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 THE 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 U.S. GAAP 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, 2015. The accompanying condensed consolidated balance sheet as of December 31, 2015 has been derived from our audited financial statements. The unaudited condensed consolidated statements of operations for the three and six
months ended June 30, 2016 and cash flows for the six months ended June 30, 2016 are not necessarily indicative of the results to be expected for any future period or for the year ending December 31, 2016.
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.
Pending Transaction
On June 27, 2016, Medtronic, Inc. (Medtronic), a Minnesota corporation, Medtronic Acquisition Corp. (Purchaser), a
Delaware corporation and a wholly-owned subsidiary of Medtronic, and HeartWare entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which Medtronic would acquire HeartWare. A copy of the Merger Agreement was
filed as Exhibit 2.1 to HeartWares Current Report on Form 8-K, which was filed with the SEC on June 27, 2016. Pursuant to the Merger Agreement, on July 26, 2016, Medtronic and Purchaser commenced a tender offer to purchase all of the
outstanding shares of HeartWare common stock at a price of $58.00 per share (the Offer Price), paid to the holder in cash, without interest upon the terms and subject to the conditions set forth in the Offer to Purchase dated
July 26, 2016 and in the related Letter of Transmittal (the Offer).
The Merger Agreement provides that, among other
matters, as soon as practicable after the acquisition of shares of common stock pursuant to the Offer, and the satisfaction or waiver of certain conditions in the Merger Agreement, Purchaser will merge with and into HeartWare with HeartWare
surviving as a wholly owned subsidiary of Parent pursuant to Delaware General Corporation Law (DGCL) Section 251(h) (the Merger). Because the Merger will be governed by Section 251(h) of the DGCL, no stockholder
vote will be required to consummate the Merger. HeartWare does not expect there to be a significant period of time between the consummation of the Offer and the consummation of the Merger. At the effective time of the Merger (the Effective
Time), each share of HeartWare common stock issued and outstanding immediately prior to the Effective Time (other than Shares (i) owned by the Company as treasury stock, (ii) owned by Parent or Purchaser, or (iii) held by a
holder who is entitled to demand and properly demands appraisal for such shares of common stock in accordance with Section 262 of the DGCL shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically
cancelled and converted into the right to receive an amount in cash, payable to the holder thereon, without any interest thereon, equal to the Offer Price (the Merger Consideration), on the terms and conditions set forth in the Merger
Agreement. The Offer is described in a Tender Offer Statement on Schedule TO filed by Medtronic and Purchaser with the SEC on July 26, 2016. Also on July 26, 2016, HeartWare filed a
Schedule 14D-9
containing, among other things, the HeartWare boards recommendation that all holders of HeartWare common stock accept the Offer, tender their shares of common stock pursuant to the
Offer and, if required by applicable law, adopt the Merger Agreement and approve the Merger related to the Offer. Investors and security holders are urged to carefully read these documents and the other documents relating to the transactions
contemplated by the Merger Agreement when they become available because these documents will contain important information relating to the Offer and related transactions. HeartWares stockholders are advised to read these documents and any
other documents relating to the tender offer that will be filed with the SEC carefully and in their entirety because they contain important information. HeartWares stockholders may obtain copies of these documents for no charge at the
SECs website at www.sec.gov or by contacting HeartWares investor relations department at HeartWare International, Inc., 500 Old Connecticut Path, Framingham, MA 01701, Attention: Investor Relations.
At the Effective Time, (i) each outstanding and unexercised option granted under an equity plan of the Company (whether vested or
unvested) will be automatically cancelled and the option holder will be entitled to receive a cash payment from the Company in an amount equal to the product of the excess, if any, of the Merger Consideration over the exercise price of each such
option and the number of unexercised shares subject to such option immediately prior to the Effective Time, less any required withholding of taxes and (ii) each outstanding restricted stock unit granted under an equity plan of the Company will
be automatically cancelled, and the holder of the restricted stock unit will be entitled to receive a cash payment in an amount equal to the product of the Merger Consideration and the number of shares underlying such restricted stock unit as of
immediately prior to the Effective Time (assuming achievement of all performance milestones in the case of restricted stock units that are subject to performance-based vesting), less any required withholding of taxes.
The Offer is not subject to a financing condition. The Offer is conditioned upon, among other things, (a) there being validly tendered
pursuant to the Offer and not properly withdrawn prior to the Expiration Date a number of shares of HeartWare common stock that when added to the shares already owned by Medtronic, Purchaser or any wholly owned subsidiaries of their ultimate parent
constitutes a majority of the then outstanding shares of HeartWare common stock (the Minimum Condition), and (b) approvals under applicable antitrust laws in Austria, Germany and Spain being obtained. The Offer was also conditioned
on the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, having expired or been terminated. The applicable waiting period expired on July 25, 2016. The Expiration Date means the end of the
day, immediately after 11:59 p.m. Eastern time on August 22, 2016, which is the date that is 20 business days following the commencement of the Offer, unless the Offer is extended in accordance with the terms of the Merger Agreement.
The Merger Agreement includes customary representations, warranties and covenants of HeartWare and Medtronic. HeartWare has agreed to operate
its business and the business of its subsidiaries in the ordinary course of business consistent with past practices through the Effective Time. The Merger Agreement provides for the Company to pay a termination fee of approximately
$27.5 million to Medtronic if HeartWare terminates the Merger Agreement under certain conditions defined in the Merger Agreement.
The summary of the Merger Agreement and the descriptions of the terms and conditions to the Offer contained in the Offer to Purchase do not
purport to be complete and are qualified in their entirety by reference to the Merger Agreement and the Offer.
