Heartware International (HTWR) 10-Q 2011 Q3 Quarterly report

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 September 30, 2011

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

COMMISSION FILE NUMBER: 001-34256

HEARTWARE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	26-3636023
(State of Incorporation)	(I.R.S. Employer Identification No.)

205 Newbury Street, Suite 101
Framingham, Massachusetts 01701
+1 508 739 0950

(Address of principal executive offices)
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero Accelerated filerþ Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of October 24, 2011
Common Stock, $0.001 Par Value Per Share	14,053,526

PART I. FINANCIAL INFORMATION	5
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	5
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4. CONTROLS AND PROCEDURES	33
PART II. OTHER INFORMATION	35
ITEM 1. LEGAL PROCEEDINGS	35
ITEM 1A. RISK FACTORS	35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	35
ITEM 6. EXHIBITS	35
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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References

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to:

• “HeartWare,” “the Company,” “HeartWare Group,” “we,” “us” and “our” refer to HeartWare International, Inc. and its consolidated subsidiaries, HeartWare Pty. Limited, HeartWare, Inc., HeartWare GmbH, HeartWare (UK) Limited and HeartWare France SAS.

• “HeartWare International, Inc.” refers to HeartWare International, Inc., a Delaware corporation incorporated on July 29, 2008.

• “HeartWare Pty. Limited” refers to HeartWare Pty. Limited (formerly known as HeartWare Limited), an Australian proprietary corporation originally incorporated on November 26, 2004.

• “HeartWare, Inc.” refers to HeartWare, Inc., a Delaware corporation incorporated on April 3, 2003. HeartWare, Inc. was acquired by HeartWare Pty. Limited on January 24, 2005.

• “HeartWare GmbH” refers to HeartWare GmbH, a German corporation established on February 19, 2010.

• “HeartWare (UK) Limited” refers to HeartWare (UK) Limited, a limited liability corporation established in the United Kingdom on February 19, 2010.

• “HeartWare France SAS” refers to HeartWare France, a French corporation established on August 16, 2011.

Currency

Unless indicated otherwise in this Quarterly Report on Form 10-Q, all references to “$”, “U.S.$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “AU$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia, and references to “€” or “Euros” means Euros, the single currency of Participating Member States of the European Union.

Trademarks

HEARTWARE^®, HVAD^® and MVAD^®, KRITON^® and various company logos are the trademarks of the Company in the United States, Europe, Australia and other countries. All other trademarks and trade names mentioned in this Quarterly Report on Form 10-Q are the property of their respective owners.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on our management’s beliefs, assumptions and expectations and on information currently available to our management. Generally, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements, which generally are not historical in nature. All statements that address operating or financial performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements, including without limitation:

• our expectations with respect to regulatory submissions and approvals, such as United States Food & Drug Administration (“FDA”) approval of our premarket approval application for our HeartWare^® Ventricular Assist System for a bridge-to-transplant indication;

• our expectations with respect to our clinical trials, including initiation of, enrollment in or completion of our clinical trials;

• our expectations with respect to the integrity or capabilities of our intellectual property position;

• our ability and plans to commercialize our existing products;

• our ability and plans to develop and commercialize new products and the expected features and functionalities and possible benefits of these products; and

• our estimates regarding our capital requirements and availability and our financial performance, including profitability and foreign currency fluctuation.

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Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on forward-looking statements because they speak only as of the date when made. We do not assume any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by federal securities laws and the rules of the Securities and Exchange Commission (the “SEC”). We may not actually achieve the plans, projections or expectations disclosed in our forward-looking statements, and actual results, developments or events could differ materially from those disclosed in the forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, including without limitation those described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on February 24, 2011, and those described from time to time in our other filings with the SEC.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

	September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	99,124,304		$	192,148,312
Short-term investments, net		90,291,868			21,330,110
Accounts receivable, net		11,336,947			19,052,672
Inventories, net		28,573,235			15,076,590
Prepaid expenses and other current assets		5,039,322			2,406,505
Total current assets		234,365,676			250,014,189
Property, plant and equipment, net		14,827,525			7,484,022
Long-term investments, net		—			4,005,659
Other intangible assets, net		1,905,454			1,595,456
Deferred financing costs, net		2,727,671			2,939,149
Restricted cash		1,538,429			1,538,429
Total assets	$	255,364,755		$	267,576,904
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,568,149		$	3,889,643
Accrued expenses and other current liabilities		11,237,716			7,001,350
Total current liabilities		15,805,865			10,890,993
Convertible senior notes, net		92,876,969			88,921,557
Other long-term liabilities		1,947,012			—
Commitments and contingencies — See Note 16
Stockholders’ equity:
Preferred stock — $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2011 and December 31, 2010		—			—
Common stock — $.001 par value; 25,000,000 shares authorized; 14,053,526 and 13,878,686 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		14,054			13,879
Additional paid-in capital		313,186,481			302,533,344
Accumulated deficit		(160,759,907	)		(127,268,545	)
Accumulated other comprehensive loss:
Cumulative translation adjustments		(7,717,949	)		(7,548,706	)
Unrealized gain on investments		12,230			34,382
Total accumulated other comprehensive loss		(7,705,719	)		(7,514,324	)
Total stockholders’ equity		144,734,909			167,764,354
Total liabilities and stockholders’ equity	$	255,364,755		$	267,576,904

The accompanying notes are an integral part of these financial statements.

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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues, net	$	21,339,698		$	13,816,693		$	59,703,789		$	34,276,891
Cost of revenues		7,883,570			6,002,368			23,392,368			15,976,258
Gross profit		13,456,128			7,814,325			36,311,421			18,300,633
Operating expenses:
Selling, general and administrative		10,832,896			6,993,636			29,389,309			19,238,437
Research and development		12,705,042			9,312,738			32,284,700			21,579,617
Total operating expenses		23,537,938			16,306,374			61,674,009			40,818,054
Loss from operations		(10,081,810	)		(8,492,049	)		(25,362,588	)		(22,517,421	)
Other income (expense):
Foreign exchange gain (loss)		(1,433,303	)		514,191			(707,089	)		(259,309	)
Interest expense		(2,688,898	)		—			(7,940,928	)		(971	)
Investment income, net		118,322			133,775			413,422			407,254
Other, net		121,373			—			105,821			—
Loss before income taxes		(13,964,316	)		(7,844,083	)		(33,491,362	)		(22,370,447	)
Provision for income taxes		—			—			—			—
Net loss	$	(13,964,316	)	$	(7,844,083	)	$	(33,491,362	)	$	(22,370,447	)
Net loss per common share — basic and diluted	$	(1.00	)	$	(0.57	)	$	(2.41	)	$	(1.66	)
Weighted average shares outstanding — basic and diluted		13,948,162			13,752,829			13,924,182			13,467,540

The accompanying notes are an integral part of these financial statements.

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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net loss	$	(13,964,316	)	$	(7,844,083	)	$	(33,491,362	)	$	(22,370,447	)
Foreign currency translation adjustments		(260,688	)		261,075			(169,243	)		198,337
Unrealized gain (loss) on investments		3,155			76,209			(22,152	)		31,085
Comprehensive loss	$	(14,221,849	)	$	(7,506,799	)	$	(33,682,757	)	$	(22,141,025	)

The accompanying notes are an integral part of these financial statements.

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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited)

										Accumulated
	Common Shares				Additional					Other
	Shares				Paid-In		Accumulated			Comprehensive
	Issued		Amount		Capital		Deficit			Loss			Total
Balance, December 31, 2010		13,878,686	$	13,879	$	302,533,344	$	(127,268,545	)	$	(7,514,324	)	$	167,764,354
Issuance of common stock pursuant to share-based awards		174,840		175		658,548		—			—			658,723
Share-based compensation		—		—		9,994,589		—			—			9,994,589
Net loss		—		—		—		(33,491,362	)		—			(33,491,362	)
Other comprehensive loss:
Foreign currency translation adjustment		—		—		—		—			(169,243	)		(169,243	)
Unrealized loss on investments		—		—		—		—			(22,152	)		(22,152	)
Balance, September 30, 2011		14,053,526	$	14,054	$	313,186,481	$	(160,759,907	)	$	(7,705,719	)	$	144,734,909

The accompanying notes are an integral part of these financial statements.

