##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2010
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 COMMISSION FILE NUMBER: 001-34256
 HEARTWARE INTERNATIONAL, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    26-3636023(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 205 Newbury Street, Suite 101
Framingham, Massachusetts 01701
+1 508 739 0950
 
 : þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 Yes o No o
 o þ
  Class
    
    Shares Outstanding as of April 23, 2010Common Stock, $0.001 Par Value Per Share
    
    13,635,054




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##### 



PART I. FINANCIAL INFORMATION
    
    
    4ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    
    
    4ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
    
    
    21ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 4. CONTROLS AND PROCEDURES
    
    
    29PART II. OTHER INFORMATION
    
    
    30ITEM 1A. RISK FACTORS
    
    
    30ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    30ITEM 6. EXHIBITS
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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References
  
    
    HeartWare, the Company, HeartWare Group, we, us and our refer to HeartWare
International, Inc. and its consolidated subsidiaries, HeartWare Pty. Limited, HeartWare,
Inc., HeartWare GmbH and HeartWare Limited.
 
    
    HeartWare International, Inc. refers to HeartWare International, Inc., a Delaware
corporation incorporated on July 29, 2008.
 
    
    HeartWare Pty. Limited refers to HeartWare Pty. Limited (formerly known as HeartWare
Limited), an Australian proprietary corporation originally incorporated on November 26,
2004.
 
    
    HeartWare, Inc. refers to HeartWare, Inc., a Delaware corporation incorporated on
April 3, 2003. HeartWare, Inc. was acquired by HeartWare Pty. Limited on January 24, 2005.
 
    
    HeartWare GmbH refers to HeartWare GmbH, a German corporation established on February
19, 2010.
 
    
    HeartWare Limited refers to HeartWare Limited, a limited liability corporation
established in the United Kingdom on February 19, 2010.
 Currency
  Trademarks
   3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    87,282,917
    
    
    $
    50,834,714Short-term investments, net
    
    
    16,599,360
    
    
    
    Accounts receivable
    
    
    7,851,844
    
    
    
    11,384,647Inventories, net
    
    
    11,991,051
    
    
    
    8,870,903Prepaid expenses and other current assets
    
    
    2,909,853
    
    
    
    1,663,157Total current assets
    
    
    126,635,025
    
    
    
    72,753,421Property, plant and equipment, net
    
    
    4,313,077
    
    
    
    3,719,415Other intangible assets, net
    
    
    1,305,913
    
    
    
    1,191,917Restricted cash
    
    
    288,429
    
    
    
    288,429Total assets
    
    $
    132,542,444
    
    
    $
    77,953,182LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,711,834
    
    
    $
    3,122,131Accrued expenses and other current liabilities
    
    
    3,783,639
    
    
    
    3,848,086Total current liabilities
    
    
    5,495,473
    
    
    
    6,970,217Commitments and contingenciesStockholders equity:Preferred stock  $.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding at March 31, 2010 and December 31,
2009
    
    
    
    
    
    
    Common stock  $.001 par value; 25,000,000
shares authorized; 13,632,197 and 11,786,173
shares issued and outstanding at March 31, 2010
and December 31, 2009, respectively
    
    
    13,632
    
    
    
    11,786Additional paid-in capital
    
    
    237,251,879
    
    
    
    176,698,329Accumulated deficit
    
    
    (102,415,960
    )
    
    
    (97,871,645
    )Accumulated other comprehensive loss:Cumulative translation adjustments
    
    
    (7,778,788
    )
    
    
    (7,855,505
    )Unrealized loss on short-term investments
    
    
    (23,792
    )
    
    
    Total stockholders equity
    
    
    127,046,971
    
    
    
    70,982,965Total liabilities and stockholders equity
    
    $
    132,542,444
    
    
    $
    77,953,182
   4




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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months Ended March 31,2010
    
    
    2009Revenues, net
    
    $
    10,703,120
    
    
    $
    1,477,796Cost of revenues
    
    
    5,680,542
    
    
    
    718,308Gross profit
    
    
    5,022,578
    
    
    
    759,488Operating expenses:Selling, general and administrative
    
    
    4,556,422
    
    
    
    4,199,663Research and development
    
    
    4,755,678
    
    
    
    3,489,780Total operating expenses
    
    
    9,312,100
    
    
    
    7,689,443Loss from operations
    
    
    (4,289,522
    )
    
