Attached files
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EX-31.1 - EXHIBIT 31.1 - HeartWare International, Inc. | c16599exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - HeartWare International, Inc. | c16599exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - HeartWare International, Inc. | c16599exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - HeartWare International, Inc. | c16599exv32w2.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 March 31, 2011
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 April 27, 2011 | |
Common Stock, $0.001 Par Value Per Share | 13,920,906 |
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 $, U.S.$ 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 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, Europe, 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, such as FDA
approval of our premarket approval application for our HeartWare® Ventricular Assist System
for a bridge-to-transplant indication; |
| our expectations with respect to our clinical trials, including enrollment in or
completion of our clinical trials; |
| our expectations with respect to the integrity or capabilities of our intellectual
property position; |
| our ability and plans to commercialize our existing products; |
| our ability and plans to develop and commercialize new products and the expected
features and functionalities and possible benefits of these products; and |
| our estimates regarding our capital requirements and financial performance, including
profitability. |
3
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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 for the fiscal year
ended December 31, 2010 filed with the SEC on February 24, 2011, and those described from time to
time in our filings with the SEC.
4
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 156,076,828 | $ | 192,148,312 | ||||
Short-term investments, net |
57,976,511 | 21,330,110 | ||||||
Accounts receivable, net |
14,115,847 | 19,052,672 | ||||||
Inventories, net |
17,342,288 | 15,076,590 | ||||||
Prepaid expenses and other current assets |
2,807,620 | 2,406,505 | ||||||
Total current assets |
248,319,094 | 250,014,189 | ||||||
Property, plant and equipment, net |
8,336,199 | 7,484,022 | ||||||
Long-term investments, net |
| 4,005,659 | ||||||
Other intangible assets, net |
1,703,494 | 1,595,456 | ||||||
Deferred financing costs, net |
2,871,169 | 2,939,149 | ||||||
Restricted cash |
1,538,429 | 1,538,429 | ||||||
Total assets |
$ | 262,768,385 | $ | 267,576,904 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,544,453 | $ | 3,889,643 | ||||
Accrued expenses and other current liabilities |
8,224,493 | 7,001,350 | ||||||
Total current liabilities |
10,768,946 | 10,890,993 | ||||||
Convertible senior notes, net |
90,200,636 | 88,921,557 | ||||||
Commitments and contingencies See Note 15 |
||||||||
Stockholders equity: |
||||||||
Preferred stock $.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
March 31, 2011 and December 31, 2010 |
| | ||||||
Common stock $.001 par value; 25,000,000 shares
authorized; 13,920,906 and 13,878,686 shares issued
and outstanding at March 31, 2011 and December 31,
2010, respectively |
13,921 | 13,879 | ||||||
Additional paid-in capital |
306,005,320 | 302,533,344 | ||||||
Accumulated deficit |
(136,699,563 | ) | (127,268,545 | ) | ||||
Accumulated other comprehensive loss: |
||||||||
Cumulative translation adjustments |
(7,522,199 | ) | (7,548,706 | ) | ||||
Unrealized gain on investments |
1,324 | 34,382 | ||||||
Total accumulated other comprehensive loss |
(7,520,875 | ) | (7,514,324 | ) | ||||
Total stockholders equity |
161,798,803 | 167,764,354 | ||||||
Total liabilities and stockholders equity |
$ | 262,768,385 | $ | 267,576,904 | ||||
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues, net |
$ | 17,974,600 | $ | 10,703,120 | ||||
Cost of revenues |
7,595,453 | 5,680,542 | ||||||
Gross profit |
10,379,147 | 5,022,578 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative |
8,664,088 | 4,556,422 | ||||||
Research and development |
9,300,128 | 4,755,678 | ||||||
Total operating expenses |
17,964,216 | 9,312,100 | ||||||
Loss from operations |
(7,585,069 | ) | (4,289,522 | ) | ||||
Other income (expense): |
||||||||
Foreign exchange gain (loss) |
592,325 | (367,014 | ) | |||||
Interest expense |
(2,605,472 | ) | | |||||
Interest income, net |
167,198 | 112,221 | ||||||
Loss before income taxes |
(9,431,018 | ) | (4,544,315 | ) | ||||
Provision for income taxes |
| | ||||||
Net loss |
$ | (9,431,018 | ) | $ | (4,544,315 | ) | ||
Net loss per common share basic and
diluted |
$ | (0.68 | ) | $ | (0.35 | ) | ||
Weighted average shares outstanding
basic and diluted |
13,900,602 | 12,958,326 | ||||||
The accompanying notes are an integral part of these financial statements.
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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net loss |
$ | (9,431,018 | ) | $ | (4,544,315 | ) | ||
Foreign currency translation adjustments |
26,507 | 76,717 | ||||||
Unrealized loss on investments |
(33,058 | ) | (23,792 | ) | ||||
Comprehensive loss |
$ | (9,437,569 | ) | $ | (4,491,390 | ) | ||
The accompanying notes are an integral part of these financial statements.