New Accounting
Standards
Standards Pending Implementation
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is
permitted. The Company is currently assessing the potential impact of adopting ASU 2016-09 on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(ASU 2016-02). ASU 2016-02 supersedes the lease guidance
under FASB Accounting Standards Codification (ASC) Topic 840,
Leases
, resulting in the creation of FASB ASC Topic 842,
Leases
. ASU 2016-02 requires a lessee to recognize in the statement of financial position a
liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. This ASU is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its financial statements and related disclosures.
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. In July 2015, the FASB voted to approve the deferral of the effective date of ASU 2014-09 by one year.
Therefore, ASU 2014-09 will become effective for us in the first quarter of our fiscal year ending December 31, 2018. Early adoption is permitted, but not earlier than the first quarter of our fiscal year ending December 31, 2017. The ASU
allows for either full retrospective or modified retrospective adoption. We have not yet selected a transition method, and we are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related
disclosures.
10
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Implemented Standards
In April 2015, the FASB issued ASU 2015-03,
Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs.
In June 2015, the FASB amended ASU 2015-03 with ASU 2015-15. The updated standard requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of the debt liability, consistent with debt discounts. This guidance was effective for periods beginning after December 15, 2015, and interim periods within those annual periods applied retrospectively. The Company adopted this guidance
in the first quarter of 2016. Debt issuance costs associated with debt were $3.6 and $4.0 million as of June 30, 2016 and December 31, 2015, respectively.
In February 2015, the FASB issued ASU No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis,
which is
intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures (collateralized debt obligations, collateralized loan obligations and
mortgage-backed security transactions). This ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate
certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification by: i) placing more emphasis on risk of loss when determining a controlling
financial interest; ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE); and iii) changing consolidation conclusions for public and
private companies in several industries that typically make use of limited partnerships or VIEs. ASU No. 2015-02 was effective for us in periods beginning after December 15, 2015. The Company adopted this guidance in the first quarter of
2016 and it did not have an effect on our consolidated financial position, results of operations or cash flows.
In January 2015, the FASB
issued ASU No. 2015-01,
Income StatementExtraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
The FASB issued this ASU as part of its
initiative to reduce complexity in accounting standards. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20 required that an entity separately classify, present, and disclose extraordinary events and transactions.
Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary
classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required
to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU were effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. The Company adopted this guidance
in the first quarter of 2016 and it did not have an effect on our consolidated financial position, results of operations or cash flows.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect
on the reported results of operations. In the period ended March 31, 2016, management reassessed certain inventory policies based on recent trends, including sales, usage and forecasted usage of specific inventory items. As a result, we now
expect that certain inventory could be held beyond one year. As of June 30, 2016, approximately $7.3 million of inventory was classified as non-current inventory and included within other assets on the accompanying consolidated balance sheet.
To reflect the result of this change, for consistency we reclassified approximately $7.7 million of inventory as of December 31, 2015 from current assets to non-current and included within other assets on the consolidated balance sheet.
Corresponding reclassifications have also been made to the Condensed Consolidated Statement of Cash Flows for the periods ended June 30, 2016 and 2015, to reflect the gross purchases and sales of these assets as a component of other non-current
assets. This change in classification does not affect previously reported cash flows from operations or from financing activities in the Condensed Consolidated Statement of Cash Flows, and had no effect on the previously reported Condensed
Consolidated Statement of Operations for any period.
In the period ended June 30, 2016, management reassessed classification of our
Valtech investment due to size of the investment. As of June 30, 2016, approximately $49.4 million of long-term investment and other assets was classified as long-term investment on the accompanying consolidated balance sheet. To reflect the
result of this change, for consistency we reclassified approximately $17.6 million of long-term investment and other assets as of December 31, 2015 to long-term investment on the consolidated balance sheet. This change in classification does
not affect reported, or previously reported, cash flows from operations or from financing activities in the Condensed Consolidated Statement of Cash Flows, and had no effect on the previously reported Condensed Consolidated Statement of Operations
for any period.
11
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 2. Liquidity
We have funded our operations primarily through product revenue, the issuance of shares of our common stock and the issuance of convertible
notes. At June 30, 2016, we had approximately $185.0 million of cash, cash equivalents and available-for-sale investments. Our cash, cash equivalents and available-for-sale 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;
acquisition of, and investment in, third-party technologies; as well as for general working capital. We believe our cash, cash equivalents and available-for-sale 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
accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. We have incurred substantial losses from operations since our inception, and losses have continued through June 30,
2016. At June 30, 2016, we had an accumulated deficit of approximately $449.8 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. We had one customer with an accounts receivable balance representing approximately 23% and 17% of our total
accounts receivable at June 30, 2016 and December 31, 2015, respectively. A portion of this account receivable was classified as long-term as of June 30, 2016 and December 31, 2015 in accordance with our payment terms with this
customer.
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, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
676
|
|
|
$
|
671
|
|
Accrual/(Reversal) of expense
|
|
|
67
|
|
|
|
(41
|
)
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
743
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016 and December 31, 2015, we recorded customer sales allowances of $73,000 and
$81,000, respectively.
Inventories, net
Components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Raw material
|
|
$
|
12,394
|
|
|
$
|
17,940
|
|
Work-in-process
|
|
|
9,826
|
|
|
|
8,858
|
|
Finished goods
|
|
|
15,644
|
|
|
|
13,149
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,864
|
|
|
$
|
39,947
|
|
|
|
|
|
|
|
|
|
|
12
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Finished goods inventories includes inventory held on consignment at customer sites of
approximately $7.9 million at June 30, 2016 and $6.2 million at December 31, 2015. The increase in consignment inventory as of June 30, 2016 is due to pre-shipment of batteries to execute a field action announced in September 2015
(see Accrued Field Action Costs for more information).
We review our inventory for excess or obsolete items and write-down obsolete or otherwise unmarketable inventory to its net realizable value.
