The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements for HeartWare International, Inc.
(we, our, us, HeartWare, the HeartWare Group or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC)
for reporting of interim financial information. Pursuant to these 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 (U.S. GAAP) 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 included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2013. The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from our audited financial statements. The unaudited condensed consolidated
statements of operations for the three and six months ended June 30, 2014 and cash flows for the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for any future period or for the year ending
December 31, 2014.
The preparation of our unaudited interim condensed consolidated financial statements in conformity with U.S. 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 revenue and
expenses during the reporting periods. Actual results could differ from those estimates.
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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09). The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or
services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15,
2016, and early adoption is not permitted. The updated standard becomes effective for us in the first quarter of our fiscal year ending December 31, 2017. We have not yet selected a transition method and we are currently evaluating the effect
that the ASU 2014-09 will have on our consolidated financial statements and related disclosures.
With the exception of the standard
discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2014, as compared to the recent accounting pronouncements described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2013, that are of significance or potential significance to us.
10
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 2. Liquidity
At June 30, 2014, we had approximately $183.9 million of cash, cash equivalents and investments.
Our cash, cash equivalents and investments are expected to be used primarily to fund our ongoing operations including expanding our sales and
marketing capabilities on a global basis, research and development (including clinical trials) of new and existing products, components and accessories, regulatory and other compliance functions as well as for general working capital. We believe our
cash, cash equivalents and investment balances are sufficient to support our planned operations for at least the next twelve months.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which
contemplate continuation of the Company as a going concern. We have incurred substantial losses from operations since our inception through June 30, 2014, although for the quarter ended June 30, 2014 we recognized an operating profit as a
result of a $13.7 million reduction in the fair value of contingent consideration (
see
Note 4). At June 30, 2014, we had an accumulated deficit of approximately $340.4 million.
Note 3. Balance Sheet Information
Accounts Receivable
Accounts receivable consists of amounts due from the sale of our HeartWare
®
Ventricular Assist System (the HVAD System) to our customers, which include hospitals, health research institutions and medical device distributors. We grant credit to customers in the normal course of business, but generally do not
require collateral or any other security to support credit sales. Our receivables are geographically dispersed, with a significant portion from customers located in Europe and other foreign countries. One customer had an accounts receivable balance
greater than 10% of total accounts receivable representing approximately 14% and 15% of our total accounts receivable at June 30, 2014 and December 31, 2013, respectively.
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 local economic conditions that may affect a customers ability to pay. Account balances are charged
off against the allowance after appropriate collection efforts have been exhausted and we feel it is probable that the receivable will not be recovered.
The following table summarizes the change in our allowance for doubtful accounts for the six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
495
|
|
|
$
|
750
|
|
Charges (reversals) to expense
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
495
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014 and December 31, 2013, we did not have an allowance for returns.
11
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Inventories
Components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Raw material
|
|
$
|
23,811
|
|
|
$
|
21,761
|
|
Work-in-process
|
|
|
9,212
|
|
|
|
8,206
|
|
Finished goods
|
|
|
12,669
|
|
|
|
10,909
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,692
|
|
|
$
|
40,876
|
|
|
|
|
|
|
|
|
|
|
Finished goods inventories includes inventory held on consignment at customer sites of approximately $5.1
million and $4.6 million at June 30, 2014 and December 31, 2013, respectively.
Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Useful Lives
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(in thousands)
|
|
Machinery and equipment
|
|
1.5 to 7 years
|
|
$
|
20,862
|
|
|
$
|
19,790
|
|
Leasehold improvements
|
|
3 to 10 years
|
|
|
8,564
|
|
|
|
7,131
|
|
Office equipment, furniture and fixtures
|
|
5 to 7 years
|
|
|
1,901
|
|
|
|
1,294
|
|
Purchased software
|
|
1 to 7 years
|
|
|
5,837
|
|
|
|
5,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,164
|
|
|
|
33,272
|
|
Less: accumulated depreciation
|
|
|
|
|
(17,321
|
)
|
|
|
(14,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,843
|
|
|
$
|
18,562
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2014, we ceased activities at our facility in Teaneck, New Jersey and vacated the
facility and recorded an impairment charge of $0.6 million related to certain office equipment and software at the facility upon their discontinued use. This amount is included in selling, general and administrative expenses on our condensed
consolidated statements of operations.