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HEARTWARE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	Nine Months Ended September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(33,491,362	)	$	(22,370,447	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment		1,674,954			958,143
Amortization of intangible assets		99,228			73,339
Share-based compensation expense		9,994,589			8,561,918
Amortization of premium on investments		679,830			330,506
Amortization of discount on convertible senior notes		3,955,412			—
Amortization of deferred financing costs		212,078			—
Other		221,611			400,000
Change in operating assets and liabilities:
Accounts receivable		7,396,932			2,763,282
Inventories, net		(14,019,547	)		(8,348,090	)
Prepaid expenses and other current assets		(2,533,284	)		(595,181	)
Accounts payable		678,903			21,787
Accrued interest on convertible senior notes		1,257,812			—
Accrued expenses and other current liabilities		2,982,620			3,318,705
Other long-term liabilities		1,947,012			—
Net cash used in operating activities		(18,943,212	)		(14,886,038	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments		(120,658,082	)		(25,802,150	)
Maturities of investments		55,000,000			—
Additions to property, plant and equipment, net		(8,528,989	)		(4,053,433	)
Additions to patents		(409,227	)		(366,958	)
Net cash used in investing activities		(74,596,298	)		(30,222,541	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		—			62,760,450
Payment of common stock issuance costs		(600	)		(4,359,934	)
Proceeds from exercise of stock options		658,723			3,266,679
Net cash provided by financing activities		658,123			61,667,195
Effect of exchange rate changes on cash and cash equivalents		(142,621	)		104,978
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(93,024,008	)		16,663,594
CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD		192,148,312			50,834,714
CASH AND CASH EQUIVALENTS — END OF PERIOD	$	99,124,304		$	67,498,308

The accompanying notes are an integral part of these financial statements.

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HEARTWARE INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Basis of Presentation

HeartWare International, Inc., referred to in these notes collectively with its subsidiaries HeartWare Pty. Limited, HeartWare, Inc., HeartWare (UK) Limited, HeartWare GmbH and HeartWare France SAS as “we,” “our,” “HeartWare” or the “Company,” is a medical device company that develops and manufactures small implantable heart pumps, or ventricular assist devices, used in the treatment of advanced heart failure.

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting of interim financial information. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States for annual financial statements and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the audited financial statements and notes thereto for the year ended December 31, 2010 included in our Annual Report on Form 10-K. The accompanying condensed consolidated balance sheet as of December 31, 2010 has been derived from our audited financial statements. The condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and cash flows for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for any future period or for the year ending December 31, 2011.

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments (consisting of only normally recurring adjustments) necessary to present fairly the financial position and results of operations as of the dates and for the periods presented.

Note 2. Liquidity

At September 30, 2011, we had approximately $189.4 million of cash, cash equivalents and investments. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern. We have sustained substantial losses from operations since our inception, and such losses have continued through September 30, 2011. At September 30, 2011, we had an accumulated deficit of approximately $160.8 million.

We have financed our operations primarily through the issuance of shares of our common stock and the issuance of convertible notes. Most recently, in December 2010, we consummated the issuance and sale of $143.75 million aggregate principal amount of convertible notes. The convertible notes are the senior unsecured obligations of the Company. The convertible notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The convertible notes will mature on December 15, 2017, unless earlier repurchased or converted. The convertible notes will be convertible at an initial conversion rate of 10 shares of common stock per $1,000 principal amount of convertible notes, which corresponds to an initial conversion price of $100.00 per share of common stock.

For the remainder of 2011, our cash, cash equivalents and investments are expected to primarily be used to fund our ongoing operations including expanding our sales and marketing capabilities on a global basis, continuing our ENDURANCE clinical trial for destination therapy, enrolling additional patients in our ADVANCE trial under a Continued Access Protocol (“CAP”), preparing for the launch of the HeartWare System in the United States, continued product development, regulatory and other compliance functions, including costs related to our Pre-Market Approval application, as well as for general working capital. We believe our cash, cash equivalent and investment balances are sufficient to support our planned operations through 2012.

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Note 3. Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of HeartWare International, Inc., and its subsidiaries described in Note 1. All inter-company balances and transactions have been eliminated in consolidation.

Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“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 revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are recorded on our condensed consolidated balance sheets at cost, which approximates fair value. All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents.

Investments

Our investments classified as available-for-sale are stated at fair value with unrealized gains and losses reported in accumulated other comprehensive loss within stockholders’ equity. We classify our available-for-sale investments as short-term if their remaining time to maturity at purchase is beyond three months. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Interest on investments classified as available-for-sale is included in investment income, net. Premiums paid on our short-term investments are amortized over the remaining term of the investment and such amortization is included in investment income, net.

Receivables

Accounts receivable consists of amounts due from the sale of our HeartWare^® Ventricular Assist System (the “HeartWare System”) to our customers, which include hospitals, health research institutions and medical device distributors. We grant credit to customers in the normal course of business, but 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. At September 30, 2011, no customer had an accounts receivable balance greater than 10% of our total accounts receivable. At December 31, 2010, one customer had an accounts receivable balance representing approximately 13% of our total accounts receivable.

We maintain allowances for doubtful accounts for estimated losses that may result from an inability to collect payments owed to us for product sales. We regularly review the allowance by considering factors such as historical experience, the age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. Account balances are charged off against the allowance after appropriate collection efforts are exhausted and we feel it is probable that the receivable will not be recovered.

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The following table summarizes the change in our allowance for doubtful accounts for the nine months ended September 30, 2011 and 2010:

	Nine months ended
	September 30,
	2011			2010
Beginning balance	$	600,000		$	—
Additions (bad debt expense)		300,000			400,000
Deductions (charge-offs)		(573,392	)		—
Ending balance	$	326,608		$	400,000

As of September 30, 2011 and December 31, 2010, we did not have an allowance for returns.

Inventories, net

Inventories are stated at the lower of cost or market. Cost is determined using a first-in, first-out, or FIFO, method. Work-in-process and finished goods include direct and indirect labor and manufacturing overhead. Finished goods include product which is ready-for-use and which is held by us or by our customers on a consignment basis.

We review our inventory for excess or obsolete inventory and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. Obsolescence may occur due to product expiring or product improvements rendering previous versions obsolete. In May 2011, we began shipping a sintered version of the HeartWare System on a global basis. Sintering is a process whereby minute beads are adhered to a titanium surface commonly used in medical devices to facilitate tissue adhesion. The extent to which this product enhancement will cause obsolescence of existing non-sintered inventory is difficult to determine at this time as the rate of customer acceptance is dependent on many factors and our ability to provide sintered product commercially in the U.S. is subject to FDA approval. As of September 30, 2011, we had $2.1 million of non-sintered inventory on hand and this product continues to be implanted at select customer sites. However, a write-down of all or a portion of this inventory as obsolete could have a material impact on our results of operations.

Deferred Financing Costs

Costs incurred in connection with the issuance of our convertible senior notes in December 2010 have been allocated between the liability component and the equity component as further discussed in Note 11. The liability component of the issuance costs incurred was capitalized and is included in deferred financing costs, net on our condensed consolidated balance sheets. These costs are being amortized using the effective interest method through December 15, 2017, the maturity date of the notes, and such amortization expense is reflected in interest expense on our condensed consolidated statements of operations. The amount of amortization for the three and nine months ended September 30, 2011 was approximately $73,000 and $212,000, respectively.

Product Warranty

Certain patient accessories sold with the HeartWare System are covered by a limited warranty ranging from one to two years. Estimated contractual warranty obligations are recorded as an expense when the related revenue is recognized and are included in cost of revenues on our condensed consolidated statements of operations. Factors that affect the estimated warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim, and vendor supported warranty programs. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

The amount of the liability recorded is equal to the estimated costs to repair or otherwise satisfy claims made by customers. Accrued warranty expense is included as a component of accrued expenses and other current liabilities on our condensed consolidated balance sheets.

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The costs to repair or replace products associated with product recalls and voluntary service campaigns are recorded when they are determined to be probable and reasonably estimable as a cost of revenues and are not included in the product warranty liability. No such costs were incurred in the nine months ended September 30, 2011 and approximately $411,000 was incurred in the nine months ended September 30, 2010.