Beginning in the period ending March 31, 2016 we reassessed certain inventory policies based on recent trends, including sales, usage and
forecasted usage of specific inventory items. As a result, we expect that certain inventory to be held beyond one year. As of June 30, 2016, approximately $7.3 million of raw material inventory was classified as non-current inventory and
included within other assets on the accompanying consolidated balance sheet. To reflect the result of this change, for consistency we reclassified approximately $7.7 million of raw material inventory as of December 31, 2015 from current assets
to non-current and included within other assets on the consolidated balance sheet.
Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
Useful Lives
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(in thousands)
|
|
Machinery and equipment
|
|
|
1.5 to 7 years
|
|
|
$
|
22,575
|
|
|
$
|
21,785
|
|
Leasehold improvements
|
|
|
3 to 10 years
|
|
|
|
8,923
|
|
|
|
8,891
|
|
Office equipment, furniture and fixtures
|
|
|
5 to 7 years
|
|
|
|
2,105
|
|
|
|
2,105
|
|
Purchased software
|
|
|
1 to 7 years
|
|
|
|
8,986
|
|
|
|
7,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,589
|
|
|
|
40,356
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(28,054
|
)
|
|
|
(25,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,535
|
|
|
$
|
15,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investment
Long-term investment consists of an investment in Valtech Cardio, Ltd.
As of June 30, 2016, we have invested approximately $49.4 million in Valtech Cardio, Ltd (Valtech), an early-stage, privately
held company headquartered in Or Yehuda, Israel specializing in the development of devices for mitral and tricuspid valve repair and replacement. Our investment is carried in long-term investments and other assets and consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Preferred Stock
|
|
$
|
10,495
|
|
|
$
|
10,495
|
|
Convertible Promissory Notes Receivable, due July 10, 2017
|
|
|
8,320
|
|
|
|
7,125
|
|
Convertible Promissory Notes Receivable, due February 1, 2019
|
|
|
30,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,428
|
|
|
$
|
17,620
|
|
|
|
|
|
|
|
|
|
|
In October 2013, we invested $10 million in Valtech in the form of a convertible promissory note with an
interest rate of 6% per annum (the 2013 Note), which, along with net accrued interest, has since been converted to Valtech equity pursuant to the terms of the 2013 Note.
In July 2015, we invested an additional $5 million in Valtech in the form of a convertible promissory note with an interest rate of
6% per annum.
13
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On September 1, 2015, we entered into a Business Combination Agreement (the
BCA) by and among the Company, Valtech, HW Global, Inc. (Holdco), HW Merger Sub, Inc., Valor Merger Sub Ltd. and Valor Shareholder Representative, LLC, pursuant to which we and Valtech proposed to effect a strategic
combination of our respective businesses under Holdco, subject to certain closing conditions. Effective January 28, 2016, we terminated the BCA pursuant to the terms of the BCA by delivering written notice to the other parties. After entering
into the BCA and pursuant to the terms of the BCA, we loaned Valtech an aggregate principal amount of $3 million in interim funding at an interest rate of 6% per annum in $1 million increments in each of November 2015, December 2015 and
January 2016. In connection with the termination provisions of the BCA, we loaned Valtech an additional $30 million on February 1, 2016 also in the form of a convertible promissory note with an interest rate of 6% per annum. We have no
current contractual obligations to further fund Valtech.
Upon maturity, each of the convertible promissory notes become due and payable
in cash or Valtech preferred stock, at the option of Valtech, pursuant to terms of the convertible promissory notes. If the convertible promissory notes become due and payable upon an event of default (as defined in the notes), we determine whether
the notes are paid in cash or Valtech preferred stock.
Our investment in Valtech was deemed to be realizable as of June 30, 2016.
The fair value of this investment has not been estimated as of June 30, 2016 and December 31, 2015 as no impairment indicators were identified.
Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Long-term inventory
|
|
|
7,287
|
|
|
|
7,739
|
|
Long-term receivables
|
|
|
3,659
|
|
|
|
2,539
|
|
Security deposits
|
|
|
2,407
|
|
|
|
2,586
|
|
Other assets
|
|
|
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,353
|
|
|
$
|
13,844
|
|
|
|
|
|
|
|
|
|
|
Other Accrued Liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Accrued payroll and other employee costs
|
|
$
|
12,031
|
|
|
$
|
14,068
|
|
Accrued field action
|
|
|
4,175
|
|
|
|
8,503
|
|
Accrued warranty
|
|
|
5,505
|
|
|
|
6,116
|
|
Accrued material purchases
|
|
|
967
|
|
|
|
4,107
|
|
Accrued professional fees
|
|
|
2,940
|
|
|
|
2,685
|
|
Accrued research and development costs
|
|
|
1,335
|
|
|
|
2,191
|
|
Accrued restructuring costs
|
|
|
1,329
|
|
|
|
1,955
|
|
Accrued VAT
|
|
|
1,286
|
|
|
|
1,238
|
|
Other accrued expenses
|
|
|
5,457
|
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,025
|
|
|
$
|
45,889
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and other employee costs
Accrued payroll and other employee costs included estimated year-end employee bonuses of approximately $5.2 million and $8.0 million at
June 30, 2016 and December 31, 2015, respectively.
14
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Accrued Warranty
Certain patient accessories sold with the HVAD System are covered by a limited warranty ranging from one to two years. Estimated 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 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.