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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, 2010 |
13,878,686 | $ | 13,879 | $ | 302,533,344 | $ | (127,268,545 | ) | $ | (7,514,324 | ) | $ | 167,764,354 | |||||||||||
Issuance of common stock
pursuant to share-based awards |
42,220 | 42 | 536,596 | | | 536,638 | ||||||||||||||||||
Share-based compensation |
| | 2,935,380 | | | 2,935,380 | ||||||||||||||||||
Net loss |
| | | (9,431,018 | ) | | (9,431,018 | ) | ||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Foreign currency translation
Adjustment |
| | | | 26,507 | 26,507 | ||||||||||||||||||
Unrealized loss on investments |
| | | | (33,058 | ) | (33,058 | ) | ||||||||||||||||
Balance, March 31, 2011 |
13,920,906 | $ | 13,921 | $ | 306,005,320 | $ | (136,699,563 | ) | $ | (7,520,875 | ) | $ | 161,798,803 | |||||||||||
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)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (9,431,018 | ) | $ | (4,544,315 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Depreciation of property, plant and equipment |
493,362 | 281,039 | ||||||
Amortization of intangible assets |
30,637 | 23,226 | ||||||
Share-based compensation expense |
2,935,380 | 1,726,467 | ||||||
Amortization of premium on investments |
232,612 | 21,448 | ||||||
Amortization of discount on convertible notes |
1,279,079 | | ||||||
Amortization of deferred financing costs |
68,580 | | ||||||
Loss on disposal of assets |
18,140 | | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
4,944,326 | 3,553,778 | ||||||
Inventories, net |
(2,287,146 | ) | (3,120,148 | ) | ||||
Prepaid expenses and other current assets |
(398,505 | ) | (1,244,721 | ) | ||||
Accounts payable |
(1,346,209 | ) | (1,406,311 | ) | ||||
Accrued interest on convertible senior notes |
1,257,813 | | ||||||
Accrued expenses and other current liabilities |
(36,293 | ) | (83,833 | ) | ||||
Net cash used in operating activities |
(2,239,242 | ) | (4,793,370 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of investments |
(46,906,413 | ) | (16,644,600 | ) | ||||
Maturities of investments |
14,000,000 | | ||||||
Additions to property, plant and equipment |
(1,363,737 | ) | (864,848 | ) | ||||
Additions to patents |
(138,676 | ) | (137,222 | ) | ||||
Proceeds from disposition of assets |
28,892 | | ||||||
Net cash used in investing activities |
(34,379,934 | ) | (17,646,670 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from issuance of common stock |
| 62,760,450 | ||||||
Payment of common stock issuance costs |
(600 | ) | (4,259,079 | ) | ||||
Proceeds from exercise of stock options |
536,638 | 340,092 | ||||||
Net cash provided by financing activities |
536,038 | 58,841,463 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
11,654 | 46,780 | ||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(36,071,484 | ) | 36,448,203 | |||||
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD |
192,148,312 | 50,834,714 | ||||||
CASH AND CASH EQUIVALENTS END OF PERIOD |
$ | 156,076,828 | $ | 87,282,917 | ||||
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)
Note 1. Basis of Presentation
HeartWare International, Inc., referred to in these notes collectively with its subsidiaries
HeartWare Pty. Limited, HeartWare, Inc., HeartWare (UK) Limited and HeartWare GmbH as we, our,
HeartWare or the Company, is a medical device company that develops and manufactures small
implantable heart pumps, or ventricular assist devices, used in the treatment of advanced heart
failure.
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, 2010 included in our Annual Report on Form 10-K. The
accompanying condensed consolidated balance sheet as of December 31, 2010 has been derived from our
audited financial statements. The condensed consolidated statements of operations and cash flows
for the three months ended March 31, 2011 are not necessarily indicative of the results to be
expected for any future period or for the year ending December 31, 2011.
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.
Note 2. Liquidity
At March 31, 2011, we had approximately $214.1 million of 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 contemplates
continuation of the Company as a going concern. We have sustained substantial losses from
operations since our inception, and such losses have continued through March 31, 2011. At March
31, 2011, we had an accumulated deficit of approximately $136.7 million.
We have financed our operations primarily through the issuance of shares of our common stock
and the issuance of convertible notes. Most recently, in December 2010, we consummated the
issuance and sale of $143.75 million aggregate principal amount of convertible notes. The
convertible notes are the senior unsecured obligations of the Company. The convertible notes bear
interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15
of each year, beginning on June 15, 2011. The convertible notes will mature on December 15, 2017,
unless earlier repurchased or converted. The convertible notes will be convertible at an initial
conversion rate of 10 shares of common stock per $1,000 principal amount of convertible notes,
which corresponds to an initial conversion price of $100.00 per share of common stock.
For the remainder of 2011, our cash, cash equivalents and investments are expected to
primarily be used to fund our ongoing operations including expanding our sales and marketing
capabilities on a global basis, continuing our ENDURANCE trial for destination therapy, enrolling
additional patients in our ADVANCE trial under a Continued Access Protocol (CAP), continued
product development, regulatory and other compliance functions as well as for general working
capital. We believe our cash, cash equivalent and investment balances are sufficient to support our
planned operations through 2012.
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Note 3. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of HeartWare International, Inc.,
and its subsidiaries described in Note 1. All inter-company balances and transactions have been
eliminated in consolidation.
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 with an original maturity of three months or
less at the date of purchase 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 at
purchase is beyond three 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 such amortization is included in
interest income, net.
Receivables
Accounts receivable consists of amounts due from the sale of our HeartWare System to our
customers, which are primarily hospitals and health research institutions. As of March 31, 2011,
one customer had an accounts receivable balance representing approximately 11% of our total
accounts receivable. As of December 31, 2010, one customer had an accounts receivable balance
representing approximately 13% of our total accounts receivable.
We maintain allowances for doubtful accounts for estimated losses that may result from an
inability to collect payments owed to us for product sales. We regularly review the allowance by
considering factors such as historical experience, the age of the accounts receivable balances and
current economic conditions that may affect a customers ability to pay. As of March 31, 2011 and
December 31, 2010, we did not have an allowance for returns.
The following table summarizes the change in our allowance for doubtful accounts for the three
months ended March 31, 2011 and 2010:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance |
$ | 600,000 | $ | | ||||
Additions (bad debt expense) |
| | ||||||
Deductions (charge-offs) |
| | ||||||
Ending balance |
$ | 600,000 | $ | | ||||
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Inventories, net
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.
Deferred Financing Costs
Costs incurred in connection with the issuance of our convertible senior notes in December
2010 have been allocated between the liability component and the equity component as further
discussed in Note 10. The liability component of the issuance costs incurred was capitalized and is
included in deferred financing costs, net on the condensed consolidated balance sheets. These costs are
amortized using the effective interest method until December 15, 2017, the maturity date of the
notes, and such amortization expense is reflected in interest expense on our condensed consolidated
statements of operations. The amount of amortization for the three months ended March 31, 2011 was
approximately $69,000.
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 the 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.
The amount of the liability 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 sheets.
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 the product warranty liability. No such costs were incurred in
the three months ended March 31, 2011 and approximately $390,000 was incurred in the three months
ended March 31, 2010.
The following table summarizes the change in our warranty liability for the three months ended
March 31, 2011 and 2010:
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Beginning balance |
$ | 290,891 | $ | 99,169 | ||||
Accrual for (reversal of) warranty expense |
(88,466 | ) | 40,962 | |||||
Warranty costs incurred during the period |
| (21,075 | ) | |||||
Ending balance |
$ | 202,425 | $ | 119,056 | ||||
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 March 31, 2011 and December 31, 2010 and are carried at fair value. See
Note 5, Fair Value Measurements and Note 10, Debt for more information.