The following table summarizes the change in our warranty liability for the nine months ended September 30, 2011 and 2010:

	Nine months ended
	September 30,
	2011			2010
Beginning balance	$	290,891		$	99,169
Accrual for (reversal of) warranty expense		(20,491	)		229,422
Warranty costs incurred during the period		(34,171	)		(97,961	)
Ending balance	$	236,229		$	230,630

Leases

We lease all of our administrative and manufacturing facilities. We recognize rent expense on a straight-line basis over the terms of our leases. Any scheduled rent increases, rent holidays and other related incentives are recognized on a straight-line basis over the terms of the leases. The difference between the cash rental payments and the straight-line recognition of rent expense over the terms of the leases results in a deferred rent asset or liability. As of September 30, 2011, the long-term portion of our deferred rent liability of approximately $1.9 million is included in other long-term liabilities on our condensed consolidated balance sheets.

Fair Value Measurements

The carrying amounts reported on our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their fair value based on the short-term maturity of these instruments. Investments are considered available-for-sale as of September 30, 2011 and December 31, 2010 and are carried at fair value. See Note 6, “Fair Value Measurements” and Note 11, “Debt” for more information.

Vendor Concentration

For the three and nine months ended September 30, 2011, we purchased approximately 53% and 54%, respectively, of our inventory components and supplies from two vendors. For the three and nine months ended September 30, 2010, we purchased approximately 53% and 52%, respectively, of our inventory components and supplies from the same two vendors. In addition, one of these vendors supplies consulting services and material used in research and development activities. As of September 30, 2011 and 2010, the amounts due to these vendors totaled approximately $860,000 and $1.8 million, respectively.

Concentration of Credit Risk and other Risks and Uncertainties

Financial instruments that potentially expose us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade accounts receivable. Cash and cash equivalents are primarily on deposit with financial institutions in the United States and these deposits generally exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (the “FDIC”). The Company has not experienced any historical losses on its deposits of cash and cash equivalents. Our investments consist of investment grade rated corporate and government agency debt.

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Concentration of credit risk with respect to our trade accounts receivable from our customers is primarily limited to hospitals, health research institutions and medical device distributors. Credit is extended to our customers, based on an evaluation of a customer’s financial condition and collateral is not required. We have an allowance for doubtful accounts of approximately $327,000 at September 30, 2011.

We are subject to certain risks and uncertainties including, but not limited to, our ability to achieve profitability, to generate cash flow sufficient to satisfy our indebtedness, to run clinical trials in order to receive and maintain FDA and foreign regulatory approvals for our products, the ability to achieve widespread acceptance of our product, our ability to manufacture our products in a sufficient volume and at a reasonable cost, the ability to protect our proprietary technologies and develop new products, the risks associated with operating in foreign countries, and general competitive and economic conditions. Changes in any of the preceding areas could have a material adverse effect on our business, results of operations or financial position.

New Accounting Standards

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU No. 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The provisions of ASU No. 2011-04 will become effective for us on January 1, 2012 and are to be applied prospectively. We do not expect the adoption of the provisions of ASU No. 2011-04 to have a material effect on our consolidated financial position, results of operations or cash flows and we do not expect to materially modify or expand our financial statement footnote disclosures.

In June 2011, the FASB issued ASU No. 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of stockholders’ equity. The presentation requirements will become effective for us on January 1, 2012. As ASU No. 2011-05 applies to financial statement presentation matters, the adoption of ASU No. 2011-05 will not affect our consolidated financial position, results of operations or cash flows and we believe our current presentation of comprehensive income complies with the new presentation requirements.

Note 4. Investments

We have cash investment policies that limit investments to investment grade securities. At September 30, 2011 and December 31, 2010, all of our investments were classified as available-for-sale and carried at fair value. Our investments in corporate debt are guaranteed by the FDIC or foreign governments. At September 30, 2011, all of our investments had maturity dates of less than twenty-four months.

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The amortized cost and fair value of our investments, with gross unrealized gains and losses, were as follows:

At September 30, 2011

			Gross		Gross
	Amortized		Unrealized		Unrealized			Aggregate
	Cost Basis		Gains		Losses			Fair Value
Short-term investments:
U.S. government agency debt	$	25,185,201	$	3,384	$	(5,924	)	$	25,182,661
Corporate debt		15,094,437		14,770		—			15,109,207
Certificates of deposit		50,000,000		—		—			50,000,000
Total short-term investments	$	90,279,638	$	18,154	$	(5,924	)	$	90,291,868

At December 31, 2010

			Gross		Gross
	Amortized		Unrealized		Unrealized			Aggregate
	Cost Basis		Gains		Losses			Fair Value
Short-term investments:
Corporate debt	$	21,294,673	$	35,437	$	—		$	21,330,110
Total short-term investments	$	21,294,673	$	35,437	$	—		$	21,330,110
Long-term investments:
U.S. government agency debt	$	4,006,714	$	—	$	(1,055	)	$	4,005,659
Total long-term investments	$	4,006,714	$	—	$	(1,055	)	$	4,005,659

For the three and nine months ended September 30, 2011 and 2010 we did not have any realized gains or losses on our investments.

Note 5. Foreign Exchange Instruments

During the quarter ended June 30, 2011, we entered into a foreign currency forward-exchange contract in an effort to minimize the risk of future fluctuations in the exchange rate between Australian dollars and Japanese Yen. The foreign currency forward-exchange contract was directly related to an asset purchase commitment by our Australian subsidiary. We do not utilize derivative financial instruments for speculative or trading purposes.

As of September 30, 2011, the forward contract to sell Australian dollars to Japanese Yen had a notional value of AU$858,000 and an exchange rate of one Australian dollar to 83.35 Japanese Yen. As of September 30, 2011, the fair value of the forward contact was approximately $101,000, which is included in prepaid expenses and other current assets on our condensed consolidated balance sheet. During the three and nine months ended September 30, 2011, the change in the fair value of this forward exchange contract resulted in a gain of approximately $121,000 and $106,000, respectively, which is included in other, net on our condensed consolidated statements of operations.

Note 6. Fair Value Measurements

FASB ASC 820 —Fair Value Measurements and Disclosures,defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to us as of the reporting dates. Accordingly, the estimates presented in these condensed consolidated financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

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The three levels of the fair value hierarchy are as follows:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 — Instruments with primarily unobservable value drivers.

The following table represents the fair value of our financial assets and financial liabilities measured at fair value on a recurring basis and which level was used in the fair value hierarchy.

At September 30, 2011
	Carrying			Fair		Fair Value Measurements at the Reporting Date Using
	Value			Value		Level 1		Level 2		Level 3
Assets
Short-term investments	$	90,291,868		$	90,291,868	$	—	$	90,291,868	$	—
Foreign exchange instrument		101,250			101,250		—		101,250		—
Liabilities
Convertible senior notes		92,876,969	(1)		141,899,938		—		141,899,938		—

At December 31, 2010
	Carrying			Fair		Fair Value Measurements at the Reporting Date Using
	Value			Value		Level 1		Level 2		Level 3
Assets
Short-term investments	$	21,330,110		$	21,330,110	$	—		21,330,110	$	—
Long-term investments		4,005,659			4,005,659		—		4,005,659		—
Liabilities
Convertible senior notes		88,921,557	(1)		160,693,813		—		160,693,813		—

(1) The carrying amount of our convertible senior notes is net of unamortized discount. See Note 11, “Debt” for more information.

The fair value of our investments was determined using quoted prices for the instruments in markets that are not considered active. The fair value of our foreign exchange instrument was determined using observable market data such as pricing for similar instruments or recently executed transactions. The fair value of our convertible senior notes was determined using observable market data (including trade data) and is presented for disclosure purposes only.

Note 7. Inventories, Net

Components of inventories, net are as follows:

	September 30,		December 31,
	2011		2010
Raw material	$	7,671,988	$	4,279,170
Work-in-process		6,344,944		2,708,840
Finished goods		14,556,303		8,088,580
	$	28,573,235	$	15,076,590

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Finished goods inventories includes inventory held on consignment at customer sites of $4.7 million at September 30, 2011 and December 31, 2010.