The following table
summarizes the change in our warranty liability for the six months ended June 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
6,116
|
|
|
$
|
4,685
|
|
Accrual for warranty expense
|
|
|
637
|
|
|
|
2,097
|
|
Warranty costs incurred during the period
|
|
|
(1,248
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,505
|
|
|
$
|
5,401
|
|
|
|
|
|
|
|
|
|
|
Accrued Field Action Costs
The costs to repair or replace products associated with field actions and voluntary service campaigns are recorded when they are determined to
be probable and reasonably estimable as a cost of revenue. Costs associated with field actions are not included in our warranty liability. The following table summarizes the change in field action liability for the six months ended June 30,
2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
8,503
|
|
|
$
|
1,888
|
|
Accrual for field action costs
|
|
|
3,339
|
|
|
|
470
|
|
Field action costs incurred during the period
|
|
|
(7,667
|
)
|
|
|
(1,746
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,175
|
|
|
$
|
612
|
|
|
|
|
|
|
|
|
|
|
In February 2015, we expanded a 2013 voluntary field safety corrective action, by initiating a voluntary
medical device recall of certain older controllers distributed in the U.S. during the ADVANCE and ENDURANCE clinical trial periods. The action had been initiated in certain foreign markets around the end of 2014. The affected controllers exhibit a
higher susceptibility to electrostatic discharge than newer, commercial controllers. This recall was ongoing as of June 30, 2016.
In September 2015, we announced planned field actions to replace certain older AC adapters in use outside the United States and older
batteries with new, more reliably designed product improvements. We also announced plans to implement a controller software update intended to improve controller performance reliability. These actions began on January 7, 2016 following
requisite regulatory approvals. Recall costs incurred during the six months ended June 30, 2016 were associated with these actions.
In March 2016, we announced a planned field action related to the anticipated replacement of certain controllers based upon the potential for
the power or driveline connectors to become loose. During the six months ended June 30, 2016, the Company recorded a total charge of $3.3 million related to this planned field action. The Companys estimated liability for replacements is
based upon assumptions which it considers reasonable in light of known circumstances.
As further discussed in Note 13, on July 12,
2016 the Company adopted a voluntary controller replacement plan pursuant to which it will introduce a new and improved HVAD System controller to be implemented effective once the new controller attains applicable regulatory approvals. The program
is expected to result in a controller replacement liability of approximately $24 million to $27 million for prospective replacement of HVAD controllers in the field beginning in the third or fourth quarter of 2016.
15
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Accrued Restructuring Costs
The following table summarizes changes in our accrued restructuring costs for the six months ended June 30, 2016:
|
|
|
|
|
|
|
Facility Leases
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
1,955
|
|
Restructuring charges
|
|
|
|
|
Payments
|
|
|
(358
|
)
|
Adjustments to estimated obligations
|
|
|
(310
|
)
|
Change in fair value
|
|
|
42
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,329
|
|
|
|
|
|
|
The restructuring obligations reflected above resulted from the closure of CircuLite, Inc.s former
headquarters in Teaneck, New Jersey, which we ceased to occupy in 2014. The Teaneck operating lease runs through September 2020. The remaining obligation as of June 30, 2016 reflects recent events including entry into a sublease agreement for
approximately 43% of the leased space, taking into consideration the applicable sublet terms, and a termination payment made to the landlord related to the recapture of approximately 57% by the landlord which became effective on July 15, 2016.
The termination payment of approximately $0.9 million was accrued as of June 30, 2016 and included in selling, general and administrative expenses on our condensed consolidated statements of operations. This obligation was paid during July
2016. (
see
Note 4 for significant inputs in determining estimate).
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, 2016 and 2015.
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, 2016 and December 31, 2015
and are carried at fair value.
16
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables represent 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
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
As of June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
55,981
|
|
|
$
|
55,981
|
|
|
$
|
|
|
|
$
|
55,981
|
|
|
$
|
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
192,107
|
(1)
|
|
|
240,732
|
|
|
|
|
|
|
|
240,732
|
|
|
|
|
|
Contingent consideration
|
|
|
13,510
|
|
|
|
13,510
|
|
|
|
|
|
|
|
|
|
|
|
13,510
|
|
Royalties
|
|
|
839
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
839
|
|
Lease exit costs
|
|
|
1,329
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the
Reporting Date Using
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(in thousands)
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
68,531
|
|
|
$
|
68,531
|
|
|
$
|
|
|
|
$
|
68,531
|
|
|
$
|
|
|
Long-term investments
|
|
|
980
|
|
|
|
980
|
|
|
|
|
|
|
|
980
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
187,089
|
(1)
|
|
|
200,351
|
|
|
|
|
|
|
|
200,351
|
|
|
|
|
|
Contingent consideration
|
|
|
12,330
|
|
|
|
12,330
|
|
|
|
|
|
|
|
|
|
|
|
12,330
|
|
Royalties
|
|
|
918
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
918
|
|
Lease exit costs
|
|
|
1,955
|
|
|
|
1,955
|
|
|
|
|
|
|
|
|
|
|
|
1,955
|
|
(1)
|
The carrying amount of our convertible senior notes is net of unamortized discount and deferred financing costs.
See
Note 7 (Debt) for more information.
|
Our Level 2 financial assets and liabilities include available-for-sale investments and our convertible senior notes. The fair value of our
available-for-sale investments and our 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
Determining the fair value of the contingent consideration related to our acquisition of CircuLite in December 2013 requires significant management judgment or estimation. The
estimated fair value 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 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 over the next 14 years pursuant to agreements related to intellectual property licensed or acquired by World Heart Corporation, which we
acquired in August 2012. 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.
|
17
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
|
Lease exit costs
In the first quarter of 2014, we ceased the use of CircuLites former headquarters 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 management judgment. The fair value of this liability is remeasured at estimated fair value at each reporting period. Actual
amounts paid may differ from the obligation recorded.
|
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, 2016:
|
|
|
|
|
|
|
Contingent
Consideration
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
12,330
|
|
Payments
|
|
|
|
|
Change in fair value
|
|
|
1,180
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,510
|
|
|
|
|
|
|
The change in the fair value of the contingent consideration in the six months ended June 30, 2016
resulting from accretion of the liability 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. Potential valuation adjustments will be made in future accounting periods as additional information becomes available, including, among other items, progress toward developing the CircuLite System, as well as
revenue and milestone targets as compared to our current projections, with the impact of these adjustments being recorded in our condensed consolidated statements of operations.
