costs and include all operating costs not associated with or otherwise classified as research and
development costs or cost of revenues.
Selling, general and administrative expenses were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Total selling,
general and
administrative |
$ | 6,994 | $ | 3,149 | 122.1 | % | $ | 19,238 | $ | 11,721 | 64.1 | % |
The increase for the three months ended September 30, 2010 was primarily a result of an
increase in salaries and related employee costs of approximately $2.6 million, primarily due to
increased headcount to build our sales and marketing and administrative functions to support
expected future growth and an increase in non-cash share-based compensation expense of
approximately $1.1 million. The increase in share-based compensation expense is due to an annual
grant of equity awards to our employees at the end of the third quarter of 2009.
For the three months ended September 30, 2010, we also experienced increases in travel and
marketing expenses of approximately $431,000, taxes of $402,000, bad debt expense of $115,000 and
office expenses of $103,000. Increases in these areas were partially offset by a reduction in legal
fees of approximately $300,000 as compared to the equivalent prior year period which included
significant legal fees associated with the terminated merger with Thoratec Corporation.
The increase for the nine months ended September 30, 2010 was primarily a result of an
increase in salaries and related employee costs of approximately $8.5 million, primarily due to
increased headcount and an increase in share-based compensation of approximately $5.4 million. The
increase in share-based compensation expense is due to an annual grant of equity awards to our
employees in September 2009 and the recognition of approximately $1.2 million of share-based
compensation expense related to a grant with a vesting period that would have begun in September
2009 but was subject to stockholder approval, which was obtained at our annual meeting of
stockholders in the second quarter of 2010. We also experienced increases in travel and marketing
expenses of approximately $1.2 million, taxes of $514,000, consulting and professional services
fees of $493,000 and bad debt expense of $400,000. However, increases in these areas were
significantly offset by a reduction in legal fees of approximately $4.6 million associated with the
terminated merger with Thoratec Corporation mentioned above.
In the three months ended September 30, 2010, selling, general and administrative expenses
were approximately 43% of operating expenses compared to 46% of operating expenses in the same
period in the prior year. In the nine months ended September 30, 2010, selling, general and
administrative expenses were approximately 47% of operating expenses compared to 54% of operating
expenses in the same period in the prior year.
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Research and Development
Research and development expenses are the direct and indirect costs associated with developing
our products prior to commercialization and are expensed as incurred. These expenses fluctuate
based on project level activity and consist primarily of salaries and wages and related employee
costs of our research and development and clinical and regulatory staff, external research and
development costs, materials and expenses associated with clinical trials. Additional costs include
travel, facilities and overhead allocations.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | 2010 | 2009 | Change | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Total research and
development
expenses |
$ | 9,313 | $ | 3,646 | 155.4 | % | $ | 21,580 | $ | 9,994 | 115.9 | % |
The increase for the three months ended September 30, 2010 was primarily a result of an
increase in expenses related to existing and next generation research projects and on-going
clinical trials and regulatory activities aggregating approximately $4.6 million. We also
experienced increased salaries and related employee costs of approximately $1.0 million, primarily
due to increased headcount and heightened activities in connection with preparation for the
Companys PMA submission and expansion of the Companys efforts on its next generation of pumps,
which included an increase in share-based compensation of approximately $170,000.
The increase for the nine months September 30, 2010 was primarily a result of an increase in
salaries and related employee costs of approximately $3.2 million primarily due to increased
headcount and heightened activities in connection with preparation for the Companys PMA submission
and expansion of the Companys efforts on its next generation of pumps, which included an increase
in share-based compensation of approximately $1.0 million. We also experienced increased expenses
related to existing and next generation research projects and on-going clinical trials and
regulatory activities aggregating approximately $8.1 million.
In the three months ended September 30, 2010, research and development expenses were
approximately 57% of operating expenses compared to 54% of operating expenses in the same period in
the prior year. In the nine months ended September 30, 2010, research and development expenses were
approximately 53% of operating expenses compared to 46% of operating expenses in the same period in
the prior year.
We expect that research and development expenses will continue to represent a significant
portion of our operating expenses for the foreseeable future related to clinical trials
particularly in the US for the HeartWare System (and including preparation for our PMA submission
for the bridge-to-transplant indication) and new product development, including costs related to
the development of the MVAD.
Foreign Exchange
Foreign exchange gains totaled approximately $514,000 in the three month period ended
September 30, 2010, compared to approximately $108,000 in the same period in the prior year.