Note 8. Property, Plant and Equipment, Net

Property, plant and equipment, net consists of the following:

	Estimated	September 30,			December 31,
	Useful Lives	2011			2010
Machinery and equipment	1.5 to 7 years	$	13,595,449		$	8,966,747
Leasehold improvements	3 to 7 years		3,455,520			282,483
Office equipment, furniture and fixtures	5 to 7 years		944,084			450,849
Purchased software	5 to 7 years		2,412,181			1,741,132
			20,407,234			11,441,211
Less: accumulated depreciation			(5,579,709	)		(3,957,189	)
		$	14,827,525		$	7,484,022

Note 9. Other Intangible Assets, Net

The gross carrying amount of intangible assets and the related accumulated amortization for intangible assets subject to amortization are as follows:

			September 30, 2011					December 31, 2010
	Weighted Average Life		Gross Carrying		Accumulated			Gross Carrying		Accumulated
Amortizable Intangible Assets	(Years)		Amount		Amortization			Amount		Amortization
Patents		15	$	2,270,910	$	(365,456	)	$	1,861,684	$	(266,228	)

Amortization expense for the three months ended September 30, 2011 and 2010 was approximately $35,000 and $25,000, respectively. Amortization expense for the nine months ended September 30, 2011 and 2010 was approximately $99,000 and $73,000, respectively.

Note 10. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	September 30,		December 31,
	2011		2010
Accrued payroll and other employee costs	$	5,413,767	$	4,152,833
Accrued material purchases		1,559,812		255,679
Accrued interest payable on convertible senior notes		1,467,448		209,635
Accrued research and development costs		800,762		671,928
Accrued professional fees		800,261		577,237
Accrued VAT		566,121		647,525
Other accrued expenses		629,545		486,513
	$	11,237,716	$	7,001,350

Accrued payroll and other employee costs included estimated year-end employee bonuses of approximately $3.2 million and $3.1 million at September 30, 2011 and December 31, 2010, respectively.

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Note 11. Debt

Convertible Senior Notes

On December 15, 2010, we completed the sale of 3.5% convertible senior notes due 2017 (the “Convertible Notes”) for an aggregate principal amount of $143.75 million pursuant to the terms of an Indenture dated December 15, 2010. The Convertible Notes are the senior unsecured obligations of the Company. The Convertible Notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The Convertible Notes will mature on December 15, 2017, unless earlier repurchased by us or converted.

The Convertible Notes will be convertible at an initial conversion rate of 10 shares of our common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of $100.00 per share of our common stock representing a conversion premium of approximately 23% based on the closing price of $81.31 per share of our common stock on December 9, 2010, the day the notes were priced. The conversion rate is subject to adjustment from time to time upon the occurrence of certain events.

Prior to June 15, 2017, holders may convert their Convertible Notes at their option only upon satisfaction of one or more conditions relating to the sale price of our common stock, the trading price per $1,000 principal amount of Convertible Notes or specified corporate events. On or after June 15, 2017, until the close of business of the business day immediately preceding the date the Convertible Notes mature, holders may convert their Convertible Notes at any time, regardless of whether any of the foregoing conditions have been met. As of the date of this report, none of the events that would allow holders to convert their Convertible Notes have occurred. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination thereof, at our election.

In accordance with ASC 470-20,Debt, which applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, we recorded the long-term debt and equity components on our Convertible Notes separately on the issuance date. The amount recorded for long-term debt was determined by measuring the fair value of a similar liability that does not have an associated equity component. The measurement of fair value required the Company to make estimates and assumptions to determine the present value of the cash flows of the Convertible Notes, absent the conversion feature. This treatment increased interest expense associated with our Convertible Notes by adding a non-cash component to interest expense in the form of amortization debt discount, calculated based on the difference between the 3.5% cash coupon rate and the effective interest rate on debt borrowing of approximately 12.5%. The discount is being amortized to interest expense through the December 15, 2017 maturity date of the Convertible Notes using the effective interest method and is included in interest expense on our condensed consolidated statements of operations. Additionally, we allocated the costs related to issuance of the Convertible Notes on the same percentage as the long-term debt and equity components, such that a portion of the costs is allocated to the long-term debt component and the equity component included in additional paid-in capital. The portion of the costs allocated to the long-term debt component is presented as deferred financing costs, net on our condensed consolidated balance sheets. These deferred financing costs are also being amortized to interest expense through the December 15, 2017 maturity date of the Convertible Notes using the effective interest method and such amortization is included in interest expense on our condensed consolidated statements of operations

The Convertible Notes and the equity component, which is recorded in additional paid-in-capital, consisted of the following:

	September 30,			December 31,
	2011			2010
Principal amount	$	143,750,000		$	143,750,000
Unamortized discount		(50,873,031	)		(54,828,443	)
Net carrying amount	$	92,876,969		$	88,921,557
Equity component	$	55,037,913		$	55,037,913

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Based on the initial conversion rate of 10 shares of our common stock per $1,000 principal amount of Convertible Notes, which corresponds to an initial conversion price of $100.00 per share of our common stock, the number of shares issuable upon conversion of the Convertible Notes is 1,437,500. The value of these shares, based on the closing price of our common stock on September 30, 2011 of $64.41, was approximately $92.6 million.

Interest expense related to the Convertible Notes consisted of interest due on the principal amount, amortization of the discount and amortization of the portion of the deferred financing costs allocated to the long-term debt component. For the three and nine months ended September 30, 2011, interest expense related to the Convertible Notes was as follows:

	Three Months		Nine Months
	Ended		Ended
	September 30, 2011		September 30, 2011
Stated amount at 3.5% coupon rate	$	1,257,813	$	3,773,438
Amortization of discount		1,358,259		3,955,412
Amortization of deferred financing costs		72,826		212,078
	$	2,688,898	$	7,940,928

Note 12. Stockholders’ Equity

In February 2010, we completed a public offering of approximately 1.77 million shares of our common stock, including the underwriter’s exercise of their overallotment to purchase 230,595 shares, at an offering price of $35.50 per share for aggregate gross proceeds of approximately $62.8 million. The underwriters for the transaction received a fee of 6% of the gross proceeds. After fees and related expenses, net proceeds from the offering were approximately $58.5 million.

The offering was completed pursuant to a prospectus supplement, dated January 27, 2010, to a shelf registration statement on Form S-3 that was previously filed with the SEC and which was declared effective on January 20, 2010. This shelf registration statement allows us to offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the prospectus, up to an aggregate amount of $100 million.

In the nine months ended September 30, 2011, we issued an aggregate of 20,364 shares of our common stock upon the exercise of stock options and an aggregate of 154,476 shares of our common stock upon the vesting of restricted stock units.

Note 13. Share-Based Compensation

We recognize share-based compensation expense for the portion of awards that are ultimately expected to vest using an accelerated accrual method over the vesting period from the date of grant. We estimate forfeitures at the time of grant. We have applied a forfeiture rate of approximately 12.5% to all unvested share-based awards as of September 30, 2011, which represents the portion that we expect will be forfeited over the vesting period. We reevaluate this estimated rate periodically and adjust the forfeiture rate as necessary. Vesting of share-based awards issued with performance-based vesting criteria must be “probable” before we begin recording share-based compensation expense. At each reporting period, we review the likelihood that these awards will vest and if the vesting is deemed probable, we begin to recognize compensation expense at that time. If ultimately performance goals are not met, for any awards where vesting was previously deemed probable, previously recognized compensation cost will be reversed.

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We allocate share-based compensation expense to cost of revenues, selling, general and administrative expense and research and development expense based on the award holders’ employment function. For the three and nine months ended September 30, 2011 and 2010, we recorded share-based compensation expense as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of revenues	$	546,088	$	257,536	$	1,664,950	$	733,456
Selling, general and administrative		1,992,988		1,768,618		5,646,423		6,248,595
Research and development		1,018,700		536,802		2,683,216		1,579,867
	$	3,557,776	$	2,562,956	$	9,994,589	$	8,561,918

No deferred tax benefits were attributed to our share-based compensation expense recorded in the accompanying condensed consolidated financial statements because we are in a net operating loss position and a full valuation allowance is maintained for all net deferred tax assets. We receive a tax deduction for certain stock option exercises during the period the options are exercised, and for the vesting of restricted stock units during the period the restricted stock units vest. For stock options, the amount of the tax deduction is generally equal to 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 equal to the fair market value of our shares of common stock at the vesting date. Excess tax benefits are not included in the accompanying condensed consolidated financial statements because we are in a net operating loss position and a full valuation allowance is maintained for all net deferred tax assets.