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, 2016:
|
|
|
|
|
|
|
Royalties
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
918
|
|
Payments
|
|
|
(110
|
)
|
Change in fair value
|
|
|
31
|
|
|
|
|
|
|
Ending balance
|
|
$
|
839
|
|
|
|
|
|
|
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, 2016:
|
|
|
|
|
|
|
Lease Exit
Costs
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
1,955
|
|
Adjustments
|
|
|
(310
|
)
|
Payments
|
|
|
(358
|
)
|
Change in fair value
|
|
|
42
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,329
|
|
|
|
|
|
|
18
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The restructuring obligations reflected above resulted from the closure of CircuLites
former headquarters in Teaneck, New Jersey, which we ceased to occupy in 2014. The Teaneck operating lease runs through September 2020. The remaining obligation as of June 30, 2016 reflects recent events including entry into a sublease
agreement for approximately 43% of the leased space, taking into consideration the applicable sublet terms, and a termination payment made to the landlord related to the recapture of approximately 57% by the landlord which became effective on
July 15, 2016. The termination payment of approximately $0.9 million was accrued as of June 30, 2016 and included in selling, general and administrative expenses on our condensed consolidated statements of operations. This obligation was
paid during July 2016.
Potential valuation adjustments will be made in future accounting periods as additional information becomes
available,, with the impact of these adjustments being recorded in our condensed consolidated statements of operations.
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, 2016:
|
|
|
|
|
|
|
|
|
Valuation Methodology
|
|
Significant
Unobservable
Input
|
|
Weighted
Average
(range, if
applicable)
|
Contingent consideration
|
|
Probability-weighted income approach
|
|
Milestone dates
|
|
2020 to 2023
|
|
|
|
|
Discount rate
|
|
17.0% to 24.0%
|
|
|
|
|
Probability of occurrence
|
|
50%
|
Royalties
|
|
Discounted cash flow
|
|
Discount rate
|
|
4.8% to 7.8%
|
Lease exit costs
|
|
Discounted cash flow
|
|
Sublease start date
|
|
October 1, 2016
|
|
|
|
|
Sublease rate
|
|
$31.00/square foot
|
|
|
|
|
Discount rate
|
|
3.5%
|
Assets That Are Measured at Fair Value on a Nonrecurring Basis
Non-marketable equity investments and non-financial assets such as intangible assets, goodwill and property, plant, and equipment, are
evaluated for impairment annually or when indicators of impairment exist and are measured at fair value only if an impairment charge is recorded. In the six months ended June 30, 2016 and 2015, we recorded impairment charges of zero and $1.1,
respectively, million related to certain property, plant, and equipment.
See
Note 3 for more information. Non-financial assets such as identified intangible assets acquired in connection with our acquisitions 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.
Note 5. Investments
We have cash
investment policies that limit investments to investment-grade-rated securities. At June 30, 2016 and December 31, 2015, all of our investments were classified as available-for-sale and carried at fair value. At June 30, 2016 and
December 31, 2015, our short-term and long-term investments had maturity dates of less than twenty-four months.
19
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The amortized cost and fair value of our investments, with gross unrealized gains and losses,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
At June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
30,963
|
|
|
$
|
11
|
|
|
$
|
(45
|
)
|
|
$
|
30,929
|
|
U.S. government agency debt
|
|
|
15,000
|
|
|
|
7
|
|
|
|
|
|
|
|
15,007
|
|
Certificates of deposit
|
|
|
10,045
|
|
|
|
|
|
|
|
|
|
|
|
10,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
56,008
|
|
|
$
|
18
|
|
|
$
|
(45
|
)
|
|
$
|
55,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Aggregate
|
|
|
|
Cost Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
32,666
|
|
|
$
|
|
|
|
$
|
(100
|
)
|
|
$
|
32,566
|
|
U.S. government agency debt
|
|
|
25,000
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
24,940
|
|
Certificates of deposit
|
|
|
11,025
|
|
|
|
|
|
|
|
|
|
|
|
11,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
68,691
|
|
|
$
|
|
|
|
$
|
(160
|
)
|
|
$
|
68,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
980
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
980
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2016 and 2015, we did not have any realized gains or losses on our
investments. At June 30, 2016 and December 31, 2015, the number of available-for-sale investments that had been in a continuous loss position for more than twelve months was five and thirteen, respectively. As of June 30, 2016, a
total of four individual securities had been in an unrealized loss position for twelve months or less and the losses were determined to be temporary. We regularly review our investment portfolio to determine if any security is other-than-temporarily
impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security has been less than
its amortized cost, the financial condition of the issuer, the time to maturity of the investment and our intent to sell the security prior to maturity where we would not be able to recover its amortized cost basis.
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, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
61,233
|
|
|
$
|
61,390
|
|
Additions
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
Foreign currency translation impact
|
|
|
20
|
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
61,253
|
|
|
$
|
61,254
|
|
|
|
|
|
|
|
|
|
|
20
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
CircuLite System technology
|
|
$
|
10,800
|
|
|
$
|
10,800
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Patents
|
|
$
|
8,121
|
|
|
$
|
7,424
|
|
Purchased intangible assets
|
|
|
|
|
|
|
|
|
Acquired technology rights
|
|
|
9,925
|
|
|
|
9,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,046
|
|
|
|
17,349
|
|
Less: Accumulated amortization Patents
|
|
|
(1,826
|
)
|
|
|
(1,551
|
)
|
Less: Accumulated amortization Purchased intangible assets
|
|
|
(3,408
|
)
|
|
|
(2,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,812
|
|
|
$
|
13,045
|
|
|
|
|
|
|
|
|
|
|
Our other intangible assets are amortized using the straight-line method over their estimated useful lives as
follows:
|
|
|
Patents
|
|
15 years
|
Purchased intangible assets
|
|
|
Acquired technology rights
|
|
6 to 16 years
|
Amortization expense for each of the three months ended June 30, 2016 and 2015 was $0.5 million,
respectively. Amortization expense for each of the six months ended June 30, 2016 and 2015 was $1.0.