    
    (6,929,955
    )Other income (expense):Foreign exchange (loss) gain
    
    
    (367,014
    )
    
    
    692,548Interest income, net
    
    
    112,221
    
    
    
    6,756Other, net
    
    
    
    
    
    
    (2,032
    )Loss before income taxes
    
    
    (4,544,315
    )
    
    
    (6,232,683
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (4,544,315
    )
    
    $
    (6,232,683
    )Net loss per common share  basic and diluted
    
    $
    (0.35
    )
    
    $
    (0.70
    )Weighted average shares outstanding  basic
and diluted
    
    
    12,958,326
    
    
    
    8,866,889
   5




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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
 Three Months Ended March 31,2010
    
    
    2009Net loss
    
    $
    (4,544,315
    )
    
    $
    (6,232,683
    )Foreign currency translation
adjustments
    
    
    76,717
    
    
    
    (586,560
    )Unrealized loss on short-term
investments
    
    
    (23,792
    )
    
    
    Comprehensive loss
    
    $
    (4,491,390
    )
    
    $
    (6,819,243
    )
   6




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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(unaudited)
 AccumulatedCommon Shares
    
    
    Additional
    
    
    
    
    
    
    OtherShares
    
    
    
    
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveIssued
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    TotalBalance, December 31, 2009
    
    
    11,786,173
    
    
    $
    11,786
    
    
    $
    176,698,329
    
    
    $
    (97,871,645
    )
    
    $
    (7,855,505
    )
    
    $
    70,982,965Issuance of common stock
pursuant to public offering,
net of offering costs
    
    
    1,767,900
    
    
    
    1,768
    
    
    
    58,487,069
    
    
    
    
    
    
    
    
    
    
    
    58,488,837Issuance of common stock
pursuant to share-based awards
    
    
    78,124
    
    
    
    78
    
    
    
    340,014
    
    
    
    
    
    
    
    
    
    
    
    340,092Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    1,726,467
    
    
    
    
    
    
    
    
    
    
    
    1,726,467Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,544,315
    )
    
    
    
    
    
    
    (4,544,315
    )Accumulated other
comprehensive loss:Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,717
    
    
    
    76,717Unrealized loss on
short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,792
    )
    
    
    (23,792
    )Balance, March 31, 2010
    
    
    13,632,197
    
    
    $
    13,632
    
    
    $
    237,251,879
    
    
    $
    (102,415,960
    )
    
    $
    (7,802,580
    )
    
    $
    127,046,971
   7




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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Three Months Ended March 31,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (4,544,315
    )
    
    $
    (6,232,683
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation
    
    
    281,039
    
    
    
    206,263Amortization
    
    
    23,226
    
    
    
    16,385Share-based compensation expense
    
    
    1,726,467
    
    
    
    294,479Amortization of premium on short-term investments
    
    
    21,448
    
    
    
    Loss on disposal of assets
    
    
    
    
    
    
    2,032Change in operating assets and liabilities:Accounts receivable
    
    
    3,553,778
    
    
    
    (934,981
    )Inventories, net
    
    
    (3,120,148
    )
    
    
    (3,176,566
    )Prepaid expenses and other current assets
    
    
    (1,244,721
    )
    
    
    3,271Accounts payable
    
    
    (1,406,311
    )
    
    
    1,105,260Accrued expenses and other current liabilities
    
    
    (83,833
    )
    
    
    1,336,586Net cash used in operating activities
    
    
    (4,793,370
    )
    
    
    (7,379,954
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of short-term investments
    
    
    (16,644,600
    )
    
    
    Additions to property, plant and equipment
    
    
    (864,848
    )
    
    
    (64,346
    )Additions to patents
    
    
    (137,222
    )
    
    
    (202,583
    )Net cash used in investing activities
    
    
    (17,646,670
    )
    
    
    (266,929
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock
    
    
    62,760,450
    
    
    
    Payment of offering costs
    
    
    (4,259,079
    )
    
    
    Proceeds from exercise of stock options
    
    
    340,092
    
    
    
    20,207Net cash provided by financing activities
    
    
    58,841,463
    
    
    
    20,207Effect of exchange rate changes on cash and cash equivalents
    
    
    46,780
    
    
    
    (585,262
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    36,448,203
    
    
    