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Vendor Concentration
For the three months ended March 31, 2011, we purchased approximately 54.3% of our inventory
components and supplies from two vendors. For the three months ended March 31, 2010, we purchased
approximately 53.4% of our inventory components and supplies from three vendors. In addition, one
of these vendors supplies consulting services and material used in research and development
activities. As of March 31, 2011 and 2010, the amounts due to these vendors totaled approximately
$640,000 and $633,000, respectively.
Concentration of Credit Risk and other Risks and Uncertainties
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 $600,000 at March 31, 2011 and December 31, 2010.
We are subject to certain risks and uncertainties including, but not limited to, our ability
to achieve profitability, to generate cash flow sufficient to satisfy our indebtedness, to run
clinical trials in order to receive and maintain FDA and foreign regulatory approvals for our
products, the ability to achieve widespread acceptance of our product, our ability to manufacture
our products in a sufficient volume and at a reasonable cost, the ability to protect our
proprietary technologies and develop new products, the risks associated with operating in foreign
countries, and general competitive and economic conditions. Changes in any of the preceding areas
could have a material adverse effect on our business, results of operations or financial position.
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 became effective for us for revenue arrangements entered into or
materially modified beginning January 1, 2011. Adoption of the provisions of ASU No. 2009-14 did
not have a material effect on our consolidated financial position, results of operations or cash
flows.
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, while certain of the disclosure requirements became 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.
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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 became effective for us on January 1, 2011. Adoption of the provisions of ASU No.
2010-13 did not have a material effect on our consolidated financial position, results of
operations or cash flows.
Note 4. Investments
We have cash investment policies that limit investments to investment grade securities. At
March 31, 2011 and December 31, 2010, all of our investments were classified as available-for-sale
and carried at fair value. Such investments consist of corporate debt, a portion of which is
guaranteed by foreign governments, and U.S. government agency debt securities. At March 31, 2011,
all of our investments had maturity dates of less than twenty-four months.
The amortized cost and fair value of our investments, with gross unrealized gains and losses,
were as follows:
At March 31, 2011
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Aggregate | |||||||||||||
Cost Basis | Gains | Losses | Fair Value | |||||||||||||
Short-term investments: |
||||||||||||||||
Corporate debt |
$ | 21,316,023 | $ | 23,137 | $ | | $ | 21,339,160 | ||||||||
U.S. government agency debt |
36,659,164 | | (21,813 | ) | 36,637,351 | |||||||||||
Total short-term investments |
$ | 57,975,187 | $ | 23,137 | $ | (21,813 | ) | $ | 57,976,511 | |||||||
At December 31, 2010
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Aggregate | |||||||||||||
Cost Basis | Gains | Losses | Fair Value | |||||||||||||
Short-term investments: |
||||||||||||||||
Corporate debt |
$ | 21,294,673 | $ | 35,437 | $ | | $ | 21,330,110 | ||||||||
Total short-term investments |
$ | 21,294,673 | $ | 35,437 | $ | | $ | 21,330,110 | ||||||||
Long-term investments: |
||||||||||||||||
U.S. government agency debt |
$ | 4,006,714 | $ | | $ | (1,055 | ) | $ | 4,005,659 | |||||||
Total long-term investments |
$ | 4,006,714 | $ | | $ | (1,055 | ) | $ | 4,005,659 | |||||||
For the three months ended March 31, 2011 and 2010 we did not have any realized gains or
losses on our investments.
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Note 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 the reporting dates. 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.
The following table represents the fair value of our financial assets and financial
liabilities measured at fair value on a recurring basis and which level was used in the fair value
hierarchy.
At March 31, 2011 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements at the Reporting Date Using | ||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets |
||||||||||||||||||||
Short-term investments |
$ | 57,976,511 | $ | 57,976,511 | $ | | $ | 57,976,511 | $ | | ||||||||||
Liabilities |
||||||||||||||||||||
Convertible senior
notes |
$ | 90,200,636 | (1) | $ | 163,807,438 | $ | | $ | 163,807,438 | $ | |
At December 31, 2010 | ||||||||||||||||||||
Carrying | Fair | Fair Value Measurements at the Reporting Date Using | ||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets |
||||||||||||||||||||
Short-term investments |
$ | 21,330,110 | $ | 21,330,110 | $ | | $ | 21,330,110 | $ | | ||||||||||
Long-term investments |
$ | 4,005,659 | $ | 4,005,659 | $ | | $ | 4,005,659 | $ | | ||||||||||
Liabilities |
||||||||||||||||||||
Convertible senior
notes |
$ | 89,921,557 | (1) | $ | 160,693,813 | $ | | $ | 160,693,813 | $ | |
(1) | The carrying amount of our convertible senior notes is net of unamortized
discount. See Note 10, Debt for more information. |
The fair value of our investments and convertible senior notes was determined using quoted
prices for the instruments in markets that are not active. The fair value of our convertible senior
notes is presented for disclosure purposes only.
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Note 6. Inventories, Net
Components of Inventories, net are as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Raw material |
$ | 3,716,816 | $ | 4,279,170 | ||||
Work-in-process |
3,719,460 | 2,708,840 | ||||||
Finished goods |
9,906,012 | 8,088,580 | ||||||
$ | 17,342,288 | $ | 15,076,590 | |||||
Finished goods inventories includes inventory held on consignment at customer sites of
$5.2 million and $4.7 million, at March 31, 2011 and December 31, 2010, respectively.
Note 7. Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
Estimated | March 31, | December 31, | ||||||||||
Useful Lives | 2011 | 2010 | ||||||||||
Machinery and equipment |
1.5 to 7 years | $ | 9,712,779 | $ | 8,966,747 | |||||||
Leasehold improvements |
3 to 7 years | 475,512 | 282,483 | |||||||||
Office equipment, furniture
and fixtures |
5 to 7 years | 669,379 | 450,849 | |||||||||
Purchased software |
5 to 7 years | 1,929,381 | 1,741,132 | |||||||||
12,787,051 | 11,441,211 | |||||||||||
Less: accumulated depreciation |
(4,450,852 | ) | (3,957,189 | ) | ||||||||
$ | 8,336,199 | $ | 7,484,022 | |||||||||
Note 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:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||
Weighted Average Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
Amortizable Intangible Assets | (Years) | Amount | Amortization | Amount | Amortization | |||||||||||||||
Patents |
15 | $ | 2,000,359 | $ | (296,865 | ) | $ | 1,861,684 | $ | (266,228 | ) |
Amortization expense for the three months ended March 31, 2011 and 2010 was $30,637 and
$23,226, respectively.