Other Accrued Liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Accrued payroll and other employee costs
|
|
$
|
9,012
|
|
|
$
|
10,840
|
|
Accrued milestone payment
|
|
|
|
|
|
|
5,000
|
|
Accrued material purchases
|
|
|
5,655
|
|
|
|
4,325
|
|
Accrued warranty
|
|
|
3,400
|
|
|
|
2,498
|
|
Accrued product recall costs
|
|
|
3,018
|
|
|
|
|
|
Accrued professional fees
|
|
|
1,388
|
|
|
|
2,428
|
|
Accrued research and development costs
|
|
|
2,656
|
|
|
|
2,307
|
|
Accrued restructuring costs
|
|
|
2,026
|
|
|
|
245
|
|
Accrued VAT
|
|
|
1,708
|
|
|
|
1,329
|
|
Other accrued expenses
|
|
|
6,485
|
|
|
|
6,304
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,348
|
|
|
$
|
35,276
|
|
|
|
|
|
|
|
|
|
|
12
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Accrued Payroll and Other Employee Costs
Accrued payroll and other employee costs included estimated year-end employee bonuses of approximately $4.1 million and $6.6 million at
June 30, 2014 and December 31, 2013, respectively.
Accrued Warranty
Certain patient accessories sold with the HVAD 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 revenue on our condensed consolidated statements of operations. Factors that affect estimated warranty liability include the number of
units sold, historical and anticipated rates of warranty claims, cost per claim, and vendor supported warranty programs. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. The amount of the
liability recorded is equal to the estimated costs to repair or otherwise satisfy claims made by customers.
The following table
summarizes changes in our warranty liability for the six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
2,498
|
|
|
$
|
543
|
|
Accrual for warranty expense
|
|
|
1,790
|
|
|
|
500
|
|
Warranty costs incurred during the period
|
|
|
(888
|
)
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,400
|
|
|
$
|
698
|
|
|
|
|
|
|
|
|
|
|
The warranty liability as of June 30, 2014 takes into account recent substantial increases in product
sales which are covered by our limited warranty policy.
Accrued Product Recall Costs
In April 2014, we implemented an Urgent Medical Device Correction following an observed increase in complaints related to earlier-than-expected
battery depletion and routine battery handling. This notification provided information to assist patients and clinicians to monitor battery performance, recognize abnormal behaviors and reinforce proper power management of the HVAD System. We
increased our warranty liability in the first quarter of 2014 to account for an anticipated higher level of battery returns likely to be associated with increased battery performance awareness following implementation of the field safety corrective
action. On July 30, 2014, we extended our field safety corrective action to include a voluntary recall of certain older batteries. The recall instructs sites to replace certain older batteries in the field upon patients routine visits in
order to further mitigate the potential risks associated with premature battery depletion.
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 revenue and are not included in product warranty liability. During the quarter ended
June 30, 2014, we recorded a $1.7 million charge for estimated costs associated with the battery recall discussed above.
13
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Accrued Restructuring Costs
The following table summarizes changes in our accrued restructuring costs during the six months ended June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility Leases
|
|
|
Severance and
Related
|
|
|
Contract
Termination
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
245
|
|
|
$
|
|
|
|
$
|
245
|
|
Restructuring charges
|
|
|
2,204
|
|
|
|
715
|
|
|
|
688
|
|
|
|
3,607
|
|
Payments
|
|
|
(449
|
)
|
|
|
(615
|
)
|
|
|
(688
|
)
|
|
|
(1,752
|
)
|
Adjustments to estimated obligations
|
|
|
(57
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
(88
|
)
|
Change in fair value
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,712
|
|
|
$
|
314
|
|
|
$
|
|
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring obligations reflected above resulted from the following actions:
Facility Closures
In the first quarter of 2014 we ceased the use of our facility in Teaneck, New Jersey, which was subject to an operating lease that runs
through the end of 2020. In connection with this action, we recorded a $1.7 million liability equal to the estimated fair value of the remaining lease obligation as of the cease-use date (
see
Note 4). In the first quarter of 2014, we also
relocated our corporate headquarters and ceased activities at our former headquarters in Framingham, Massachusetts. In connection with this action, we recorded a $0.5 million liability equal to the aggregate of the remaining payments on the lease
for our former headquarters as of the cease-use date. Both of these items are included in selling, general and administrative expenses on our condensed consolidated statements of operations.
Severance Agreements
In the first six months of 2014, we incurred various costs related to the integration of CircuLites operations, including severance costs
aggregating $0.6 million, the majority of which were recorded in the first quarter of 2014. We recorded $0.4 million in research and development expenses and the remaining $0.2 million in selling, general and administrative expenses on our condensed
consolidated statements of operations.
Contract Termination
As a result of anticipated design modifications to the SYNERGY system and our decision to move manufacturing of the SYNERGY system to our Miami
Lakes facility, we terminated a supply agreement with a vendor in Germany for the purchase of components necessary to produce the prior-to-modification version of the SYNERGY system. In connection with the termination of this supply agreement, we
recorded a charge of $0.7 million in the first quarter of 2014, which is included in research and development expenses on our condensed consolidated statements of operations.