Foreign exchange losses totaled approximately $259,000 in the nine month period ended September 30,
2010, compared to approximately $260,000 in the same period in the prior year. In 2010, the
majority of our realized and unrealized foreign exchange gains and losses were experienced upon the
collection of certain accounts receivable that were denominated in foreign currencies, and the
translation to US dollars of customer accounts receivable denominated in foreign currencies at
period end, primarily the Euro. We expect this trend to continue for the foreseeable future as the
Euro represents a majority of our sales denominated in foreign currencies. In 2009, the majority of
our foreign exchange gains and losses were due to remeasurement of our cash holdings denominated in
US dollars held by our Australian subsidiary as a result of movements in the exchange rate between
the Australian dollar and the US dollar. During the first half of 2009, we maintained the majority
of our cash and cash equivalents in Australia, denominated in both Australian and US dollars.
However, beginning in the second half of 2009, the majority of our cash and cash equivalents are in
US dollars on deposit with banks located in the United States.
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Interest Expense
Interest expense in 2009 consists of interest incurred on the principal amount of the $4.0
million convertible loan from Thoratec obtained in August 2009 and amortization of deferred
financing costs related to the Thoratec Loan Agreement. Interest on the convertible loan was
payable at a rate of 10% per annum. The deferred financing costs were being amortized over the term
of the Thoratec Loan Agreement, which was to expire no later than November 1, 2011. There was no
such interest expense in 2010 as the convertible loan was repaid and the Loan Agreement terminated
in the fourth quarter of 2009.
Interest expense was approximately $351,000 in the three and nine months ended September 30,
2009. Interest incurred on the principal amount of the convertible loan was approximately $63,000
and non-cash amortization of the deferred financing costs totaled approximately $288,000.
Interest Income, net
Interest income is primarily derived from investments and cash and short-term deposit accounts
held in the US. The amortization of premium on our investments is also included in interest income,
net. Interest income, net was approximately $134,000 and $407,000 in the three and nine months
ended September 30, 2010, respectively, compared to $7,000 and $26,000 in the same periods in the
prior year, respectively. The increase in interest income was primarily due to higher average daily
cash balances during the 2010 period resulting from the capital raises completed in the second half
of 2009 and February 2010. However, we experienced lower interest rates in 2010 compared to 2009.
Change in Fair Value of Derivative Instrument
As further discussed in Note 5 to the accompanying condensed consolidated financial
statements, we recorded the fair value of a derivative instrument on July 31, 2009 related to the
Australian dollar denominated conversion feature in the Thoratec Loan Agreement. In the three and
nine months ended September 30, 2009, we recognized a non-cash charge of approximately $2.2 million
due to the increase in the fair value of this derivative between July 31, 2009 and September 30,
2009. This increase in fair value was primarily due to an increase in the fair value of our common
stock from July 31, 2009 to September 30, 2009. There was no such charge in 2010 as the Loan
Agreement terminated in the fourth quarter of 2009.
Income Taxes
We are subject to taxation in the United States as well as jurisdictions outside of the United
States. These jurisdictions have different marginal tax rates. While we have incurred losses since
inception, changes in issued capital and share ownership, as well as other factors, may limit our
ability to utilize any net operating loss carry-forwards, and as such a 100% valuation allowance
has been recorded against our net deferred tax assets.
As of September 30, 2010, we did not have revenues or profit which would be sufficient to
allow any portion of our deferred tax assets to be recorded so there is no tax provision provided
on our consolidated income statement. We intend to closely consider whether to record a deferred
tax asset as we further expand the commercialization of our products.
Liquidity and Capital Resources
As of September 30, 2010, we had approximately $93.0 million in cash, cash equivalents and
investments, compared to $50.8 million at December 31, 2009. The increase is primarily a result of
the cash proceeds from our public offering of common stock, which closed in February 2010.