Equity Plans

We have issued share-based awards to employees, non-executive directors and outside consultants through various approved plans and outside of any formal plan. New shares are issued upon the exercise of share-based awards.

On August 5, 2008, we adopted the HeartWare International, Inc. 2008 Stock Incentive Plan (“2008 SIP”). The 2008 SIP allows for the issuance of share-based awards to employees, directors and consultants. We have issued options and restricted stock units (“RSU’s”) to employees and directors under the 2008 SIP. The plan allows for the issuance of share-based awards representing up to 13% of the prior fiscal year’s weighted average shares outstanding, less share-based awards outstanding under our other equity plans. At September 30, 2011, there were approximately 605,000 shares available for future awards under the 2008 SIP.

Stock Options

Each option allows the holder to subscribe for and be issued one share of our common stock at a specified price, which is generally the quoted market price of our common stock on the date the option is issued. Options generally vest on a pro-rata basis on each anniversary of the issuance date within four years of the date the option is issued. Options may be exercised after they have vested and prior to the specified expiry date provided applicable exercise conditions are met, if any. The expiry date can be for periods of up to ten years from the date the option is issued.

In 2007 and 2008, we granted options with performance-based vesting criteria. These performance-based options vest in four equal tranches contingent upon the achievement of pre-determined corporate milestones related primarily to the development of our products and the achievement of certain prescribed clinical and regulatory objectives. Any performance-based options that have not vested after five years from the date of grant automatically expire.

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The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model using the assumptions established at that time. The following table includes the assumptions used for options issued in the three and nine months ended September 30, 2011 and 2010.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		58.00	%		60.26	%		58.23	%		60.94	%
Risk-free interest rate		1.40	%		2.05	%		1.97	%		2.71	%
Estimated holding period (years)		6.25			6.25			6.25			6.25

Information related to options granted under all of our plans at September 30, 2011 and activity in the nine 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
				Average		Remaining
				Exercise		Contractual Life		Aggregate
	Shares			Price		(Years)		Intrinsic Value
Outstanding at December 31, 2010		404,366		$	32.87
Granted		18,250			74.53
Exercised		(20,364	)		32.35
Forfeited		(8,991	)		37.26
Expired		—			—
Outstanding at September 30, 2011		393,261		$	33.80		6.09	$	12,039,434
Exercisable at September 30, 2011		276,625		$	32.43		5.45	$	8,846,795

The aggregate intrinsic values at September 30, 2011 noted in the table above represent the closing price of our common stock traded on NASDAQ, less the weighted average exercise price at period end multiplied by the number of options outstanding or exercisable.

At September 30, 2011, 34,283 of the 116,636 options outstanding that are not yet exercisable are subject to performance-based vesting criteria as described above.

The weighted average grant date fair value per share of options issued in the nine months ended September 30, 2011 and 2010 was $41.92 and $28.62 per share, respectively.

The total intrinsic value of options exercised in the nine months ended September 30, 2011 was approximately $1.1 million. Cash received from options exercised in the nine months ended September 30, 2011 was approximately $659,000. The total intrinsic value of options exercised in the nine months ended September 30, 2010 was approximately $3.5 million. Cash received from options exercised in the nine months ended September 30, 2010 was approximately $3.3 million.

At September 30, 2011, there was approximately $1.3 million of unrecognized compensation cost related to non-vested option awards, including performance-based options not yet deemed probable of vesting. The expense is expected to be recognized over a weighted average period of 1.3 years.

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Restricted Stock Units

RSU’s issued under the plans vest on a pro-rata basis on each anniversary of the issuance date over three or four years or vest in accordance with performance-based criteria. The RSU’s with performance-based vesting criteria vest in tranches contingent upon the achievement of pre-determined corporate milestones related primarily to the development of our products and the achievement of certain prescribed clinical and regulatory objectives. RSU’s with performance-based vesting criteria not vested after five years from the date of grant automatically expire. There is no consideration payable on the vesting or exercise of RSU’s issued under the plans. Upon vesting, the RSU’s are exercised automatically and settled in shares of our common stock.

Information related to RSU’s at September 30, 2011 and activity in the nine months then ended is as follows:

				Weighted
				Average
				Remaining
				Contractual
	Number of			Life		Aggregate
	Units			(Years)		Intrinsic Value
Outstanding at December 31, 2010		544,865
Granted		75,450
Vested/Exercised		(154,476	)
Forfeited		(18,905	)
Expired		—
Outstanding at September 30, 2011		446,934			1.53	$	28,787,019
Exercisable at September 30, 2011		—			—	$	—

The aggregate intrinsic value at September 30, 2011 noted in the table above represents the closing price of our common stock traded on NASDAQ, multiplied by the number of RSU’s outstanding.

At September 30, 2011, 56,257 of the 446,934 RSU’s outstanding that are not yet exercisable are subject to performance-based vesting criteria as described above.

The total intrinsic value of RSU’s vested in the nine months ended September 30, 2011 and 2010 was approximately $9.6 million and $11.6 million, respectively.

The fair value of each RSU award equals the closing price of our common stock on the date of grant. The weighted average grant date fair value per share of RSU’s granted in the nine months ended September 30, 2011 and 2010 was $76.64 and $55.99, respectively.

At September 30, 2011, we had approximately $13.8 million of unrecognized compensation cost related to non-vested RSU awards, including awards not yet deemed probable of vesting. The expense is expected to be recognized over a weighted average period of 1.4 years.

Note 14. Net Loss Per Common 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 during the period. Diluted net loss per common share adjusts basic net loss per common share for the dilutive effects of convertible securities, options and other potentially dilutive instruments only in the periods in which such effect is dilutive. Due to our net loss for all periods presented, all potentially dilutive instruments were excluded because their inclusion would have been anti-dilutive. The following instruments have been excluded from the calculation of diluted net loss per common share, as their effect would be anti-dilutive.

	Three and Nine Months Ended
	September 30,
	2011		2010
Common shares issuable upon:
Conversion of convertible senior notes		1,767,923		—
Exercise of share-based awards		840,195		786,235

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Note 15. Business Segment, Geographic Areas and Major Customers

For financial reporting purposes, we have one reportable segment which designs, manufactures and markets medical devices for the treatment of advanced heart failure. Generally, products are sold to customers located in the United States through our clinical trials, as commercial products to customers in Europe and under special access in other countries. Product sales attributed to a country or region are based on the location of the customer to whom the products are sold. Long-lived assets are primarily held in the United States.

Product sales by geographic location are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2011		2010		2011		2010
United States	$	7,606	$	3,880	$	19,795	$	8,427
Germany		8,569		6,415		22,281		17,254
International, excluding Germany		5,165		3,522		17,628		8,596
	$	21,340	$	13,817	$	59,704	$	34,277

For the three and nine months ended September 30, 2011, no customers individually accounted for more than 10% of product sales in the respective periods. For the three and nine months ended September 30, 2010, one customer accounted for approximately 18% of product sales in both periods. As the majority of our revenue is generated outside of the U.S., we are dependent on favorable economic and regulatory environments for our products in Europe and other countries outside of the U.S.

The percentage of our revenue generated in the U.S. has increased for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 primarily due to enrollment in our ENDURANCE destination therapy trial which commenced in August 2010 and has continued in 2011.

Note 16. Commitments and Contingencies

At September 30, 2011, we had purchase order commitments of approximately $27.9 million related to product costs and property, plant and equipment purchases. Many of our materials and supplies require long lead times and as such purchase order commitments reflect materials that may be received up to one year from the date of order.

From time to time we may be involved in litigation or other contingencies arising in the ordinary course of business. Except as set forth below or in our 2010 Annual Report on Form 10-K, and based on the information presently available, management believes that there are no contingencies, claims or actions, pending or threatened, the ultimate resolution of which will have a material adverse effect on our financial position, liquidity or result of operations.