14
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 4. 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 the accompanying 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.
We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a
reclassification of levels of certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the six months ended June 30, 2014 or 2013.
The carrying amounts reported on our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities approximate their fair value based on the short-term maturity of these instruments. Investments are considered available-for-sale as of June 30, 2014 and December 31, 2013 and are carried at fair
value.
The following tables 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 the respective dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
As of June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
36,104
|
|
|
$
|
36,104
|
|
|
$
|
|
|
|
$
|
36,104
|
|
|
$
|
|
|
Long-term investments
|
|
|
1,225
|
|
|
|
1,225
|
|
|
|
|
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
110,849
|
(1)
|
|
|
168,323
|
|
|
|
|
|
|
|
168,323
|
|
|
|
|
|
Contingent consideration
|
|
|
56,440
|
|
|
|
56,440
|
|
|
|
|
|
|
|
|
|
|
|
56,440
|
|
Royalties
|
|
|
965
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
965
|
|
Lease exit costs
|
|
|
1,466
|
|
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
1,466
|
|
15
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the Reporting Date Using
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
37,596
|
|
|
$
|
37,596
|
|
|
$
|
|
|
|
$
|
37,596
|
|
|
$
|
|
|
Long-term investments
|
|
|
1,225
|
|
|
|
1,225
|
|
|
|
|
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
107,125
|
(1)
|
|
|
174,117
|
|
|
|
|
|
|
|
174,117
|
|
|
|
|
|
Contingent consideration
|
|
|
67,000
|
|
|
|
67,000
|
|
|
|
|
|
|
|
|
|
|
|
67,000
|
|
Royalties
|
|
|
999
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
(1)
|
The carrying amount of our convertible senior notes is net of unamortized discount.
See
Note 7 (Debt) for more information.
|
Our Level 2 financial assets and liabilities include available-for-sale investments and convertible senior notes. The fair value of our
available-for-sale investments and convertible senior notes was determined using quoted prices (including trade data) for the instruments in markets that are not active. The fair value of our convertible senior notes is presented for disclosure
purposes only.
Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Our Level 3 financial liabilities include the following:
|
|
|
Contingent consideration
The estimated fair value of the contingent consideration related to our acquisition of CircuLite in December 2013 requires significant management judgment or estimation and is
calculated using the income approach, using various revenue assumptions and applying a probability to each outcome. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period. Actual amounts
paid may differ from the obligations recorded.
|
|
|
|
Royalties
Royalties represent future royalty payments to be made pursuant to agreements related to intellectual property licensed or acquired by World Heart Corporation, which we acquired in August 2012,
to be paid over the next 3 to 17 years. Determination of fair value requires significant management judgment or estimation. The royalty payment obligations were valued using a discounted cash flow model, the future minimum royalty payment amounts
and discount rates commensurate with our market risk and the terms of the obligations.
|
|
|
|
Lease exit costs
In the first quarter of 2014 we ceased the use of our facility in Teaneck, New Jersey, which was subject to an operating lease that runs through the end of 2020, and we recorded a
liability equal to the estimated fair value of the remaining lease payments as of the cease-use date. The fair value was estimated based upon the discounted present value of the remaining lease payments, considering future estimated sublease income,
estimated broker fees and required tenant improvements. This estimated fair value requires significant management judgment. The fair value of this liability will be remeasured at estimated fair value at each reporting period. Actual amounts paid may
differ from the obligation recorded.
|
16
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes the change in fair value, as determined by Level 3 inputs, of
the contingent consideration for the six months ended June 30, 2014:
|
|
|
|
|
|
|
Contingent
Consideration
|
|
|
|
(in thousands)
|
|
|
|
Beginning balance
|
|
$
|
67,000
|
|
Payments
|
|
|
|
|
Change in fair value
|
|
|
(10,560
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
56,440
|
|
|
|
|
|
|
The change in fair value of the contingent consideration in the six months ended June 30, 2014 was
primarily due to a $16.6 million reduction as a result of the probable unlikelihood of achieving the performance milestone conditions related to the re-launch of the SYNERGY Surgical System, which is undergoing redesign following its removal from
the market in 2013 and loss of CE marking in the European Union in March 2014. This decrease in fair value was partially offset by a $6.0 million increase in fair value due to the effect of the passage of time on the fair value measurement.
Adjustments associated with the change in fair value of contingent consideration are presented on a separate line item on our condensed consolidated statements of operations. Adjustments will be similarly presented in future accounting periods.