Note 9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Accrued payroll and other employee costs |
$ | 2,499,099 | $ | 4,152,833 | ||||
Accrued material purchases |
1,626,939 | 255,679 | ||||||
Accrued interest payable on convertible notes |
1,467,448 | 209,635 | ||||||
Accrued professional fees |
707,274 | 577,237 | ||||||
Accrued research and development costs |
596,160 | 671,928 | ||||||
Accrued VAT |
548,903 | 647,525 | ||||||
Other accrued expenses |
778,670 | 486,513 | ||||||
$ | 8,224,493 | $ | 7,001,350 | |||||
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Accrued payroll and other employee costs included estimated year-end employee bonuses of
approximately $883,000 and $3.1 million at March 31, 2011 and December 31, 2010, respectively.
Note 10. Debt
Convertible Senior Notes
On December 15, 2010, we completed the sale of 3.5% convertible senior notes due 2017 (the
Convertible Notes) for an aggregate principal amount of $143.75 million pursuant to the terms of
an Indenture dated December 15, 2010. The Convertible Notes are the senior unsecured obligations of
the Company. The Convertible Notes bear interest at a rate of 3.5% per annum, payable semi-annually
in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The Convertible
Notes will mature on December 15, 2017, unless earlier repurchased by us or converted.
The Convertible Notes will be convertible at an initial conversion rate of 10 shares of our
common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial
conversion price of $100.00 per share of our common stock representing a conversion premium of
approximately 23% based on the closing price of $81.31 per share of our common stock on December 9,
2010, the day the notes were priced. The conversion rate is subject to adjustment from time to time
upon the occurrence of certain events.
Prior to June 15, 2017, holders may convert their Convertible Notes at their option only upon
satisfaction of one or more conditions relating to the sale price of our common stock, the trading
price per $1,000 principal amount of Convertible Notes or specified corporate events. On or after
June 15, 2017 until the close of business of the business day immediately preceding the date the
Convertible Notes mature, holders may convert their Convertible Notes at any time, regardless of
whether any of the foregoing conditions have been met. As of the date of this report, none of the
events that would allow holders to convert their Convertible Notes have occurred. Upon conversion,
we will pay or deliver, as the case may be, cash, shares of our common stock or a combination
thereof, at our election.
In accordance with ASC 470-20, Debt, which applies to certain convertible debt instruments
that may be settled in cash or other assets, or partially in cash, upon conversion, we recorded the
long-term debt and equity components on our Convertible Notes separately on the issuance date. The
amount recorded for long-term debt was determined by measuring the fair value of a similar
liability that does not have an associated equity component. The measurement of fair value required
the Company to make estimates and assumptions to determine the present value of the cash flows of
the Convertible Notes, absent the conversion feature. This treatment increased interest expense
associated with our Convertible Notes by adding a non-cash component to amortize a debt discount
calculated based on the difference between the 3.5% cash coupon rate and the effective interest
rate on debt borrowing of approximately 12.5%. The discount is being amortized to interest expense
through the December 15, 2017 maturity date of the Convertible Notes using the effective interest
method and is included in interest expense on the condensed consolidated statements of operations.
Additionally, we allocated the costs related to issuance of the Convertible Notes on the same
percentage as the long-term debt and equity components, such that a portion of the costs is
allocated to the long-term debt component and the equity component included in additional paid-in
capital. The portion of the costs allocated to the long-term debt component is presented as
deferred financing costs, net on our condensed consolidated balance sheets. These deferred
financing costs are also being amortized to interest expense through the December 15, 2017 maturity
date of the Convertible Notes using the effective interest method and such amortization is included
in interest expense on the condensed consolidated statements of operations.
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The Convertible Notes and the equity component, which is recorded in additional
paid-in-capital, consisted of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Principal amount |
$ | 143,750,000 | $ | 143,750,000 | ||||
Unamortized discount |
(53,549,364 | ) | (54,828,443 | ) | ||||
Net carrying amount |
$ | 90,200,636 | $ | 88,921,557 | ||||
Equity component |
$ | 55,037,913 | $ | 55,037,913 | ||||
Based on the initial conversion rate of 10 shares of our common stock per $1,000
principal amount of Convertible Notes, which corresponds to an initial conversion price of $100.00
per share of our common stock, the number of shares issuable upon conversion of the Convertible
Notes is 1,437,500. The value of these shares, based on the closing price of our common stock on
March 31, 2011 of $85.52, was approximately $122.9 million. The fair value of our Convertible Notes
as presented in Note 5 was $163.8 million and $160.7 million at March 31, 2011 and December 31,
2010, respectively.
Interest expense related to the Convertible Notes consisted of interest due on the principal
amount, amortization of the discount and amortization of the portion of the deferred financing
costs allocated to the long-term debt component. For the three months ended March 31, 2011,
interest expense related to the Convertible Notes was as follows:
Stated amount at 3.5% coupon rate |
$ | 1,257,813 | ||
Amortization of discount |
1,279,079 | |||
Amortization of deferred financing costs |
68,580 | |||
$ | 2,605,472 | |||
Note 11. 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 three months ended March 31, 2011, we issued an aggregate of 15,491 shares of our
common stock upon the exercise of stock options and an aggregate of 26,729 shares of our common
stock upon the vesting of restricted stock units.
Note 12. 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 March 31, 2011, which represents the
portion that we expect will be forfeited over the vesting period. We reevaluate this estimated rate
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.
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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 months ended March 31, 2011 and 2010, we recorded share-based compensation
expense as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cost of revenues |
$ | 585,218 | $ | 268,650 | ||||
Selling, general and administrative |
1,444,349 | 902,058 | ||||||
Research and development |
905,813 | 555,759 | ||||||
$ | 2,935,380 | $ | 1,726,467 | |||||
No deferred 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.
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 March 31, 2011, there were approximately 681,000
shares available for future awards under 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 price 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.
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Table of Contents
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
assumptions used for options issued in the three months ended March 31, 2011 and 2010.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Dividend yield |
0 | % | 0 | % | ||||
Expected volatility |
58.76 | % | 61.30 | % | ||||
Risk-free interest rate |
2.51 | % | 2.90 | % | ||||
Estimated holding period (years) |
6.25 | 6.25 |
Information related to options granted under all of our plans at March 31, 2011 and
activity in the three 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,
2010 |
404,366 | $ | 32.87 | |||||||||||||
Granted |
1,750 | 86.58 | ||||||||||||||
Exercised |
(15,491 | ) | 34.64 | |||||||||||||
Forfeited |
(3,062 | ) | 59.14 | |||||||||||||
Expired |
| | ||||||||||||||
Outstanding at March 31, 2011 |
387,563 | $ | 33.18 | 6.47 | $ | 20,285,034 | ||||||||||
Exercisable at March 31, 2011 |
246,700 | $ | 34.88 | 5.72 | $ | 12,493,926 | ||||||||||
The aggregate intrinsic values at March 31, 2011 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 or exercisable.