21
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 7. Debt
At June 30, 2016 and December 31, 2015, we had outstanding convertible debt as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(in thousands)
|
|
Principal amount of the 3.5% convertible senior notes, due 2017
|
|
$
|
42,471
|
|
|
$
|
42,471
|
|
Deferred financing costs
|
|
|
(3,400
|
)
|
|
|
(3,652
|
)
|
Unamortized discount
|
|
|
(4,595
|
)
|
|
|
(5,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,476
|
|
|
$
|
32,825
|
|
|
|
|
|
|
|
|
|
|
Equity component
|
|
$
|
7,629
|
|
|
$
|
7,629
|
|
|
|
|
|
|
|
|
|
|
Principal amount of the 1.75% convertible senior notes, due 2021
|
|
$
|
202,366
|
|
|
$
|
202,366
|
|
Deferred financing costs
|
|
|
(246
|
)
|
|
|
(321
|
)
|
Unamortized discount
|
|
|
(44,489
|
)
|
|
|
(47,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157,631
|
|
|
$
|
154,264
|
|
|
|
|
|
|
|
|
|
|
Equity component
|
|
$
|
47,400
|
|
|
$
|
47,400
|
|
|
|
|
|
|
|
|
|
|
Interest expense related to our convertible debt consisted of contractual 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 and was included in interest expense in our condensed consolidated statements of operations. For the three
and six months ended June 30, 2016 and 2015, interest expense related to our convertible debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Coupon rate
|
|
$
|
1,257
|
|
|
$
|
1,284
|
|
|
$
|
2,514
|
|
|
$
|
2,542
|
|
Amortization of discount
|
|
|
2,371
|
|
|
|
2,125
|
|
|
|
4,692
|
|
|
|
4,193
|
|
Amortization of deferred financing costs
|
|
|
165
|
|
|
|
132
|
|
|
|
327
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,793
|
|
|
$
|
3,541
|
|
|
$
|
7,533
|
|
|
$
|
6,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible Senior Notes
On December 15, 2010, we completed the sale of 3.5% convertible senior notes due December 15, 2017, unless earlier repurchased by us
or converted (the 2017 Notes) for an aggregate principal amount of $143.75 million, pursuant to the terms of an indenture dated December 15, 2010 (the Indenture) and a supplemental indenture (the First
Supplemental Indenture), both filed with the SEC as exhibits to our Current Report on Form 8-K on December 15, 2010. The 2017 Notes are senior unsecured obligations of the Company. The 2017 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.
In May 2015, we entered into separate,
privately negotiated, exchange agreements (the Exchange) with certain holders of our outstanding 2017 Notes. The general terms of exchange agreements were filed with the SEC on May 7, 2015 as an exhibit to our Current Report on Form
8-K. Pursuant to these agreements, we exchanged $101.3 million aggregate principal amount of the 2017 Notes for $118.2 million principal amount of 1.75% convertible senior notes due 2021 (see further discussion below). We did not receive any
proceeds related to the Exchange.
Pursuant to the terms of the Indenture and First Supplemental Indenture, the 2017 Notes are convertible
at an initial conversion rate of 10 shares of our common stock per $1,000 principal amount of 2017 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.
22
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The 2017 Notes mature on December 15, 2017, unless earlier repurchased by us or
converted. Prior to June 15, 2017, holders may convert their 2017 Notes at their option only upon satisfaction of one or more of the conditions specified in the First Supplemental Indenture relating to (i) the sale price of our common
stock, (ii) the trading price per $1,000 principal amount of 2017 Notes or (iii) specified corporate events. On or after June 15, 2017, until the close of business of the business day immediately preceding the date the 2017 Notes
mature, holders may convert their 2017 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.
Based on the initial conversion rate of 10 shares of our common stock per $1,000 principal amount of 2017 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 2017 Notes is 424,710. The value of these shares, based on the closing price of our common stock on
June 30, 2016 of $57.75 per share, was approximately $24.5 million. The fair value of our 2017 Notes as presented in Note 4 was $40.4 million at June 30, 2016.
1.75% Convertible Senior Notes
In May 2015, we issued $84.2 million principal amount of 1.75% convertible senior notes due December 15, 2021 (the 2021
Notes), unless earlier repurchased, redeemed or converted (the 2021 Notes) pursuant to the terms of the Indenture and a second supplemental indenture (the Second Supplemental Indenture), which was filed with the SEC on
May 19, 2015 as an exhibit to our Current Report on from 8-K. Combined with the 2021 Notes issued in connection with the Exchange described above, the aggregate principal amount issued under the 2021 Notes was $202.4 million. The Exchange
resulted in the retirement of outstanding 2017 Notes with a carrying value of $83.1 million, the write-off of unamortized debt issuance costs of $1.0 million and settlement of $10.7 million related to the conversion feature embedded in the 2017
Notes. The 2021 Notes offered in the Exchange had a fair value of $88.0 million, which resulted in a loss on extinguishment of debt of $16.6 million in the three months ended June 30, 2015.
The net proceeds from the issuance of the 2021 Notes amounted to $75.5 million, net of deferred issuance costs paid as of September 30,
2015. In connection with the issuance of the 2021 Notes, we incurred costs of approximately $5.2 million. The 2021 Notes are senior unsecured obligations of the Company and bear interest at a rate of 1.75% per annum, payable semi-annually in
arrears on June 15 and December 15 of each year.