The following table summarizes the change in fair value, as determined by Level 3 inputs, of the royalties for the six months ended
June 30, 2014:
|
|
|
|
|
|
|
Royalties
|
|
|
|
(in thousands)
|
|
|
|
Beginning balance
|
|
$
|
999
|
|
Payments
|
|
|
(70
|
)
|
Change in fair value
|
|
|
36
|
|
|
|
|
|
|
Ending balance
|
|
$
|
965
|
|
|
|
|
|
|
The expense associated with the change in fair value of the royalty payment obligations is included in
research and development expenses on our condensed consolidated statements of operations.
The following table summarizes the change in
fair value, as determined by Level 3 inputs, of the lease exit costs for the six months ended June 30, 2014:
|
|
|
|
|
|
|
Lease Exit
Costs
|
|
|
|
(in thousands)
|
|
|
|
Beginning balance
|
|
$
|
|
|
Accruals
|
|
|
1,676
|
|
Payments
|
|
|
(224
|
)
|
Change in fair value
|
|
|
14
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,466
|
|
|
|
|
|
|
The expense associated with the change in fair value of the lease exit costs is included in selling, general
and administrative expenses on our condensed consolidated statements of operations.
17
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents quantitative information about the inputs and valuation
methodologies used for our fair value measurements classified in Level 3 of the fair value hierarchy as of June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
June 30, 2014
(in thousands)
|
|
|
Valuation Methodology
|
|
Significant
Unobservable Input
|
|
Weighted Average
(range, if applicable)
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
56,440
|
|
|
Probability weighted income approach
|
|
Milestone dates
|
|
|
2019 to 2022
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
20.0% to 24.0%
|
|
|
|
|
|
|
|
|
|
Probability of occurrence
|
|
|
0% to 100%
|
|
|
|
|
|
|
Royalties
|
|
$
|
965
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
4.8% to 7.8%
|
|
|
|
|
|
|
Lease exit costs
|
|
$
|
1,466
|
|
|
Discounted cash flow
|
|
Sublease start date
|
|
|
November 2015
|
|
|
|
|
|
|
|
|
|
Sublease rate
|
|
$
|
26.50/square foot
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.5%
|
|
Contingent Consideration
The estimated fair value of the contingent consideration related to the acquisition of CircuLite is calculated using the income approach, with
significant inputs that include various revenue assumptions, discount rates and applying a probability to each outcome. Material changes in any of these inputs could result in a significantly higher or lower fair value measurement.
The estimated fair value of the contingent consideration is calculated on a quarterly basis by management. Potential valuation adjustments
will be made as additional information becomes available, including, among other items, the progress toward achieving re-launch of the SYNERGY Surgical System, revenue and milestone targets as compared to initial projections, with the impact of
these adjustments being recorded in our condensed consolidated statement of operations. In the three months ended June 30, 2014, we recorded a remeasurement adjustment to decrease the recorded value of the contingent consideration by $13.7
million. For the six months ended June 30, 2014, remeasurement adjustments decreased the recorded value of the contingent consideration by $10.6 million.
Assets That Are Measured at Fair Value on a Nonrecurring Basis
Non-financial assets such as intangible assets, goodwill and property, plant, and equipment are evaluated for impairment annually or when
indicators of impairment exist. In the first quarter of 2014, we recorded an impairment charge of $0.6 million related to certain office equipment and software. No impairment was recorded in the three and six months ended June 30, 2013.
Non-financial assets such as identified intangibles acquired in connection with our acquisition of World Heart in August 2012 and CircuLite in December 2013 are measured at fair value using Level 3 inputs, which include discounted cash flow
methodologies, or similar techniques, when there is limited market activity and the determination of fair value requires significant judgment or estimation.
18
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 5. Investments
We have cash investment policies that limit investments to investment grade rated securities. At June 30, 2014 and
December 31, 2013, all of our investments were classified as available-for-sale and carried at fair value. At June 30, 2014 and December 31, 2013, our short-term investments had maturity dates of less than twenty-four months and our
long-term investments had maturity dates within thirty-six months.
The amortized cost and fair value of our investments, with gross
unrealized gains and losses, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Aggregate
Fair Value
|
|
At June 30, 2014
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
29,286
|
|
|
$
|
17
|
|
|
$
|
(59
|
)
|
|
$
|
29,244
|
|
Certificates of deposit
|
|
|
6,860
|
|
|
|
|
|
|
|
|
|
|
|
6,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
36,146
|
|
|
$
|
17
|
|
|
$
|
(59
|
)
|
|
$
|
36,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
1,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Aggregate
Fair Value
|
|
At December 31, 2013
|
|
(in thousands)
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
32,221
|
|
|
$
|
3
|
|
|
$
|
(18
|
)
|
|
$
|
32,206
|
|
Certificates of deposit
|
|
|
5,390
|
|
|
|
|
|
|
|
|
|
|
|
5,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
37,611
|
|
|
$
|
3
|
|
|
$
|
(18
|
)
|
|
$
|
37,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
1,225
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2014 and 2013, we did not have any realized gains or losses
on our investments. At June 30, 2014 and December 31, 2013, none of our available-for-sale investments had been in a continuous loss position for more than twelve months.