At March 31, 2011, 34,283 of the 140,863 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 issued in the three months
ended March 31, 2011 and 2010 was $49.64 and $22.99 per share, respectively.
The total intrinsic value of options exercised in the three months ended March 31, 2011 was
approximately $874,000. Cash received from options exercised in the three months ended March 31,
2011 was approximately $537,000. The total intrinsic value of options exercised in the three months
ended March 31, 2010 was approximately $97,000. Cash received from options exercised in the three
months ended March 31, 2010 was approximately $340,000.
At March 31, 2011, there was approximately $1.1 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 1.3 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 related
primarily to the development of our products and the achievement of certain prescribed
clinical and regulatory objectives. 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 shares of our common stock.
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Information related to RSUs at March 31, 2011 and activity in the three months then ended is
as follows:
Weighted | ||||||||||||
Average | ||||||||||||
Remaining | ||||||||||||
Contractual | ||||||||||||
Number of | Life | Aggregate | ||||||||||
Units | (Years) | Intrinsic Value | ||||||||||
Outstanding at December 31, 2010 |
544,865 | |||||||||||
Granted |
3,250 | |||||||||||
Vested/Exercised |
(26,729 | ) | ||||||||||
Forfeited |
(12,050 | ) | ||||||||||
Expired |
| |||||||||||
Outstanding at March 31, 2011 |
509,336 | 1.60 | $ | 43,558,415 | ||||||||
Exercisable at March 31, 2011 |
| | $ | | ||||||||
The aggregate intrinsic value at March 31, 2011 noted in the table above represents the
closing price of our common stock traded on NASDAQ, multiplied by the number of RSUs outstanding.
At March 31, 2011, 58,579 of the 509,336 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 three months ended March 31, 2011 and 2010
was approximately $2.3 million and $2.6 million, respectively.
The fair value of each RSU award equals the closing price of our common stock on the date of
grant. The weighted average grant date fair value per share of RSUs granted in the three months
ended March 31, 2011 and 2010 was $86.20 and $38.57, respectively.
At March 31, 2011, we had approximately $15.9 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.
Note 13. 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 loss per common share, as their effect would be
anti-dilutive.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Common shares issuable upon: |
||||||||
Conversion of convertible notes |
1,767,923 | | ||||||
Exercise of share-based awards |
896,899 | 874,531 |
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Note 14. 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. Generally, products are
sold to customers located in the United States through our clinical trials, as commercial products
to customers in Europe and under special access in other countries. Product sales attributed to a
country or region are based on the location of the customer to whom the products are sold.
Long-lived assets are primarily held in the United States.
Product sales by geographic location are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Domestic |
$ | 6,302 | $ | 2,682 | ||||
Germany |
5,498 | 5,556 | ||||||
International, excluding Germany |
6,175 | 2,465 | ||||||
$ | 17,975 | $ | 10,703 | |||||
For the three months ended March 31, 2011, no customers exceeded 10% of product sales
individually. For the three months ended March 31, 2010, two customers exceeded 10% of product
sales individually and accounted for approximately 31% of product sales in the aggregate. As the
majority of our revenue is generated outside of the U.S., we are dependent on favorable economic
and regulatory environments for our products in Europe and other countries outside of the U.S.
The percentage of our revenue generated in the U.S. was lower in 2010 compared to 2011 due to
the completion of enrollment in our ADVANCE trial in the U.S. in February 2010. While the FDA
approved an Investigational Device Exemption Supplement that allowed us to enroll additional
patients in our ADVANCE trial under a Continued Access Protocol, we did not recommence enrollment
in our ADVANCE trial until the second quarter of 2010 while we awaited approval. Also contributing
to the increase in the percentage of our revenue generated in the U.S. in 2011 was continued
enrollment in our ENDURANCE destination therapy clinical trial in the U.S., which commenced in
August 2010.
Note 15. Commitments and Contingencies
From time to time we may be involved in litigation or other contingencies arising in the
ordinary course of business. Except as set forth below or in our 2010 Annual Report on Form 10K,
and based on the information presently available, management believes that there are no
contingencies, claims or actions, pending or threatened, the ultimate resolution of which will have
a material adverse effect on our financial position, liquidity or result of operations.
At March 31, 2011, we had purchase order commitments of approximately $21.9 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.
Note 16. Subsequent Events
We have evaluated events and transactions that occurred subsequent to March 31, 2011 through
the date the financial statements were issued, for potential recognition or disclosure in the
accompanying condensed consolidated financial statements.
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As previously reported on a Current Report on Form 8-K filed with the SEC on April 21, 2011,
we received notification from the British Standards Institution that our supplemental addendum
requesting the addition of a sintered inflow tube for our HVAD pump was accepted as a supplement to our CE Mark. Sintering
is commonly used in medical devices to facilitate tissue adhesion at the sintered region and it is
expected that sintering of the HVAD pump on the outer surface of the implanted inflow tube will
promote tissue in-growth on the lower section of the inflow tube. In the United States, the Food
and Drug Administration recently approved the introduction of a sintered inflow tube for our
destination therapy clinical trial, ENDURANCE, as well for the Continued Access Protocol of our
bridge-to-transplant study, ADVANCE. Documentation for the introduction of this enhancement has
been sent for review by the Institutional Review Boards at our U.S. clinical sites. We expect to
shortly commence offering sintered product on a global basis. We are presently not able to
determine the extent to which this product enhancement will cause obsolescence of existing
inventory. The extent of inventory obsolescence, if any, will be impacted by a variety of unknown
variables including, without limitation, the rate of adoption of sintered versus non-sintered
product, implantation rates and approval timeframes of Institutional Review Boards. As of March 31,
2011, we had approximately $4.5 million of non-sintered product on hand or held on consignment on a
global basis. A write-down of a portion of this inventory as obsolete could have a material impact
on our results of operations.