Pursuant to the terms of the Indenture and the Second Supplemental Indenture,
the 2021 Notes are convertible at an initial conversion rate of 10 shares of our common stock per $1,000 principal amount of 2021 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.
The 2021 Notes mature on December 15, 2021 unless
earlier repurchased, redeemed or converted. Prior to the close of business on the business day immediately preceding June 15, 2021, holders may convert their 2021 Notes at their option only under the following circumstances related to:
(i) the sale price of our common stock, (ii) the trading price per $1,000 principal amount of 2021 Notes or (iii) specified corporate events, or (iv) if we call the 2021 Notes for redemption, until the close of business on the
business day immediately preceding the redemption date. On or after June 15, 2021 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert their 2021 Notes at any time, regardless of
whether any of the foregoing conditions has been met.
Based on the initial conversion rate of 10 shares of our common stock per $1,000
principal amount of 2021 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 2021 Notes is 2,023,660. The value of these shares, based on the closing
price of our common stock on June 30, 2016 of $57.75 per share, was approximately $116.9 million. The fair value of our 2021 Notes as presented in Note 4 was $200.3 million at June 30, 2016.
Accounting for Debt Transactions
In accordance with accounting guidance for debt with conversion and other options, we separately account for the liability and equity
components of the Convertible Notes by allocating the proceeds between the liability component and the embedded conversion option, or equity component, due to our ability to settle the Convertible Notes in cash, common stock or a combination of cash
and common stock, at our option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that
reflected our non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the
fair value of the liability of the Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying
23
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
amount, or debt discount, is amortized to interest expense using the effective interest method over the life of the Convertible Notes. The equity component is not remeasured as long as it
continues to meet the conditions for equity classification. Additionally, we allocated the costs related to the 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 component and the equity component included in additional paid-in-capital. These deferred financing costs are being amortized to interest expense over the life of the Convertible Notes using the effective interest method.
Note Treatment in Medtronic Merger
On June 27, 2016, we announced our entry into a Merger Agreement to be acquired by Medtronic (as summarized in Note 1 above). In
connection with the announcement of the Merger Agreement, the Company has issued a notice to the registered holders of, and the trustee for, its 3.50% Convertible Senior Notes due 2017 (the
2017 Convertible
Notes) and its
1.75% Convertible Senior Notes due 2021 (the
2021 Convertible Notes
and, together with the 2017 Convertible Notes, the
Convertible Notes
) pursuant to the requirements of the supplemental indentures (the
Supplemental Indentures
) and related base indenture (as amended and supplemented by the Supplemental Indentures, the
Indenture
) governing the Convertible Notes, notifying the holders of, among other items, the
Merger Agreement, the anticipated date of the expected Fundamental Change and Make-Whole Fundamental Change (each as defined in the Supplemental Indentures) as a result of the consummation of the transaction, the anticipated convertibility of the
Convertible Notes in connection with such Fundamental Change, the right of holders of the Convertible Notes to require the Company to repurchase such holders Convertible Notes in the event of a Fundamental Change and the Companys
intention to enter into a supplemental indenture with respect to the Convertible Notes on or about the Effective Time.
Note 8. Stockholders
Equity
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, 2016, 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 merger agreement.
In the six months ended June 30, 2016, we issued 147,182 shares of our common stock upon the vesting of restricted stock units pursuant
to stockholder approved equity plans. There were no options exercised during this period.
In the six months ended June 30, 2015, we
issued an aggregate of 1,429 shares of our common stock upon the exercise of stock options and an aggregate of 107,896 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,
2016 and 2015, we recorded share-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cost of revenues
|
|
$
|
446
|
|
|
$
|
547
|
|
|
$
|
940
|
|
|
$
|
985
|
|
Selling, general and administrative
|
|
|
2,160
|
|
|
|
3,683
|
|
|
|
4,814
|
|
|
|
7,132
|
|
Research and development
|
|
|
1,602
|
|
|
|
2,516
|
|
|
|
2,841
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,208
|
|
|
$
|
6,746
|
|
|
$
|
8,595
|
|
|
$
|
12,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Deferred tax benefits attributed to our share-based compensation expense are not recognized
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.
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. At our 2015 Annual Meeting of Stockholders held on June 4, 2015, our stockholders approved an amendment to the 2012
Plan to increase the number of shares of our common stock available for issuance by 1.1 million shares. Under the terms of the 2012 Plan, as amended, the total number of shares of our common stock reserved for issuance under Awards is
2,475,000, 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 2,375,000. As of June 30, 2016, 421,745 shares have been issued upon vesting of Awards issued under the 2012 Plan and Awards with
respect to 902,975 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.
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 three or 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. In the six months ended June 30, 2016 and 2015, we issued 158,940 and 7,000 stock options, respectively.
Information related to options granted under all of our plans at June 30, 2016 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
Value
|
|
Options
|
|
(in thousands)
|
|
|
Price
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
|
111
|
|
|
$
|
49.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
159
|
|
|
|
33.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(15
|
)
|
|
|
34.63
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
255
|
|
|
|
39.20
|
|
|
|
7.01
|
|
|
$
|
10,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
102
|
|
|
|
47.08
|
|
|
|
3.09
|
|
|
$
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The aggregate intrinsic values at June 30, 2016 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 total intrinsic value of options exercised in the six months ended June 30, 2016 and 2015 was $0 and approximately $0.1 million,
respectively. Cash received from options exercised in the six months ended June 30, 2016 and 2015 was $0 and $0.3 million, respectively.
At June 30, 2016, there was approximately $1.6 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 1.6 years.
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
predetermined 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, 2016 and activity in the six months then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic Value
|
|
Restricted Stock Units
|
|
(in thousands)
|
|
|
(Years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
|
623
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
310
|
|
|
|
|
|
|
|
|
|
Vested/Exercised
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
731
|
|
|
|
1.72
|
|
|
$
|
42,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at June 30, 2016 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, 2016, 114,022 of the RSUs outstanding
were subject to performance-based vesting criteria as described above.