19
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 6. Goodwill, In-Process Research and Development and Other Intangible Assets, Net
Goodwill
The carrying
amount of goodwill and the change in the balance for the six months ended June 30, 2014 and 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
61,596
|
|
|
$
|
1,190
|
|
Additions
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
Foreign currency translation impact
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
61,581
|
|
|
$
|
1,190
|
|
|
|
|
|
|
|
|
|
|
In-Process Research and Development
The carrying value of our in-process research and development assets, which relate to the development and potential commercialization of
certain acquired technologies, consisted of the following at June 30, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(in thousands)
|
|
SYNERGY system technology
|
|
$
|
35,500
|
|
|
$
|
35,500
|
|
|
|
|
|
|
|
|
|
|
In-process research and development has an indefinite life. At the time the economic life becomes determinable
(upon project completion or abandonment) the amount will be amortized over its expected remaining life.
Other Intangible Assets
Other intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(in thousands)
|
|
Patents
|
|
$
|
4,599
|
|
|
$
|
3,754
|
|
Purchased intangible assets
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
3,700
|
|
|
|
3,700
|
|
Customer relationships
|
|
|
1,800
|
|
|
|
1,800
|
|
Acquired technology rights
|
|
|
7,925
|
|
|
|
7,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,024
|
|
|
|
17,179
|
|
Less: Accumulated amortization Patents
|
|
|
(947
|
)
|
|
|
(800
|
)
|
Less: Accumulated amortization Purchased intangible assets
|
|
|
(1,067
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,010
|
|
|
$
|
15,975
|
|
|
|
|
|
|
|
|
|
|
Our other intangible assets are amortized using the straight-line method over their estimated useful lives as
follows:
|
|
|
|
|
Patents
|
|
|
15 years
|
|
Purchased intangible assets
|
|
|
|
|
Tradenames
|
|
|
15 years
|
|
Customer relationships
|
|
|
20 years
|
|
Acquired technology rights
|
|
|
7 to 16 years
|
|
Amortization expense for the three months ended June 30, 2014 and 2013 was $0.4 million and $0.1 million,
respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was $0.8 million and $0.2 million, respectively.
20
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 7. Debt
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 Indenture). 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. The Convertible Notes will mature on December 15, 2017, unless earlier repurchased by us or
converted.
The Convertible Notes offering was completed pursuant to a prospectus supplement, dated December 9, 2010, to a shelf
registration statement on Form S-3 that was previously filed with the SEC and which was declared effective on December 9, 2010.
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. 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 of the conditions specified in the Indenture relating to the (i) sale price of our common stock, (ii) the trading price per $1,000 principal amount
of Convertible Notes or (iii) specified corporate events. As of the date of this report on Form 10-Q, none of the events that would allow holders to convert their Convertible Notes have occurred. 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. 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.
We may not redeem
the Convertible Notes prior to maturity. Holders of the Convertible Notes may require us to purchase for cash all or a part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be
repurchased, plus accrued and unpaid interest, upon the occurrence of certain fundamental changes (as defined in the Indenture) involving the Company. The Indenture does not contain any financial or operating covenants or restrictions on the
payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.
The
Indenture contains customary terms and nonfinancial covenants and defines events of default. If an event of default (other than certain events of bankruptcy, insolvency or reorganization) involving the Company occurs and is continuing, the Trustee
(by notice to the Company) or the holders of at least 25% in principal amount of the outstanding Convertible Notes (by notice to the Company and the Trustee) may declare 100% of the principal of and accrued and unpaid interest, if any, on all the
Convertible Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company, 100% of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become due
and payable. Notwithstanding the foregoing, the Indenture provides that, to the extent we elect, the sole remedy for an event of default relating to certain failures by us to comply with certain reporting covenants in the Indenture consists
exclusively of the right to receive additional interest on the Convertible Notes.
In accordance with FASB ASC 470-20,
Debt with
Conversion and Other Options
, 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
interest expense in the form of amortization of 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 our 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
21
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 the amortization is included in interest expense on our condensed consolidated statements of operations.
The Convertible Notes
and the equity component, which is recorded in additional paid-in-capital, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
|
(in thousands)
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized discount
|
|
|
(32,901
|
)
|
|
|
(36,625
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
110,849
|
|
|
$
|
107,125
|
|
|
|
|
|
|
|
|
|
|
Equity component
|
|
$
|
55,038
|
|
|
$
|
55,038
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2014 of $88.50 per share, was approximately $127.2 million. The fair value of our Convertible Notes as presented in Note 4 was $168.3 million at June 30, 2014.