On May 3, 2011, we entered into a series of agreements with a development stage company for
the purchase of a minority equity interest at a purchase price of $300,000. The agreements also
give us the right, but not the obligation, to purchase additional shares, for up to $1.6 million,
upon the achievement of certain development milestones by the company. In addition, we were granted
the option to purchase the remaining shares of the company that are not owned by us at any time up
to 60 days following the achievement of the final milestone. We are reviewing the appropriate
accounting treatment of the transaction.
Except as disclosed above, 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. Certain abbreviated key
terms have the meanings defined elsewhere in this Quarterly Report on Form 10-Q.
Overview
HeartWare develops and manufactures small implantable heart pumps, or ventricular assist
devices, for the treatment of advanced heart failure.
The HeartWare Ventricular Assist System (the HeartWare System), which includes a left
ventricular assist device (LVAD), or blood pump, patient accessories and surgical tools, is
designed to provide circulatory support for patients in the advanced stage of 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. The HeartWare System is
designed to be implanted adjacent to the heart, avoiding the abdominal surgery generally required
to implant similar devices.
In 2009, we received CE Marking for the HeartWare System in the European Union allowing for
commercial sale and distribution of our device. In the U.S., the device is the subject of clinical
trials for two indications: bridge-to-transplant and destination therapy. Our device is also
available in other countries around the world under special access programs.
Recent key milestones in the development and commercialization of the HeartWare System include
the following:
| FDA approval of an Investigational Device Exemption (IDE) Supplement that allows us to
enroll a third allotment, of 94 additional patients, in our ADVANCE bridge-to-transplant
clinical trial under a Continued Access Protocol (CAP); |
| Submission of a Pre-Market Approval application for our HeartWare System based on data
generated in our ADVANCE bridge-to-transplant clinical trial and subsequent acceptance by
the FDA of the application for filing and substantive review; |
| Being named to the REVIVE-IT study, a study to be completed by the Universities of
Michigan and Pittsburgh on the benefits of LVADs in patients with earlier access to the
device; |
| Approval of the HeartWare System by the Therapeutic Goods Administration (TGA) in
Australia for listing on the Australian Register of Therapeutic Goods; and |
| Approval by the U.S. FDA and notification of acceptance by the British Standards
Institution of the addition of a sintered inflow tube. |
Beyond the HeartWare System, we are also evaluating our next generation device, 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 approach, and is being developed in multiple configurations. The
MVAD designs are currently at the preclinical stage and undergoing animal studies focused on
minimally 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 our products 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 U.S., continue to develop commercial markets outside of the U.S. and expand our
research and development into next generation products including the MVAD.
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We have financed our operations primarily through the issuance of convertible notes and the
issuance of shares of our common stock. Most recently, on December 15, 2010, the Company issued
Convertible Senior Notes with an aggregate principal amount of $143.75 million pursuant to the
terms of an Indenture dated as of December 15, 2010. The Convertible Senior Notes are senior
unsecured obligations of the Company. The Convertible Senior Notes bear interest at a rate of 3.5%
per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on
June 15, 2011. The Convertible Senior Notes will mature on December 15, 2017, unless earlier
repurchased or converted.
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.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with accounting principles generally
accepted in the United States. We are required to adopt various accounting policies and to make
estimates and assumptions in preparing our financial statements that affect the reported amounts of
our assets, liabilities, revenue and expenses. 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, 2010 (2010 Annual Report on Form 10-K) filed with the Securities
and Exchange Commission on February 24, 2011. Our most critical accounting policies and estimates
include: revenue recognition, inventory capitalization, accounting for share-based compensation,
measurement of fair value, income taxes and reserves. We also have other key accounting policies
that are less subjective and, therefore, their application would not have a material impact on our
reported results of operations. On an ongoing basis, we evaluate our estimates and assumptions. We
base our estimates on historical experience to the extent practicable and on various other
assumptions that we believe are reasonable under the circumstances and at the time they are made.
If our assumptions prove inaccurate or if our future results are not consistent with our historical
experience, we may be required to make adjustments in our policies that affect our reported
results. 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 2010 Annual Report on Form 10-K.
Results of Operations
Three months ended March 31, 2011 and 2010
Revenues, net
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
(in thousands) | 2011 | 2010 | Change | |||||||||
Revenues, net |
$ | 17,975 | $ | 10,703 | 68 | % |
In the three months ended March 31, 2011 and 2010, we generated revenue from commercial
sales outside of the U.S. and sales in connection with our clinical trials in the U.S. The increase
in revenue is primarily due to increased product sales in the U.S., as we have two studies on-going
as compared to one in the three months ended March 31, 2010, and increased market penetration
outside of the U.S.
We expect to continue to generate and grow commercial revenue from product sales as we further
expand our sales and marketing efforts outside of the United States, continue implanting in the
U.S. under CAP for our bridge-to-transplant clinical trial, and increase the number of implants in
our destination therapy clinical trial, ENDURANCE, in the U.S. Notwithstanding our plans to generally expand our U.S. clinical
programs, revenues from U.S. sources in connection with our trials may vary from quarter to quarter
as the number of implants under a CAP is subject to FDA approval for each cohort of patients.
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Future product sales are dependent on many factors, including receiving and maintaining the
necessary regulatory approvals in the U.S. and internationally, perception of product
performance and market acceptance among physicians, patients, health care payers and the medical
community as well as our capacity to meet customer demand by manufacturing sufficient quantities of
our products.
Cost of Revenues
Cost of revenues includes costs associated with manufacturing our product and consists of
direct materials, labor and overheard expenses allocated to the manufacturing process. Cost of
revenues totaled approximately $7.6 million and $5.7 million in the three months ended March 31,
2011 and 2010, respectively.
Gross profit and gross margin percentage are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Gross profit (in thousands) |
$ | 10,379 | $ | 5,023 | ||||
Gross margin % |
58 | % | 47 | % |
Gross margin for the three months ended March 31, 2011 increased compared to the three
months ended March 31, 2010 as a result of lower per unit costs primarily due to increased
production volume and improved efficiencies in our manufacturing processes. In addition, gross
margin for the three months ended March 31, 2010 was impacted by costs incurred in connection with
the voluntary field corrective action we initiated in April 2010, for which we accrued
approximately $390,000 in the three months ended March 31, 2010. The action was taken as a result
of a limited number of reported issues related to the audio volume of alarm notifications and
resulted in the repair or replacement of controllers in inventory, including controllers held on
consignment at customer sites, and units previously distributed through clinical trials or sold to
customers.