The total intrinsic value of RSUs vested in the six months ended
June 30, 2016 and 2015 was approximately $4.9 million and $9.3 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, 2016 and 2015 was $33.28 and $88.96, respectively.
At June 30, 2016, we had approximately $21.5 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 1.8 years.
Note 10. Net Loss Per Share
Basic net loss per common share is computed by dividing net loss for the period by the weighted-average number of common shares outstanding for
each respective period. Diluted net loss per common share adjusts basic net loss per common share for the dilutive effects of share-based awards as determined under the treasury stock method, our convertible senior notes as determined
26
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
under the if-converted method, and other potentially dilutive instruments only in the periods in which the effect is dilutive. Due to our net loss for all periods presented, all potentially
dilutive instruments were excluded because their inclusion would have been anti-dilutive. The following instruments have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Common shares issuable upon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible senior notes
|
|
|
2,449
|
|
|
|
2,449
|
|
|
|
2,449
|
|
|
|
2,449
|
|
Exercise or vesting of share-based awards
|
|
|
986
|
|
|
|
873
|
|
|
|
986
|
|
|
|
873
|
|
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 distributed to customers located in the United States through our clinical trials and as commercial products, as commercial products to customers in Europe and other countries and under special access in certain
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
40,984
|
|
|
$
|
42,922
|
|
|
$
|
74,332
|
|
|
$
|
85,111
|
|
Germany
|
|
|
10,602
|
|
|
|
13,072
|
|
|
|
21,275
|
|
|
|
25,813
|
|
International, excluding Germany
|
|
|
17,134
|
|
|
|
17,575
|
|
|
|
28,187
|
|
|
|
32,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,720
|
|
|
$
|
73,569
|
|
|
$
|
123,794
|
|
|
$
|
143,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The government of Turkey experienced a recent coup attempt, the impact of which cannot be assessed at this time. Sales to
customers in Turkey account for approximately 2-3% of our worldwide sales, or approximately 6-8% of our international sales outside Germany.
The Brexit referendum, whereupon Britain voted to leave the European Economic Community (EU), the future impact of which cannot be
assessed at this time. Sales to customers in Britain also account for approximately 2-3% of our worldwide sales, or approximately 6-8% of our international sales outside Germany.
For the three and six months ended June 30, 2016 and 2015, 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
our 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. Since 2014 and continuing in 2016, we implemented 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. As we continue to evaluate our quality systems, it
is possible that we may need to take additional actions including the possibility of voluntary product recalls when necessary to ensure patient safety and effective performance of the HVAD System.
27
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
At June 30, 2016, we had purchase order commitments of approximately $41.5 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, we have entered into employment agreements with all of our executive officers. These contracts, which may be
amended from time to time, 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, 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 and royalty payments. The
post-acquisition payments are payable based upon the achievement of CircuLite-related revenue and certain specified performance milestones over periods ranging from 8-10 years subsequent to the acquisition date. The maximum amount of the aggregate
post-acquisition payments could be $300 million. As of June 30, 2016, the fair value of the contingent consideration was estimated to be $13.5 million (
see
Note 4).
License and Development Agreements
From time to time, we license rights to technology or intellectual property from third parties. These licenses may require us to make upfront
payments as well as development or other payments upon successful completion of preclinical, clinical, regulatory or revenue milestones. In addition, these agreements may require us to pay royalties on sales of products arising from the licensed
technology or intellectual property. Because the achievement of these milestones is not reasonably estimable, we have not recorded a liability in the accompanying consolidated financial statements for any of these contingencies.
Litigation
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, 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 results of operations.
On January 22, 2016, the St. Paul Teachers Retirement Fund Association filed a putative class action complaint (the
Complaint) in the United States District Court for the Southern District of New York against the Company on behalf of all persons and entities who purchased or otherwise acquired shares of the Company from June 10, 2014 through
January 11, 2016 (the Class Period). The Complaint was amended on June 29, 2016 and claims the Company and one of our executives violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and
misleading statements about, among other things, the Companys response to the June 2014 FDA warning letter, the development of the MVAD System and the acquisition of Valtech. The Complaint seeks to recover damages on behalf of all purchasers
or acquirers of the Companys stock during the Class Period. The Company intends to vigorously defend itself against these claims. Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain
at this point. As a result we cannot reasonably estimate a range of loss for this action and accordingly have not accrued any liability associated with this action.
28
HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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, 2016 through the date the financial statements were issued,
for potential recognition or disclosure in the accompanying condensed consolidated financial statements. Except for those items noted below, we did not identify any events or transactions that should be recognized or disclosed in the accompanying
condensed consolidated financial statements.
On July 25, 2016, HeartWare submitted for European regulatory approval of its
next-generation controller, and plans to submit the new controller for approval in the United States in August 2016 with other jurisdictions to follow. The new controller is expected to be available for shipment following the Companys receipt
of regulatory marketing approvals which may take up to one year to complete.
Upon the approval of its new controller in each
jurisdiction, the Company intends to enact a voluntary plan to replace existing controllers in the field on a free-of-charge basis. The new controller is designed to provide enhancements over the Companys current controller, and is expected to
result in improved performance.
As of July 25, 2016, if the next generation controller is approved, the Company estimates that it
will incur a charge of approximately $24 million to $27 million under the controller replacement program, representing the estimated replacement cost of existing controllers in the field. This charge will be recognized upon the first regulatory
approval of the new controller, which is expected to occur prior to December 31, 2016. Also, effective with the regulatory submission, the Company will defer approximately 7% of the average per-system selling price of an HVAD System to account
for the implied controller replacement included in ongoing sale arrangements. The deferred revenue will be recognized in income when the new replacement controller is shipped to customers in the future.
29