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 and six months ended June 30, 2014 and 2013, interest expense related to the Convertible Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Stated amount at 3.5% coupon rate
|
|
$
|
1,258
|
|
|
$
|
1,258
|
|
|
$
|
2,516
|
|
|
$
|
2,516
|
|
Amortization of discount
|
|
|
1,890
|
|
|
|
1,676
|
|
|
|
3,724
|
|
|
|
3,303
|
|
Amortization of deferred financing costs
|
|
|
101
|
|
|
|
90
|
|
|
|
200
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,249
|
|
|
$
|
3,024
|
|
|
$
|
6,440
|
|
|
$
|
5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Stockholders Equity
On March 12, 2013, we entered into an Underwriting Agreement (the Underwriting Agreement) with J.P. Morgan
Securities LLC, as representative of the several underwriters named in the Underwriting Agreement (the Underwriters), pursuant to which we agreed to sell and the Underwriters agreed to purchase, subject to and upon terms and conditions
set forth therein, an aggregate of 1,500,000 shares of our common stock at a net sales price of $81.9114 per share (the public offering price of $86.45 per share minus the underwriting discount). We also granted the Underwriters an option to
purchase 225,000 additional shares of our common stock at the public offering price less the underwriting discount, which the Underwriters exercised in full on March 13, 2013. The closing of the offering occurred on March 18, 2013. After
fees and related expenses, net proceeds from the offering were approximately $141.0 million.
The offering was completed pursuant to a
prospectus supplement, dated March 12, 2013, to a shelf registration statement on Form S-3 that was previously filed with the SEC and which was declared effective on December 9, 2010. This shelf registration statement expired on
December 9, 2013.
On January 30, 2014, we filed a shelf registration statement with the SEC on Form S-3. 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 and amount of the securities described in the prospectus
contained in the registration statement or in the prospectus supplement filed with respect to a particular offering. An aggregate of 530,816 shares of our common stock were registered for issuance pursuant to various prospectus filings on
January 30, 2014 in connection with our acquisition of CircuLite. As of June 30, 2014, there remained 248,872 shares of our common stock reserved for potential issuance in connection with future contingent milestone payments under the
terms of the acquisition agreement.
22
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Following satisfaction of a pre-specified milestone in December 2013, we were obligated to
pay $5.0 million in cash or stock under the terms of a patent assignment agreement and exclusive license to certain patent applications. The $5.0 million was accrued at December 31, 2013 in other accrued liabilities on our consolidated balance
sheets. We issued pursuant to a prospectus supplement an aggregate of 50,330 registered shares of our common stock in January 2014 to settle this liability.
In the six months ended June 30, 2014, we issued an aggregate of 23,571 shares of our common stock upon the exercise of stock options and
an aggregate of 42,088 shares of our common stock upon the vesting of restricted stock units.
In the six months ended June 30, 2013,
we issued an aggregate of 68,207 shares of our common stock upon the exercise of stock options and an aggregate of 21,661 shares of our common stock upon the vesting of restricted stock units.
Note 9. Share-Based Compensation
We allocate share-based compensation expense to cost of revenue, selling, general and administrative expense and research
and development expense based on the award holders employment function. For the three and six months ended June 30, 2014 and 2013, we recorded share-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(In thousands)
|
|
Cost of revenues
|
|
$
|
662
|
|
|
$
|
611
|
|
|
$
|
1,109
|
|
|
$
|
1,142
|
|
Selling, general and administrative
|
|
|
3,665
|
|
|
|
2,792
|
|
|
|
6,397
|
|
|
|
5,219
|
|
Research and development
|
|
|
2,230
|
|
|
|
1,526
|
|
|
|
3,408
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,557
|
|
|
$
|
4,929
|
|
|
$
|
10,914
|
|
|
$
|
9,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Upon receipt of stockholder approval on May 31,
2012, we adopted the HeartWare International, Inc. 2012 Incentive Award Plan (2012 Plan). The 2012 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance
awards, dividend equivalent rights, deferred stock, deferred stock units, stock payments and stock appreciation rights (collectively referred to as Awards), to our directors, employees and consultants. Under the terms of the 2012 Plan,
the total number of shares of our common stock initially reserved for issuance under Awards is 1,375,000, provided that the total number of shares of our common stock that may be issued pursuant to Full Value Awards (Awards other than
options, stock appreciation rights or other Awards for which the holder pays the intrinsic value existing as of the date of grant whether directly or by forgoing a right to receive a payment from the Company) is 1,275,000. As of June 30, 2014,
72,834 shares have been issued upon vesting of Awards issued under the 2012 Plan and Awards with respect to 561,322 shares were issued and outstanding under the 2012 Plan. Subsequent to adoption of the 2012 Plan, no new Awards will be granted under
our prior plans. Any outstanding Awards under the prior plans will continue to be subject to the terms and conditions of the plan under which they were granted.