As previously reported on a Current Report on Form 8-K filed with the SEC on April 21, 2011,
we received notification from the British Standards Institution that our supplemental addendum
requesting the addition of a sintered inflow tube for our HVAD pump was accepted as a supplement to
our CE Mark. Sintering is commonly used in medical devices to facilitate tissue adhesion at the
sintered region and it is expected that sintering of the HVAD pump on the outer surface of the
implanted inflow tube will promote tissue in-growth on the lower section of the inflow tube. In the
United States, the Food and Drug Administration recently approved the introduction of a sintered
inflow tube for our destination therapy clinical trial, ENDURANCE, as well for the Continued Access
Protocol of our bridge-to-transplant study, ADVANCE. Documentation for the introduction of this
enhancement has been sent for review by the Institutional Review Boards at our U.S. clinical sites.
We expect to shortly commence offering sintered product on a global basis. We are presently not
able to determine the extent to which this product enhancement will cause obsolescence of existing
inventory. The extent of inventory obsolescence, if any, will be impacted by a variety of unknown
variables including, without limitation, the rate of adoption of sintered versus non-sintered
product, implantation rates and approval timeframes of Institutional Review Boards. As of March 31,
2011, we had approximately $4.5 million of non-sintered product on hand or held on consignment on a
global basis. A write-down of a portion of this inventory as obsolete could have a material impact
on our results of operations.
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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.
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
(in thousands) | 2011 | 2010 | Change | |||||||||
Total selling, general and administrative expenses |
$ | 8,664 | $ | 4,556 | 90 | % |
The increase of $4.1 million in selling, general and administrative costs is primarily a
result of an increase in employee costs, including salaries and wages and related costs, of $1.3
million, an increase in office expenses of $528,000, and an increase in travel expenses of
$609,000. In addition, we experienced an increase in share-based compensation of $542,000, an
increase in legal costs of $366,000, and increased marketing expenses of $158,000.
We expect our selling, general and administrative expenses to increase significantly in 2011
compared to 2010 as we continue to expand our sales and distribution capabilities as well as our
administrative capabilities to support our overall corporate growth. We have and will continue to
experience an increase in our employee headcount as well as an increase in costs associated with
the necessary administrative infrastructure to support this expansion.
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 | ||||||||||||
March 31, | ||||||||||||
(in thousands) | 2011 | 2010 | Change | |||||||||
Total research and development expenses |
$ | 9,300 | $ | 4,756 | 96 | % |
The increase in research and development expenses of approximately $4.5 million is
primarily due to an increase in costs associated with our U.S. clinical trials of $1.0 million and
an increase in costs associated with development projects including outside engineering,
consumables and contractors of $1.9 million, primarily related to MVAD development. We also
experienced an increase in employee costs, including salaries and wages and related costs, of
approximately $691,000 and an increase in share-based compensation of $350,000.
Even with commercial approval of the HeartWare System in Europe, 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 in the U.S. and new product development,
including costs related to the development of the MVAD.
Foreign Exchange
We generate a substantial portion of our revenues and collect receivables in foreign
currencies. Fluctuations in the exchange rate of the U.S. dollar against the Euro, British Pound
and Australian dollar can result in foreign currency exchange gains and losses that may
significantly impact our results of operation. Continued fluctuation of these exchange rates could
result in financial results that are not comparable from quarter to quarter. We do not currently
utilize foreign currency contracts to mitigate foreign exchange gains and losses.
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Foreign exchange gains totaled approximately $592,000 in the three months ended March 31,
2011, as compared to a loss of approximately $367,000 in the three months ended March 31, 2010. In
2011 and 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 U.S. 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 majority of our sales denominated in foreign currencies are settled in
Euros.
Interest Expense
Interest expense in 2011 consists of interest incurred on the principal amount of our
convertible senior notes issued in December 2010, amortization of the related discount and
amortization of the portion of the deferred financing costs allocated to the debt component. The
convertible senior notes bear interest at a rate of 3.5% per annum. The discount on the convertible
senior notes and the deferred financing costs are being amortized to interest expense through the
December 15, 2017 maturity date of the convertible senior notes using the effective interest
method.
Interest expense was approximately $2.6 million in the three months ended March 31, 2011.
Interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate was
approximately $1.3 million and non-cash amortization of the discount and deferred financing costs
totaled approximately $1.3 million.
Interest Income, net
Interest income is primarily derived from investments and cash and short-term deposit accounts
held in the U.S. The amortization of premium on our investments is also included in interest
income, net. Interest income, net was approximately $167,000 and $112,000 in the three months ended
March 31, 2011 and 2010, respectively. The increase was primarily due to higher cash and
investments balances during the 2011 period resulting from the issuance of our convertible senior
notes in December 2010. However, we experienced lower interest rates in 2011 compared to 2010.
Income Taxes
We are subject to taxation in the United States and 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 March 31, 2011, we did not have revenues or profit which would be sufficient to allow
any portion of our deferred tax assets to be recorded. We intend to monitor closely whether to
record a deferred tax asset as we further expand the commercialization of our products.
Liquidity and Capital Resources
As of March 31, 2011, our cash and cash equivalents were approximately $156.1 million as
compared to $192.1 million at December 31, 2010. The decrease is primarily a result of cash used to
support our operating and investing activities and the purchase of short-term investments,
partially offset by cash proceeds from the exercise of stock options.
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Following is a summary of our cash flow activities:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net cash used in operating activities |
$ | (2,239 | ) | $ | (4,793 | ) | ||
Net cash used in investing activities |
(34,380 | ) | (17,647 | ) | ||||
Net cash provided by financing activities |
536 | 58,841 | ||||||
Effect of exchange rate changes on cash and cash
equivalents |
12 | 47 | ||||||
Net (decrease) increase in cash and cash equivalents |
$ | (36,071 | ) | $ | 36,448 | |||
Cash Used in Operating Activities
For the three months ended March 31, 2011, cash used in operating activities included a net
loss of approximately $9.4 million and non-cash adjustments to net loss totaling approximately $6.3
million, which primarily consisted of $2.9 million of share-based compensation, $1.3 million for
the amortization of the discount on our convertible notes and $520,000 of depreciation and
amortization. Also included in cash used in operating activities in the three months ended March
31, 2011 is approximately $2.3 million for the purchase and manufacture of inventories and $1.3
million for payment of trade accounts payable, which were offset by net collections of accounts
receivable of $4.9 million and an increase in accrued interest on our convertible senior notes of
$1.3 million.