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Following is a summary of our cash flow activities:
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Net cash used in operating activities |
$ | (14,886,038 | ) | $ | (22,411,377 | ) | ||
Net cash used in investing activities |
(30,222,541 | ) | (1,349,617 | ) | ||||
Net cash provided by financing activities |
61,667,195 | 33,610,379 | ||||||
Effect of exchange rate changes on cash
and cash equivalents |
104,978 | 767,832 | ||||||
Net increase in cash and cash equivalents |
$ | 16,663,594 | $ | 10,617,217 | ||||
Cash Used in Operating Activities
Cash used in operating activities in the nine months ended September 30, 2010 included a net
loss of approximately $22.4 million, non-cash adjustments to net loss of approximately $10.3
million and changes in assets and liabilities of $2.8 million. Non-cash adjustments
consisted of share-based compensation of approximately
$8.6 million and $1.8 million of
depreciation, amortization and other non-cash expenses. Changes in assets and liabilities included a use of cash of
approximately $8.3 million for the purchase and manufacture of inventories partially offset by $2.8
million in net accounts receivable collections. We expect inventory purchases and increases in
accounts receivable to be a significant use of cash for the remainder of 2010 as we continue to
enroll patients in clinical trials in the United States and increase our international commercial
sales.
Cash used in operating activities in the nine months ended September 30, 2009 included a net
loss of approximately $19.0 million and non-cash adjustments to net loss of approximately $5.1 million, which
consisted of approximately $2.2 million for the change in fair value of a derivative,
$1.8 million of share-based compensation and $1.0 million of depreciation, amortization and
other non-cash expenses. Changes
in assets and liabilities used cash of approximately $8.5 million, including a $5.9 million
increase in accounts receivable and approximately $4.5 million for the purchase and manufacture of
inventories.
Cash Used in Investing Activities
In the nine months ended September 30, 2010 we utilized approximately $25.8 million for the
purchase of investments. These investments consist of investment grade corporate and US government
agency debt. Other investing activities in the nine months ended September 30, 2010 and 2009 used
cash of approximately $4.4 million and $1.4 million, respectively, for the purposes of acquiring
property, plant and equipment and for capitalized patent costs. In the nine months ended September
30, 2010, we had significant purchases of machinery, equipment and software to support our
expanding operations and research and development programs.
Cash Provided by Financing Activities
In February 2010, we completed a public offering of approximately 1.77 million shares of our
common stock, including the underwriters exercise of their over-allotment option to purchase
230,595 shares, at an offering price of $35.50 per share for aggregate gross proceeds of
approximately $62.8 million. After fees and expenses, net proceeds from the offering were
approximately $58.5 million. The offering was completed pursuant to a prospectus supplement, dated
January 27, 2010, to a shelf registration statement previously filed with the SEC and which was
declared effective on January 20, 2010. This shelf registration statement allows us to offer and
sell from time to time, in one or more series or issuances and on terms that we will determine at
the time of the offering, any combination of the securities described in the prospectus, up to an
aggregate amount of $100 million. The exercise of stock options in the nine months ended September
30, 2010 and 2009 resulted in cash proceeds of approximately $3.3 million and $621,000,
respectively.
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We began generating revenue in August 2008 with the commencement of our US
bridge-to-transplant clinical trial. Continued revenue is contingent upon, among other things,
market acceptance of our products among physicians, competitive clinical outcomes, patients, health
care payers or the medical community as well
as our capacity to successfully and efficiently manufacture our products. We expect to
continue to incur significant spending due to increased selling and marketing costs, on-going
regulatory and compliance requirements, increased clinical trial costs associated with our clinical
trials and additional operating expenses related to continued corporate growth.
For the remainder of 2010, our cash and cash equivalents are expected to primarily be used to
fund our ongoing operations, including continuing to expand our sales and marketing capabilities on
a global basis, supporting the Continued Access Program for our bridge-to-transplant clinical trial
and preparing a pre-market approval submission to the FDA for such trial, continuing our US
destination therapy clinical study, purchases of machinery and equipment, continued product
development, regulatory and other compliance functions as well as for general working capital. We
believe our cash, cash equivalents and investments as of September 30, 2010 are sufficient to
support our planned operations for at least the next twelve months.
Contractual Obligations
On August 16, 2010, we renewed our lease for our headquarters in Framingham, Massachusetts.
Under the amended lease we will occupy additional space in the fourth quarter of 2010, increasing
our total square footage from 7,040 to approximately 15,000. Base rent obligations will increase
to approximately $275,000 per year. The lease term expires on December 31, 2014 and we have an
option to renew for an additional four-year period at fair market value. We also have an option to
expand with an additional 3,002 square foot space in the building.
On September 30, 2010, we renewed our lease for our Miami Lakes, Florida location. Under the
amended lease we will maintain our existing space of approximately 60,000 square feet, extend the
lease term by approximately two years to expire on June 30, 2013 and pay a base rent of $9.00 per
square foot starting in June 2011, subject to a 3% annual escalation. Under the amended lease, we
have an option to renew for two additional three-year periods.