23
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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.
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions
established at that time. The following table includes the weighted average assumptions used for options issued in the three and six months ended June 30, 2014 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
39.00
|
%
|
|
|
40.00
|
%
|
|
|
39.00
|
%
|
|
|
40.00
|
%
|
Risk-free interest rate
|
|
|
1.65
|
%
|
|
|
1.15
|
%
|
|
|
1.65
|
%
|
|
|
1.15
|
%
|
Estimated holding period (years)
|
|
|
5.00
|
|
|
|
6.25
|
|
|
|
5.00
|
|
|
|
6.25
|
|
Information related to options granted under all of our plans at June 30, 2014 and activity in the six
months then ended is as follows (certain amounts in U.S.$ were converted from AU$ at the then period-end spot rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
(in thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at December 31, 2013
|
|
|
133
|
|
|
$
|
42.82
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7
|
|
|
|
88.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(24
|
)
|
|
|
26.02
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1
|
)
|
|
|
86.58
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
115
|
|
|
$
|
49.80
|
|
|
|
4.83
|
|
|
$
|
4,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
94
|
|
|
$
|
41.88
|
|
|
|
3.97
|
|
|
$
|
4,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values at June 30, 2014 noted in the table above represent the number of
in-the-money options outstanding or exercisable multiplied by the closing price of our common stock traded on NASDAQ less the weighted average exercise price at period end.
The weighted average grant date fair value per share of options issued in the six months ended June 30, 2014 and 2013 was $32.41 and
$38.51 per share, respectively.
The total intrinsic value of options exercised in the six months ended June 30, 2014 and 2013 was
approximately $1.6 million and $4.6 million, respectively. Cash received from options exercised in the six months ended June 30, 2014 and 2013 was approximately $0.6 million and $1.7 million, respectively.
At June 30, 2014, there was approximately $0.4 million of unrecognized compensation expense, net of estimated forfeitures, related to
non-vested options. This expense is expected to be recognized over a weighted average period of 1.1 years.
24
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Restricted Stock Units
Each restricted stock unit (RSU) represents a contingent right to receive one share of our common stock. RSUs generally 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 one or more tranches contingent upon the achievement of
pre-determined milestones related to the development of our products, the achievement of certain prescribed clinical and regulatory objectives, the achievement of specific financial performance measures or similar metrics. There is no consideration
payable on the vesting of RSUs issued under the plans. Upon vesting, the RSUs are exercised automatically and settled in shares of our common stock.
Information related to RSUs at June 30, 2014 and activity in the six months then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
(in thousands)
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2013
|
|
|
476
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
315
|
|
|
|
|
|
|
|
|
|
Vested/Exercised
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
725
|
|
|
|
1.64
|
|
|
$
|
64,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at June 30, 2014 noted in the table above represents the closing price of
our common stock traded on NASDAQ multiplied by the number of RSUs outstanding.
At June 30, 2014, 29,605 of the RSUs outstanding are
subject to performance-based vesting criteria as described above.
The total intrinsic value of RSUs vested in the six months ended
June 30, 2014 and 2013 was approximately $4.0 million and $2.0 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 six months ended June 30, 2014 and 2013 was $100.57 and $92.07, respectively.
At June 30, 2014, we had approximately $38.7 million of unrecognized compensation expense related to non-vested RSU awards, net of
estimated forfeitures. This expense is expected to be recognized over a weighted average period of 1.6 years.
25
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 10. Earnings Per Share
Basic earnings per share was computed by dividing net income (loss) for the period by the weighted-average number of common
shares outstanding for each respective period. Diluted earnings per share adjusts basic earnings per share for the dilutive effects of share-based awards as determined under the treasury stock method, our convertible senior notes as
determined under the if-converted method and other potentially dilutive instruments only in the periods in which the effect is dilutive.