For the three months ended March 31, 2010, cash used in operating activities included a net
loss of approximately $4.5 million and non-cash adjustments to net loss of approximately $2.1
million, which primarily consisted of approximately $1.7 million of share-based compensation and
$304,000 of depreciation and amortization. Included in cash used in operating activities in the
three months ended March 31, 2010 is approximately $3.1 million for the purchase and manufacture of
inventories, $1.2 million for prepayment of expenses and $1.4 million for the reduction of accounts
payable. These cash expenditures were partially offset by approximately $3.6 million in accounts
receivable collections.
Cash Used in Investing Activities
In the three months ended March 31, 2011, net cash used for the purchase (net of maturities in
2011) of available-for sale securities was $32.9 million compared to $16.6 million in the three
months ended March 31, 2010. Other investing activities in the three months ended March 31, 2011
and 2010 used cash of approximately $1.5 million and $1.0 million, respectively. These amounts were
expended to acquire property, plant and equipment and for capitalized patent costs.
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 three months ended March 31, 2011 and 2010 resulted in
cash proceeds of approximately $537,000 and $340,000, respectively.
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Operating Capital and Capital Expenditure Requirements
We have incurred operating losses to date and anticipate that we will continue to incur
substantial net losses as we expand our sales and marketing capabilities, develop new products and
seek regulatory approvals for the HeartWare System in the U.S. For the remainder of 2011, cash on
hand is expected to primarily be used to fund our ongoing operations, including expanding our sales
and marketing capabilities on a global basis, continuing implants in the U.S. under a CAP, and
enrolling patients in our U.S. destination therapy clinical study, continued product development,
regulatory and other compliance functions as well as for general working capital. We expect to
experience increased cash requirements for inventory and property related to the expansion of our
manufacturing capabilities to support continued growth.
Our convertible notes bear interest at a rate of 3.5% per annum, payable semi-annually in
arrears on June 15 and December 15 of each year, beginning on June 15, 2011. Based on the
outstanding principal amount of our convertible notes at March 31, 2011, the semi-annual interest
payment due on June 15, 2011 will be approximately $2.5 million. This amount is expected to be paid
from cash on hand.
We believe cash on hand and investment balances as of March 31, 2011 are sufficient to support
our planned operations throughout 2011 and 2012.
Because of the numerous risks and uncertainties associated with the development of medical
devices and the current economic situation, we are unable to estimate the exact amounts of capital
outlays and operating expenditures necessary to obtain regulatory approvals in the U.S., fund
commercial expansion outside of the U.S. and develop new products. Our future capital requirements
will depend on many factors, including but not limited to the following:
| commercial acceptance of our products; |
| costs to manufacture our products; |
| expenses required to operate multiple clinical trials; |
| further product research and development for next generation products and
peripherals and expanding indications for our products as well as efforts to sustain
and maintain incremental improvements to existing products; |
| expanding our sales and marketing capabilities on a global basis, including building
a team to support U.S. commercialization should the FDA approve our device for
marketing in the U.S.; |
| broadening our infrastructure in order to meet the needs of our growing operations;
and |
| complying with the requirements related to being a public company in both the United
States and Australia. |
Contractual Obligations
As of January 15, 2011, we entered into a Public, Private Partnership Agreement with the
Regents of the University of Michigan whereby HeartWare, Inc. will act as industry sponsor of a
study conducted by University of Michigan Cardiovascular Center and the University of Pittsburgh
exploring the potential benefits of LVADs in patients who will be given earlier access to these
devices under a grant awarded from the National Heart, Lung and Blood Institute. In the study,
called REVIVE-IT, researchers will compare whether non-transplant eligible patients with heart
failure less advanced than that of current LVAD recipients do better with implanted devices than
with current medical therapy. Pursuant to the terms of the agreement, we have committed to provide
financial support up to $9.6 million over the five-year term of the agreement.
Other than the financial commitment discussed above, in the three months ended March 31, 2011,
there were no material changes to our contractual obligations provided in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
our 2010 Annual Report on Form 10-K filed with the SEC on February 24, 2011, 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
Our exposure to interest rate risk is currently confined to interest earnings on our cash and
cash equivalents that are invested in highly liquid money market funds, short-term time deposits,
short-term bank notes and short-term commercial paper. 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. We do not presently use derivative financial
instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and
preservation of principal over other portfolio considerations.
Our convertible notes do not bear interest rate risk as the notes were issued with a fixed
interest rate of 3.5% per annum.
Foreign Currency Rate Fluctuations
We conduct business in foreign countries. For U.S. reporting purposes, we translate all assets
and liabilities of our non-U.S. entities at the period-end exchange rate and revenues and expenses
at the average exchange rates in effect during the periods. The net effect of these translation
adjustments is shown in the accompanying condensed consolidated financial statements as a component of
stockholders equity.
We generate a substantial portion of our revenues and collect receivables in foreign
currencies. Fluctuations in the exchange rate of the U.S. dollar against the Euro, British Pound
and Australian dollar can result in foreign currency exchange gains and losses that may
significantly impact our financial results. These foreign currency transaction gains and losses are
presented as a separate line item on our consolidated statements of operations. Continued
fluctuation of these exchange rates could result in financial results that are not comparable from
quarter to quarter. 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.
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 March 31, 2011. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31,
2011, 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.
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Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three
months ended March 31, 2011 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Controls and Procedures
Our management, including the Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal control over financial reporting
will prevent all errors and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control systems objectives will be
met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected. Thus,
misstatements due to error or fraud may occur and not be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
controls.
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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 described in Part I, Item 1A. Risk Factors in our Annual Report on Form
10-K for the fiscal year ended December 31, 2010 filed with the SEC on February 24, 2011.
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.
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. Through March 31, 2011, we have used approximately $30
million of the net proceeds of the offering, including approximately $8.3 million for the purchase
of inventories, approximately $16.3 million for general working capital and approximately $5.4
million for purchases of property, plant and equipment.
ITEM 6. EXHIBITS
3.1 | Certificate of Incorporation of HeartWare International, Inc. (1) |
3.2 | Bylaws of HeartWare International, Inc. (1) |
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. |
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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: May 6, 2011 | /s/ Douglas Godshall | |||
Douglas Godshall | ||||
Chief Executive Officer | ||||
Date: May 6, 2011 | /s/ David McIntyre | |||
David McIntyre | ||||
Chief Financial Officer and
Chief Operating Officer (Principal Financial Officer) |
||||
Date: May 6, 2011 | /s/ Lauren Farrell | |||
Lauren Farrell | ||||
Vice President, Finance (Principal Accounting 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 |
35