Other than the lease renewals discussed above, in the three and nine months ended September
30, 2010, there were no material changes to our contractual obligations reported in our Annual
Report on Form 10-K filed with the SEC on February 23, 2010, outside the ordinary course of
business.
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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.
Interest Rate Risk
The primary objective of our investment activities is to preserve our capital to fund
operations. We also seek to maximize income from our investments without assuming significant
risk. Our investment portfolio is made up of marketable investments in money market funds and
debt instruments of high quality corporate issuers and US government agencies. All investments
are carried at fair value and are treated as available-for-sale. Investments with maturities
beyond one year may be classified as short-term based on their highly liquid nature and because
such marketable securities represent the investment of cash that is available for current
operations. If interest rates rise, the market value of our investments may decline, which could
result in a loss if we were forced to sell an investment before its scheduled maturity. We do not
presently use derivative financial instruments in our investment portfolio.
Foreign Currency Rate Fluctuations
We conduct business in foreign countries. We generate a substantial proportion of our
revenue and collect receivables in foreign currencies. Fluctuations in the exchange rate of the
US dollar against the Euro, British Pound and the Australian dollar can result in foreign
currency exchange gains and losses that may significantly impact our financial results and our
overall cash position. We do not currently utilize foreign currency contracts to mitigate the
gains and losses generated by the remeasurement of non-functional currency assets and liabilities
but do hold cash reserves in currencies in which those reserves are anticipated to be expended.
For US reporting purposes, we translate all assets and liabilities of our non-US entities at
the period-end exchange rate and revenue and expenses at the average exchange rates in effect
during the period. The net effect of these translation adjustments is shown in the accompanying
condensed consolidated financial statements as a component of stockholders equity.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, carried out an evaluation required by the Securities Exchange Act of 1934, as amended
(the Exchange Act), of the effectiveness of the design and operation of our disclosure controls
and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of September 30, 2010. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2010, our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms and to provide reasonable assurance that such information
is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three
months ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the information set forth in this report you should carefully consider the
risk factors discussed in Item 1A Risk Factors in our Annual Report on Form 10-K.
The following risk factors reflect a material change to the Risk Factors set forth in our 2009
Annual Report on Form 10-K.
Recently adopted healthcare reform legislation may impact our profitability.
On March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into
law by President Obama. On March 30, 2010, a companion bill, the Health Care and Education
Reconciliation Act of 2010 (the Reconciliation Act) was also signed into law by President Obama.
Among other things, the PPACA and the Reconciliation Act (collectively, the Acts), when taken
together, impose a 2.3% excise tax on the sale of certain medical devices that will take effect in
2013. In addition, it is possible that standard setters or regulators may address certain unique
aspects of the accounting for the Acts in the future. In light of the inherent uncertainty of how
these Acts and other companion legislation, if any, will be implemented and applied, we are unable
to fully predict the actual impact on our financial statements.
If we fail to successfully introduce next generation products and improvements to our existing
product, our future growth may suffer.
As part of our strategy, we intend to develop and introduce a number of next generation
products and make enhancement to our existing product. We also intend to develop new indications
for our existing products. If we fail to successfully develop, manufacture, introduce or
commercialize any of these new products, product improvements and new indications on a timely
basis, or if they are not well accepted by the market, our future growth may suffer.
The long and variable sales and deployment cycles for our VAD systems may cause our product
sales and operating results to vary significantly from quarter-to-quarter.
Our VAD systems have lengthy sales cycles and we may incur substantial sales and marketing
expenses and expend significant effort without making a sale. Even after making the decision to
purchase our VAD systems, our customers often deploy our products slowly. In addition, cardiac
centers that buy the majority of our products are usually led by cardiac surgeons who are heavily
recruited by competing centers or by centers looking to increase their profiles. When one of these
surgeons moves to a new center we sometimes experience a temporary but significant reduction in
purchases by the departed center while it replaces its lead surgeon. As a result, it is difficult
for us to predict the quarter in which customers may purchase our VAD systems and our product sales
and operating results may vary significantly from quarter to quarter.
If we cannot successfully manage
the additional business and regulatory risks that result from our expansion
into multiple foreign markets, we may experience an adverse impact to our
business, financial condition and results of operations.