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On February 24, 2010, we received a letter from two holders of Series A Preferred Stock in HeartWare, Inc., an indirect subsidiary of HeartWare International, Inc. These holders requested various financial and other information regarding HeartWare, Inc. for the purpose of determining the Company’s compliance with their rights as holders of Series A Preferred Stock, including whether a liquidation event has occurred since inception in 2003. HeartWare, Inc. issued Series A-1 and Series A-2 Preferred Stock to certain equity holders of Kriton Medical, Inc. when HeartWare, Inc. purchased substantially all of the assets of Kriton in July 2003. The Series A-1 and Series A-2 Preferred Stock do not have voting or dividend rights but entitle the holders thereof to receive, upon certain liquidation events of HeartWare, Inc. (but not the liquidation of or change of control of HeartWare International, Inc.), an amount equal to $10 per share of Series A-1 and $21 per share of Series A-2. The aggregate liquidation preference payment obligation totals approximately $15 million.

On June 27, 2011, HeartWare International, Inc. and HeartWare, Inc., along with HeartWare’s directors, certain officers and a significant stockholder, were named as defendants in a putative class action lawsuit filed in Massachusetts state court by two other Series A Preferred Stockholders on behalf of all holders of Series A Preferred Stock. The complaint alleges that the defendants breached their fiduciary and contractual obligations to Series A Preferred Stockholders by preventing them from receiving a payment of the liquidation preference in connection with certain corporate transactions, including a transaction in 2005 in which HeartWare, Inc. was acquired by HeartWare Limited, a subsidiary of HeartWare International, Inc. The plaintiffs seek monetary damages, interest, costs and limited equitable relief. We do not believe HeartWare International, Inc., HeartWare, Inc. or any of our directors, officers or stockholders have abrogated the rights, or in any way failed to satisfy obligations owed to, any of our stockholders, including holders of Series A Preferred Stock. On September 12, 2011, the defendants served on plaintiffs a motion to dismiss the complaint with prejudice.

In accordance with ASC 450, Contingencies, we accrue loss contingencies including costs of settlement, damages and defense related to litigation to the extent they are probable and 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. As of September 30, 2011 we have not accrued any amounts related to the above litigation.

Note 17. Subsequent Events

We have evaluated events and transactions that occurred subsequent to September 30, 2011 through the date the financial statements were issued, for potential recognition or disclosure in the accompanying condensed consolidated financial statements.

We did not identify any events or transactions that should be recognized or disclosed in the accompanying condensed consolidated financial statements.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Certain abbreviated key terms have the meanings defined elsewhere in this Quarterly Report on Form 10-Q.

Overview

HeartWare develops and manufactures miniaturized implantable heart pumps, or ventricular assist devices, to treat patients suffering from advanced heart failure.

The HeartWare^® Ventricular Assist System (the “HeartWare System”), which includes a left ventricular assist device (“LVAD”), or blood pump, patient accessories and surgical tools, is designed to provide circulatory support for patients in the advanced stage of heart failure. The core of the HeartWare System is a proprietary continuous flow blood pump, the HVAD^® Pump, which is a full-output device capable of pumping up to 10 liters of blood per minute. The HeartWare System is designed to be implanted adjacent to the heart, avoiding the abdominal surgery generally required to implant similar devices.

In 2009, we received CE Marking for the HeartWare System in the European Union allowing for commercial sale and distribution of our device. In the U.S., the device is the subject of clinical trials for two indications: bridge-to-transplant and destination therapy. Our device is also available in other countries around the world under special access programs.

Recent key milestones in the development and commercialization of the HeartWare System include the following:

• Submission of a Pre-Market Approval application for our HeartWare System based on data generated in our ADVANCE bridge-to-transplant clinical trial, subsequent acceptance by the FDA of the application for filing and response to the FDA regarding review questions;

• Being named to the REVIVE-IT study, a study to be completed by the Universities of Michigan and Pittsburgh on the benefits of LVAD’s in patients with earlier access to the device;

• Approval of the HeartWare System by the Therapeutic Goods Administration (TGA) in Australia for listing on the Australian Register of Therapeutic Goods;

• Approval by the U.S. FDA for use in our clinical trials and notification of acceptance by the British Standards Institution of a sintered inflow tube;

• Reimbursement approval in France and Belgium of the HeartWare System; and

• Presentation at the 25th European Association for Cardio-Thoracic Surgery of clinical data from our ADVANCE bridge-to-transplant clinical trial and the Continued Access Protocol (CAP). The updated data for 241 patients enrolled in either the pivotal trial ADVANCE or CAP demonstrated a 180-day survival of 93 percent.

Beyond the HeartWare System, we are also evaluating our next generation device, the MVAD^® Pump. The MVAD Pump is a development-stage miniature ventricular assist device, approximately one-third the size of the HVAD Pump. The MVAD Pump is based on the same proprietary impeller suspension technology used in the HVAD Pump, with its single moving part held in place through a combination of passive-magnetic and hydrodynamic forces. Like the HVAD Pump, the MVAD Pump is designed to support the heart’s full cardiac output, yet also has the capability for partial support. On September 9, 2011, pre-clinical data was presented at the 19th Congress of the International Society for Rotary Blood Pumps (ISRBP), which demonstrated that the MVAD Pump attained the objectives for system performance, hemocompatability and biocompatibility in Good Laboratory Practice (“GLP”) animal studies, a precursor to human clinical trials. We are currently preparing to commence human clinical studies in 2012. The MVAD Pump is designed to be implantable by surgical techniques that are even less invasive than those required to implant the HVAD Pump.

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We began generating revenue from our products in August 2008 and have incurred net losses in each year since our inception. We expect our losses to continue as we advance and expand our clinical trial activities in the U.S., continue to develop commercial markets outside of the U.S., and expand our research and development into next generation products including the MVAD Pump.

We have financed our operations primarily through the issuance of convertible notes and the issuance of shares of our common stock. Most recently, on December 15, 2010, we issued convertible notes with an aggregate principal amount of $143.75 million pursuant to the terms of an Indenture dated as of December 15, 2010. The convertible notes are senior unsecured obligations of the Company. The convertible notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. The convertible notes will mature on December 15, 2017, unless earlier repurchased or converted.

We are headquartered in Framingham, Massachusetts. We have an operations and manufacturing facility in Miami Lakes, Florida, a small development and operations facility in Sydney, Australia and a small distribution and customer service facility in Hannover, Germany.

Critical Accounting Policies and Estimates

We prepare our financial statements in accordance with accounting principles generally accepted in the United States. We are required to adopt various accounting policies and to make estimates and assumptions in preparing our financial statements that affect the reported amounts of our assets, liabilities, revenue and expenses. Our significant accounting policies are disclosed in Note 3 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (“2010 Annual Report on Form 10-K”) filed with the Securities and Exchange Commission on February 24, 2011. During the nine months ended September 30, 2011, there were no significant changes to any of our significant accounting policies. We have included and expanded the disclosures for certain of our significant accounting policies as disclosed in Note 3 to the accompanying condensed consolidated financial statements.

Our most critical accounting policies and estimates include: revenue recognition, inventory capitalization, accounting for share-based compensation, measurement of fair value, income taxes and reserves. We also have other key accounting policies that are less subjective and, therefore, their application is less subject to variations and would not have a material impact on our reported results of operations. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience to the extent practicable and on various other assumptions that we believe are reasonable under the circumstances and at the time they are made. If our assumptions prove inaccurate or if our future results are not consistent with our historical experience, we may be required to make adjustments in our policies that affect our reported results. There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded in our 2010 Annual Report on Form 10-K.

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Results of Operations

Three and nine months ended September 30, 2011 and 2010

Revenues, net

In the three and nine months ended September 30, 2011 and 2010, we generated revenue from commercial sales outside of the U.S. and sales in connection with our clinical trials in the U.S. The increase in revenue from the comparable periods in 2010, is due to increased implants in the U.S., as we have two clinical studies on-going as compared to one in 2010, and increased market penetration outside of the U.S.

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
(in thousands)	2011		2010		Change			2011		2010		Change
Revenues, net	$	21,340	$	13,817		54	%	$	59,704	$	34,277		74	%

For the three months ended September 30, 2011, approximately 64% of our product sales were derived from commercial sales outside of the United States, predominantly in Europe, compared to approximately 72% for the three months ended September 30, 2010.

For the nine months ended September 30, 2011, approximately 67% of our product sales were derived from commercial sales outside of the United States, predominantly in Europe, compared to approximately 75% for the nine months ended September 30, 2010.