    (8,211,938
    )CASH AND CASH EQUIVALENTS  BEGINNING OF PERIOD
    
    
    50,834,714
    
    
    
    20,803,656CASH AND CASH EQUIVALENTS  END OF PERIOD
    
    $
    87,282,917
    
    
    $
    12,591,718
   8




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HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Basis of Presentation
   2. Liquidity
    3. Significant Accounting Policies
 Principles of Consolidation
   9




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Accounting Estimates
  Cash and Cash Equivalents
  Investments
  Receivables
  Inventories, net
  Product Warranty
    10




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Three months endedMarch 31,2010
    
    
    2009Beginning balance
    
    $
    99,169
    
    
    $
    Accrual for warranties
    
    
    40,962
    
    
    
    Warranty costs incurred during the period
    
    
    (21,075
    )
    
    
    Ending balance
    
    $
    119,056
    
    
    $
    
 Fair Value Measurements
  Vendor Concentration
  Concentration of Credit Risk
   New Accounting Standards
 Software (Topic 985): Certain Revenue Arrangements That Include Software
Elements (a consensus of the FASB Emerging Issues Task Force). Software: Revenue Recognition,
  11




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Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements
 Compensation-Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades
 4. Investments
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    AggregateCost Basis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueUS corporate bonds and notes
    
    $
    16,623,152
    
    
    $
    
    
    
    $
    (23,792
    )
    
    $
    16,599,360Total short-term investments
    
    $
    16,623,152
    
    
    $
    
    
    
    $
    (23,792
    )
    
    $
    16,599,360
  5. Fair Value Measurements
 Fair Value Measurements and Disclosures,
  12




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Fair Value Measurements at the Reporting Date UsingQuoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)US corporate bonds and notes
    
    $
    16,599,360
    
    
    $
    
    
    
    $
    16,599,360
    
    
    $
    Total short-term investments
    
    $
    16,599,360
    
    
    $
    
    
    
    $
    16,599,360
    
    
    $
    
 6. Inventories, Net
  March 31,
    
    
    December 31,2010
    
    
    2009Raw material
    
    $
    4,316,776
    
    
    $
    2,984,486Work-in-process
    
    
    1,155,312
    
    
    
    1,497,591Finished goods
    
    
    6,518,963
    
    
    
    4,388,826$
    11,991,051
    
    
    $
    8,870,903
   13




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7. Property, Plant and Equipment, Net
  Estimated
    
    March 31,
    
    
    December 31,Useful Lives
    
    2010
    
    
    2009Machinery and equipment
    
    5 to 7 years
    
    $
    5,737,829
    
    
    $
    5,295,217Leasehold improvements
    
    3 to 7 years
    
    
    227,631
    
    
    
    210,570Office equipment, furniture
and fixtures
    
    5 to 7 years
    
    
    301,114
    
    
    
    278,587Purchased software
    
    5 to 7 years
    
    
    881,076
    
    
    
    487,3887,147,650
    
    
    
    6,271,762Less: accumulated depreciation
    
    
    
    
    (2,834,573
    )
    
    
    (2,552,347
    )$
    4,313,077
    
    
    $
    3,719,415
 8. Other Intangible Assets, net
  March 31, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    GrossWeighted Average Life
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmortizable Intangible Assets
    
    (Years)
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationPatents
    
    
    15
    
    
    $
    1,493,867
    
    
    $
    (187,954
    )
    
    $
    1,356,645
    
    
    $
    (164,728
    )
  9. Accrued Expenses and Other Current Liabilities
  March 31,
    
    
    December 31,2010
    
    
    2009Accrued payroll and other employee costs
    
    $
    1,543,476
    
    
    $
    2,487,066Accrued material purchases and repair and
replacement costs
    
    
    1,124,653
    
    
    
    370,226Accrued research and development expenses
    
    
    500,900
    
    
    
    344,256Accrued professional fees
    
    
    312,842
    
    
    
    347,063Other accrued expenses
    
    
    301,768
    
    
    
    299,475$
    3,783,639
    
    
    $
    3,848,086
  10. Stockholders Equity
   14




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11. Share-Based Compensation
   Three Months EndedMarch 31,2010
    
    
    2009Cost of revenues
    
    $
    268,650
    
    
    $
    15,887Selling, general and administrative
    
    
    902,058
    
    
    
    140,217Research and development
    
    
    555,759
    
    
    