The following table sets forth basic and diluted income (loss) per common share for the three and six months ended June 30, 2014 and 2013
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
Net income (loss)
|
|
$
|
8,364
|
|
|
$
|
(12,934
|
)
|
|
$
|
(11,080
|
)
|
|
$
|
(25,893
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
16,989
|
|
|
|
16,370
|
|
|
|
16,962
|
|
|
|
15,619
|
|
Dilutive effects of share-based awards
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
17,305
|
|
|
|
16,370
|
|
|
|
16,962
|
|
|
|
15,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
$
|
(0.79
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.48
|
|
|
$
|
(0.79
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(1.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following instruments were excluded from the calculation of diluted weighted average shares outstanding,
as their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Common shares issuable upon:
|
|
(In thousands)
|
|
Conversion of convertible senior notes
|
|
|
1,438
|
|
|
|
1,438
|
|
|
|
1,438
|
|
|
|
1,438
|
|
Exercise or vesting of share-based awards
|
|
|
304
|
|
|
|
837
|
|
|
|
840
|
|
|
|
837
|
|
26
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 11. Business Segment, Geographic Areas and Major Customers
For financial reporting purposes, we have one reportable segment which designs, manufactures and markets medical devices for
the treatment of advanced heart failure. Products are sold to customers located in the United States through our clinical trials and as commercial products, 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 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
36,945
|
|
|
$
|
25,106
|
|
|
$
|
70,733
|
|
|
$
|
51,256
|
|
Germany
|
|
|
17,404
|
|
|
|
13,703
|
|
|
|
32,082
|
|
|
|
26,033
|
|
International, excluding Germany
|
|
|
15,782
|
|
|
|
12,027
|
|
|
|
33,788
|
|
|
|
22,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,131
|
|
|
$
|
50,836
|
|
|
$
|
136,603
|
|
|
$
|
100,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a significant portion of our revenue is generated outside of the United States, we are dependent on
favorable economic and regulatory environments for our products in Europe and other countries outside of the United States. For the three and six months ended June 30, 2014 and 2013, no customer exceeded 10% of product sales individually.
Note 12. Commitments and Contingencies
We received a warning letter from the FDA, dated June 2, 2014, following an inspection of our Miami Lakes, Florida
facility conducted in January 2014. The FDA letter cited four categories for us to address: (1) procedures for validating device design, including device labeling; (2) procedures for implementing corrective and preventive action (CAPA);
(3) maintaining records related to investigations; and (4) validation of computer software used as part of production or quality systems. The warning letter did not require any action by physicians or patients and did not restrict use of
HeartWares devices.
We sent the FDA our initial response to the warning letter within the required fifteen business days of
receipt, and committed to undertaking certain quality system improvements and providing the FDA with periodic updates. We have begun to implement systemic changes and organizational enhancements to address the four warning letter items and related
quality systems. We have established teams to review and address the items cited by the FDA and have engaged external subject matter experts to assist in assessment and remediation efforts.
At June 30, 2014, we had purchase order commitments of approximately $41.0 million related to product costs, supplies, services and
property, plant and equipment purchases. Many of our materials and supplies require long lead times. Our purchase order commitments reflect materials that may be received up to one year from the date of order.
In addition to the above, we have entered into employment agreements with all of our executive officers. These contracts do not have a fixed
term and are constructed on an at-will basis. Some of these contracts provide executives with the right to receive certain additional payments and benefits if their employment is terminated including after a change of control, as defined in these
agreements.
From time to time we invest in certain development stage entities in connection with research activities. Certain contingent
milestone payments in connection with these arrangements have not been accrued in the accompanying condensed consolidated financial statements as the amounts are indeterminate at this time.
The taxation and customs requirements, together with other applicable laws and regulations of certain foreign jurisdictions, can be inherently
complex and subject to differing interpretation by local authorities. We are subject to the risk that either we have misinterpreted applicable laws and regulations, or that foreign authorities may take inconsistent,
27
HEARTWARE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
unclear or changing positions on local law, customs practices or rules. In the event that we have misinterpreted any of the above, or that foreign authorities take positions contrary to
ours, we may incur liabilities that may differ materially from the amounts accrued in the accompanying condensed consolidated financial statements.
Contingent Consideration and Milestone Payments
In December 2013, we acquired CircuLite using a combination of cash, stock and post-acquisition milestone payments. The milestone payments are
payable based upon the achievement of six specified performance milestones over a 10 year period. The maximum amount of the aggregate milestone payments could be $320 million. As of June 30, 2014, the fair value of the contingent consideration
was estimated to be $56.4 million (
see
Note 4).
Litigation
From time to time we may be involved in litigation or other contingencies arising in the ordinary course of business. Based on the information
presently available, management believes 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.
In accordance with FASB ASC 450
, Contingencies
, we accrue loss contingencies including costs of settlement, damages and defense related
to litigation to the extent they are probable and reasonably estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the
range.
Note 13. Subsequent Events
We have evaluated events and transactions that occurred subsequent to June 30, 2014 through the date the financial
statements were issued, for potential recognition or disclosure in the accompanying condensed consolidated financial statements. Except as disclosed below, we did not identify any events or transactions that should be recognized or disclosed in the
accompanying condensed consolidated financial statements.
As described in Note 3, we extended our field safety corrective action on
July 30, 2014 to include a voluntary recall of certain older batteries. The recall instructs sites to replace certain older batteries in the field upon patients routine visits in order to further mitigate the potential risks associated
with premature battery depletion. We will continue to monitor complaints and may take further actions as appropriate.
28