We operate in multiple currencies outside of the U.S., with the majority of our international revenue denominated in Euro. During the three and nine months ended September 30, 2011, our net international revenue increased $3.8 million, or 38%, and $14.1 million, or 54%, respectively, as compared to the same periods in the prior year. The change in exchange rates for all foreign currencies for the three and nine months ended accounted for approximately $1.1 million and $2.5 million of the increase in each period.

We expect to continue to generate and grow commercial revenue from product sales as we further expand our sales and marketing efforts outside of the United States and continue enrollment of our destination therapy clinical trial, ENDURANCE, in the U.S. Notwithstanding our plans to generally expand our U.S. clinical programs, revenues from U.S. sources in connection with our trials may vary from quarter to quarter as the recruitment of qualified patients that meet protocol criteria fluctuate and additional CAP cohorts are subject to FDA approval.

Future product sales are dependent on many factors, including receiving and maintaining the necessary regulatory approvals in the U.S. and internationally, perception of product performance and market acceptance among physicians, patients, health care payers and the medical community as well as our capacity to meet customer demand by manufacturing sufficient quantities of our products.

Cost of Revenues

Cost of revenues includes costs associated with manufacturing our product and consists of direct materials, labor and overheard expenses allocated to the manufacturing process. Cost of revenues totaled approximately $7.9 million and $6.0 million in the three months ended September 30, 2011 and 2010, respectively. Cost of revenues totaled approximately $23.4 million and $16.0 million in the nine months ended September 30, 2011 and 2010, respectively.

Gross profit and gross margin percentage are as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands)	2011			2010			2011			2010
Gross profit	$	13,456		$	7,814		$	36,311		$	18,301
Gross margin %		63.1	%		56.6	%		60.8	%		53.4	%

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Gross margin percentage for the three and nine months ended September 30, 2011 increased compared to the same periods in 2010 as a result of lower per unit costs in 2011 primarily due to increased production volume and improved efficiencies in our manufacturing processes.

Selling, General and Administrative

Selling, general and administrative expenses include costs associated with selling and marketing our products and the general corporate administration of the Company. These costs are primarily related to salaries and wages and related employee costs, travel, external consultants and contractors, legal and accounting fees and general infrastructure costs, and include all operating costs not associated with or otherwise classified as research and development costs or cost of revenues.

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands)	2011		2010		Change			2011		2010		Change
Total selling, general and administrative	$	10,833	$	6,994		55	%	$	29,389	$	19,238		53	%

The increase of $3.8 million for the three months ended September 30, 2011 as compared to three months ended September 30, 2010 was primarily a result of an increase in employee costs, including salaries and wages and related costs, of approximately $1.6 million, primarily due to increased headcount to build our global sales and marketing and administrative functions to support expected future growth. We also experienced increases in office expenses of $659,000, legal costs of $485,000, travel expenses of $404,000 and non-cash share-based compensation expense of $224,000.

The increase of $10.2 million for the nine months ended September 30, 2011 was primarily a result of an increase in employee costs, including salaries and wages and related costs, of approximately $4.3 million, primarily due to increased headcount. We also experienced increases in office expenses of $1.7 million, travel expenses of $1.5 million, marketing expenses of $1.1 million and legal costs of $1.0 million. These increases were partially offset by a decrease in non-cash share-based compensation expense of approximately $602,000.

We expect our selling, general and administrative expenses to increase significantly in 2011 compared to 2010 as we continue to expand our sales and distribution capabilities as well as our administrative capabilities to support our overall corporate growth. We have and will continue to experience an increase in our employee headcount as well as an increase in costs associated with the necessary administrative infrastructure to support this expansion.

Research and Development

Research and development expenses are the direct and indirect costs associated with developing our products prior to commercialization and are expensed as incurred. These expenses fluctuate based on project level activity and consist primarily of salaries and wages and related employee costs of our research and development, clinical and regulatory staff, external research and development costs, and materials and expenses associated with clinical trials. Additional costs include travel, facilities and overhead allocations.

	Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands)	2011		2010		Change			2011		2010		Change
Total research and development expenses	$	12,705	$	9,313		36	%	$	32,285	$	21,580		50	%

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The increase of $3.4 million for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 was primarily due to an aggregate increase in costs associated with development projects, including the costs of supplies and components, animal studies, consultants and contractors, of $1.7 million, primarily related to MVAD system development. We also experienced an increase in clinical trial costs of $766,000, primarily due to our ENDURANCE clinical trial for destination therapy, an increase in employee costs, including salaries and wages and related costs, of approximately $1.1 million and an increase in non-cash share-based compensation of $482,000. These increases were partially offset by a decrease in outside engineering costs associated with our development projects of $949,000.

The increase of $10.7 million for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 was primarily due to an increase in costs associated with development projects, including consumables, animal studies, outside engineering, consultants and contractors, of $5.0 million, primarily related to MVAD development. We also experienced an increase in employee costs, including salaries and wages and related costs, of approximately $2.6 million and an increase in share-based compensation of $1.1 million. Costs associated with our U.S. clinical trials increased by $1.0 million.

Even with commercial approval of the HeartWare System in Europe, we expect that research and development expenses will continue to represent a significant portion of our operating expenses for the foreseeable future related to clinical trials in the U.S. and new product development, including costs related to the development of the MVAD system.

Foreign Exchange

We generate a substantial portion of our revenues and collect receivables in foreign currencies. Fluctuations in the exchange rate of the U.S. dollar against the Euro, British Pound and Australian dollar can result in foreign currency exchange gains and losses that may significantly impact our financial results. Continued fluctuation of these exchange rates could result in financial results that are not comparable from quarter to quarter. As discussed in Note 5, we entered into a foreign currency forward-exchange contract related to an asset purchase commitment by our Australian subsidiary. The purchase is denominated in a currency in which we do not normally transact business. Notwithstanding this foreign currency forward-exchange contract, we do not currently utilize foreign currency contracts to mitigate foreign exchange gains and losses.

In the three and nine months ended September 30, 2011, our net foreign exchange losses totaled approximately $1.4 million and $707,000, respectively. In the three months ended September 30, 2010, our net foreign exchange gains totaled approximately $514,000, while in the nine months ended September 30, 2010, our net foreign exchange losses totaled approximately $259,000. In 2011 and 2010, the majority of our realized and unrealized foreign exchange gains and losses were experienced upon the collection of certain accounts receivable that were denominated in foreign currencies, and the translation to U.S. dollars of customer accounts receivable denominated in foreign currencies at period end, primarily the Euro. We expect to continue realizing foreign exchange gains and losses for the foreseeable future as the majority of our sales denominated in foreign currencies are settled in Euros.

Interest Expense

Interest expense in 2011 consists of interest incurred on the principal amount of our convertible senior notes issued in December 2010, amortization of the related discount and amortization of the portion of the deferred financing costs allocated to the debt component. The convertible senior notes bear interest at a rate of 3.5% per annum. The discount on the convertible senior notes and the deferred financing costs are being amortized to interest expense through the December 15, 2017 maturity date of the convertible senior notes using the effective interest method.

Interest expense was approximately $2.69 million in the three months ended September 30, 2011. Interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate was approximately $1.26 million and non-cash amortization of the discount and deferred financing costs totaled approximately $1.43 million.

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Interest expense was approximately $7.94 million in the nine months ended September 30, 2011. Interest incurred on the principal amount of the convertible notes at the 3.5% coupon rate was approximately $3.77 million and non-cash amortization of the discount and deferred financing costs totaled approximately $4.17 million.

Investment Income, net

Investment income is primarily derived from investments and cash and short-term deposit accounts held in the U.S. The amortization of premium on our investments is also included in investment income, net. Investment income, net was approximately $118,000 and $413,000 in the three and nine months ended September 30, 2011, respectively, compared to $134,000 and $407,000 in the same periods in the prior year. While we have had greater cash and investments balances during 2011 as a result of the issuance of our convertible senior notes in December 2010, we have experienced lower interest rates in 2011 compared to 2010.

Income Taxes

We are subject to taxation in the United States and jurisdictions outside of the United States. These jurisdictions have different marginal tax rates. While we have incurred losses since inception, changes in issued capital and share ownership, as well as other factors, may limit our ability to utilize any net operating loss carry-forwards, and as such a 100% valuation allowance has been recorded against our net deferred tax assets.