    138,375$
    1,726,467
    
    
    $
    294,479
  Equity Plans
  HeartWare International, Inc. 2008 Stock Incentive Plan
   15




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Stock Options
    Three Months EndedMarch 31, 2010Dividend yield
    
    
    0
    %Expected volatility
    
    
    61.30
    %Risk-free interest rate
    
    
    2.90
    %Estimated holding period (years)
    
    
    6.25
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual Life
    
    
    AggregateShares
    
    
    Price
    
    
    (Years)
    
    
    Intrinsic ValueOutstanding at December 31,
2009
    
    
    520,835
    
    
    $
    27.96Granted
    
    
    20,000
    
    
    
    38.57Exercised
    
    
    (10,992
    )
    
    
    31.31Forfeited
    
    
    (5,751
    )
    
    
    26.17Expired
    
    
    (6,707
    )
    
    
    45.56Outstanding at March 31, 2010
    
    
    517,385
    
    
    $
    28.72
    
    
    
    7.11
    
    
    $
    8,149,120Exercisable at March 31, 2010
    
    
    284,715
    
    
    $
    29.79
    
    
    
    6.29
    
    
    $
    4,180,714
     16




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Restricted Stock Units
   WeightedAverageRemainingContractualNumber of
    
    
    Life
    
    
    AggregateUnits
    
    
    (Years)
    
    
    Intrinsic ValueOutstanding at December 31, 2009
    
    
    413,135Granted
    
    
    15,500Vested/Exercised
    
    
    (67,132
    )Forfeited
    
    
    (4,357
    )Expired
    
    
    Outstanding at March 31, 2010
    
    
    357,146
    
    
    
    9.18
    
    
    $
    15,882,283Exercisable at March 31, 2010
    
    
    
    
    
    
    
    
    
    $
    
       17




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12. Net Loss Per Common Share
  Three Months EndedMarch 31,2010
    
    
    2009Common shares issuable upon:Exercise of share-based awards
    
    
    874,531
    
    
    
    837,678
 13. Business Segment, Geographic Areas and Major Customers
   Three Months EndedMarch 31,(in thousands)
    
    2010
    
    
    2009Domestic
    
    $
    2,682
    
    
    $
    1,125International
    
    
    8,021
    
    
    
    353$
    10,703
    
    
    $
    1,478
  14. Commitments and Contingencies
  
 
  18




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19




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15. Subsequent Events
     20




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ITEM 2:
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
   Overview
      21




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Critical Accounting Policies and Estimates
   22




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Revenue Recognition
 Revenue
Recognition
 Inventories
     Share-Based Compensation
   23




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Income Taxes
  Income Taxes
  Results of Operations
 Three months ended March 31, 2010 and 2009
 Revenues, net
   24




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Cost of Revenues
   Three Months EndedMarch 31,2010
    
    
    2009Gross profit (in thousands)
    
    $
    5,023
    
    
    $
    759Gross margin %
    
    
    47
    %
    
    
    51
    %
   Selling, General and Administrative
   Three Months EndedMarch 31,(in thousands)
    
    2010
    
    
    2009
    
    
    ChangeTotal selling, general and administrative expenses
    
    $
    4,556
    
    
    $
    4,200
    
    
    
    8.5
    %
  25




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Research and Development
    Three Months EndedMarch 31,(in thousands)
    
    2010
    
    
    2009
    
    
    ChangeTotal research and development expenses
    
    $
    4,756
    
    
    $
    3,490
    
    
    
    36.3
    %
  Foreign Exchange
   Interest Income, net
   26




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Other, net
  Income Taxes
   Liquidity and Capital Resources
      27




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28




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ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
  Foreign Currency Rate Fluctuations
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   29




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PART II. OTHER INFORMATION
 
 ITEM 1A.
    
    RISK FACTORS
   Recently adopted healthcare reform legislation may impact our profitability.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 6.
    
    EXHIBITS
 31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  30




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##### Table of Contents



Signatures
  HEARTWARE INTERNATIONAL, INC.Date:      May 4, 2010
    /s/  Douglas GodshallDouglas GodshallChief Executive OfficerDate:      May 4, 2010
    /s/  David McIntyreDavid McIntyreChief Financial Officer and Chief Operating Officer  31




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##### Table of Contents



EXHIBIT INDEX
 31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act31.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the
Securities Exchange Act32.1
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32