We have aggressively
expanded, and expect to continue to expand, into additional foreign
markets. This expansion will subject us to new business and regulatory
risks, including, but not limited to:
• | failure to fulfill foreign regulatory requirements on a timely basis or at all to market the HeartWare System or other future products; | ||
• | availability of, and changes in, reimbursement within prevailing foreign health care payment systems; | ||
• | adapting to the differing laws and regulations, business and clinical practices, and patient preferences in foreign countries; | ||
• | difficulties in managing foreign relationships and operations, including any relationships that we may establish with foreign partners, distributors or sales or marketing agents; | ||
• | differing levels of protection for intellectual property rights in some countries; | ||
• | difficulty in collecting accounts receivable and longer collection periods; | ||
• | costs of enforcing contractual obligations in foreign jurisdictions; | ||
• | recessions in economies outside of the United States; | ||
• | political instability and unexpected changes in diplomatic and trade relationships; | ||
• | currency exchange rate fluctuations; and | ||
• | potentially adverse tax consequences, including our ability to interpret local tax rules and implement appropriate tax treatment/collection. |
We will be impacted by
these additional business risks, which may adversely impact our business,
financial condition and results of operations. In addition, expansion into
additional foreign markets imposes additional burdens on our small executive
and administrative personnel, research and sales department and generally
limited managerial resources. Our efforts to introduce our current or future
products into additional foreign markets may not be successful, in which case
we may have expended significant resources without realizing the expected
benefit. Ultimately, the investments required for expansion into additional
foreign markets could exceed the returns, if any, generated from this
expansion.
The taxation and
customs requirements, together with other applicable laws and regulations of
certain foreign jurisdictions, can be inherently complex and subject to
differing interpretation by local authorities. We are subject to the risk that
either we have misinterpreted applicable laws and regulations, or that foreign
authorities may take inconsistent, unclear or changing positions on local law,
customs practices or rules. In the event that we have misinterpreted
any of the above, or that foreign authorities take positions contrary to
ours, we may incur liabilities that may differ materially from the amounts
accrued in the accompanying condensed consolidated financial statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 2, 2010, we completed an underwritten public offering of 1,767,900 shares of our
common stock (including 230,595 shares issued as a result of the full exercise of an overallotment
option by the underwriter) at a price to the public of $35.50 per share, or an aggregate offering
price of $62.8 million. The offer and sales of the shares in the offering were registered under the
Securities Act of 1933 pursuant to a shelf registration statement on Form S-3 (File No.
333-164004), which became effective on January 20, 2010 and which registered up to $100 million of
our common stock. The offering did not terminate before all of the securities offered were sold.
J.P. Morgan acted as sole book-running manager of the offering.
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We raised approximately $58.5 million in the offering, after deducting underwriting discounts
and commissions of $3.8 million and other estimated offering costs of $470,000. No payments were
made by us to our directors, officers or persons owning ten percent or more of our common stock or
to their associates, or to our affiliates. We have used to date approximately $18.9 million of
the net proceeds of the offering, including approximately $7.6 million for the purchase of
inventories, approximately $7.7 million for general working capital and approximately $3.5
million for purchases of property, plant and equipment. Approximately $25.8 million of the cash
proceeds were used to purchase investments, which we expect to liquidate from time to time as
necessary or desirable.
ITEM 6. EXHIBITS
3.1 | Certificate of Incorporation of HeartWare International, Inc. (1) |
|||
3.2 | Bylaws of HeartWare International, Inc. (1) |
|||
10.1 | Second Amendment to Business Lease, dated August 9, 2010, between HeartWare, Inc. and
Atlantic-Philadelphia Realty LLC (2) |
|||
10.2 | First Amendment to Lease made as of the 30th day of September, 2010 by and between JDRP
ASSOCIATES NO. 1, LTD. and HEARTWARE, INC. (3) |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act |
|||
31.1 | Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference to the respective exhibits filed with the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2008. | |
(2) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 19, 2010. | |
(3) | Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2010. |
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Signatures
In accordance with 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.
HEARTWARE INTERNATIONAL, INC. |
||||
Date: November 4, 2010 | /s/ Douglas Godshall | |||
Douglas Godshall | ||||
Chief Executive Officer | ||||
Date: November 4, 2010 | /s/ David McIntyre | |||
David McIntyre | ||||
Chief Financial Officer and Chief Operating Officer |
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EXHIBIT INDEX
31.1 | Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act |
|||
31.1 | Certification of 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
34