As of September 30, 2011, we did not have revenues or profit which would be sufficient to allow any portion of our deferred tax assets to be recorded. We intend to monitor closely whether to record a deferred tax asset as we further expand the commercialization of our products.

Liquidity and Capital Resources

As of September 30, 2011, our cash and cash equivalents were approximately $99.1 million as compared to $192.1 million at December 31, 2010. The decrease is primarily a result of cash used to support our operating and investing activities and the purchase of short-term investments, partially offset by cash proceeds from the exercise of stock options.

Following is a summary of our cash flow activities:

	Nine Months Ended September 30,
	2011			2010
	(in thousands)
Net cash used in operating activities	$	(18,943	)	$	(14,886	)
Net cash used in investing activities		(74,596	)		(30,222	)
Net cash provided by financing activities		658			61,667
Effect of exchange rate changes on cash and cash equivalents		(143	)		105
Net (decrease) increase in cash and cash equivalents	$	(93,024	)	$	16,664

Cash Used in Operating Activities

For the nine months ended September 30, 2011, cash used in operating activities included a net loss of approximately $33.5 million and non-cash adjustments to net loss totaling approximately $16.8 million, which primarily consisted of $10.0 million of share-based compensation, $4.0 million for the amortization of the discount on our convertible notes and $1.8 million of depreciation and amortization on long-lived assets. Also included in cash used in operating activities in the nine months ended September 30, 2011 is approximately $14.0 million for the purchase and manufacture of inventories and $2.5 million for prepaid expenses. These amounts were partially offset by net collections of trade accounts receivable of $7.4 million, an increase in accrued expenses of $3.0 million, an increase in deferred rent of $1.9 million and an increase in trade accounts payable of $679,000.

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For the nine months ended September 30, 2010, cash used in operating activities included a net loss of approximately $22.4 million, non-cash adjustments to net loss of approximately $10.3 million and changes in assets and liabilities of $2.8 million. Non-cash adjustments primarily consisted of share-based compensation of approximately $8.6 million and $1.0 million of depreciation and amortization on long-lived assets. Changes in assets and liabilities included a use of cash of approximately $8.3 million for the purchase and manufacture of inventories partially offset by $2.8 million in net accounts receivable collections.

Cash Used in Investing Activities

In the nine months ended September 30, 2011, net cash used for the purchase (net of maturities in 2011) of available-for sale securities was $65.7 million compared to $25.8 million in the nine months ended September 30, 2010. Other investing activities in the nine months ended September 30, 2011 and 2010 used cash of approximately $8.9 million and $4.4 million, respectively. These amounts were expended to acquire property, plant and equipment and for capitalized patent costs.

Cash Provided by Financing Activities

In February 2010, we completed a public offering of approximately 1.77 million shares of our common stock, including the underwriter’s exercise of their over-allotment option to purchase 230,595 shares, at an offering price of $35.50 per share for aggregate gross proceeds of approximately $62.8 million. After fees and expenses, net proceeds from the offering were approximately $58.5 million. The offering was completed pursuant to a prospectus supplement, dated January 27, 2010, to a shelf registration statement previously filed with the SEC and which was declared effective on January 20, 2010. This shelf registration statement allows us to offer and sell from time to time, in one or more series or issuances and on terms that we will determine at the time of the offering, any combination of the securities described in the prospectus, up to an aggregate amount of $100 million.

The exercise of stock options in the nine months ended September 30, 2011 and 2010 resulted in cash proceeds of approximately $659,000 and $3.3 million, respectively.

Operating Capital and Capital Expenditure Requirements

We have incurred operating losses to date and anticipate that we will continue to incur substantial net losses as we expand our sales and marketing capabilities, develop new products and seek regulatory approvals for the HeartWare System in the U.S. For the remainder of 2011, cash on hand is expected to primarily be used to fund our ongoing operations, including;

• expanding our sales and marketing capabilities on a global basis,

• continuing implants in the U.S. under a CAP and in our U.S. destination therapy clinical study,

• continued product development,

• regulatory activities, including PMA submissions and testing, and other compliance functions, and

• general working capital.

We expect to experience increased cash requirements for inventory and property related to the expansion of our manufacturing capabilities, including the build-out of our new manufacturing facility located in Miami Lakes, Florida, to support continued growth.

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Our convertible notes bear interest at a rate of 3.5% per annum, payable semi-annually in arrears on June 15 and December 15 of each year. The $2.5 million interest payment that was due on June 15, 2011 was paid on a timely basis. Based on the outstanding principal amount of our convertible senior notes at September 30, 2011, the semi-annual interest payment due on December 15, 2011 will be approximately $2.5 million. This amount is expected to be paid from cash on hand.

We believe cash on hand and investment balances as of September 30, 2011 are sufficient to support our planned operations throughout the remainder of 2011 and 2012.

Because of the numerous risks and uncertainties associated with the development of medical devices and the current economic situation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to obtain regulatory approvals in the U.S., fund commercial expansion outside of the U.S. and develop new products. Our future capital requirements will depend on many factors, including but not limited to the following:

• commercial acceptance of our products;

• costs to manufacture our products;

• expenses required to operate multiple clinical trials;

• further product research and development for next generation products and peripherals and expanding indications for our products as well as efforts to sustain and maintain incremental improvements to existing products;

• expanding our sales and marketing capabilities on a global basis, including building a team to support U.S. commercialization should the FDA approve our device for marketing in the U.S.;

• broadening our infrastructure in order to meet the needs of our growing operations; and

• complying with the requirements related to being a public company in both the United States and Australia.

Contractual Obligations

As of January 15, 2011, we entered into a Public, Private Partnership Agreement with the Regents of the University of Michigan whereby HeartWare, Inc. will act as industry sponsor of a study conducted by University of Michigan Cardiovascular Center and the University of Pittsburgh exploring the potential benefits of LVADs in patients who will be given earlier access to these devices under a grant awarded from the National Heart, Lung and Blood Institute. In the study, called REVIVE-IT, researchers will compare whether non-transplant eligible patients with heart failure less advanced than that of current LVAD recipients do better with implanted devices than with current medical therapy. Pursuant to the terms of the agreement, we have committed to provide financial support up to $9.6 million over the five-year term of the agreement.

Other than the financial commitment discussed above, in the nine months ended September 30, 2011, there were no material changes to our contractual obligations provided in Part II, Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded in our 2010 Annual Report on Form 10-K filed with the SEC on February 24, 2011, outside the ordinary course of business.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Interest Rate Risk

Our exposure to interest rate risk is currently confined to interest earnings on our cash and cash equivalents that are invested in highly liquid money market funds, short-term time deposits, short-term bank notes and short-term commercial paper. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to generate reasonable income from our investments without assuming significant risk. We do not presently use derivative financial instruments in our investment portfolio. Our cash and investments policy emphasizes liquidity and preservation of principal over other portfolio considerations.

Our convertible senior notes do not bear interest rate risk as the notes were issued with a fixed interest rate of 3.5% per annum.

Foreign Currency Rate Fluctuations

We conduct business in foreign countries. For U.S. reporting purposes, we translate all assets and liabilities of our non-U.S. entities at the period-end exchange rate and revenues and expenses at the average exchange rates in effect during the periods. The net effect of these translation adjustments is shown in the accompanying condensed consolidated financial statements as a component of stockholders’ equity.

We generate a significant portion of our revenues and collect receivables in foreign currencies. Fluctuations in the exchange rate of the U.S. dollar against major foreign currencies, including the Euro, British Pound and Australian dollar, can result in foreign currency exchange gains and losses that may significantly impact our financial results. These foreign currency transaction gains and losses are presented as a separate line item on our condensed consolidated statements of operations. Continued fluctuation of these exchange rates could result in financial results that are not comparable from quarter to quarter. We do not currently utilize foreign currency contracts to mitigate the gains and losses generated by the remeasurement of non-functional currency assets and liabilities but do hold cash reserves in currencies in which those reserves are anticipated to be expended.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of September 30, 2011. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Thus, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 16, “Commitments and Contingencies” in the accompanying condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

In addition to the information set forth in this report you should carefully consider the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on February 24, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 2, 2010, we completed an underwritten public offering of 1,767,900 shares of our common stock (including 230,595 shares issued as a result of the full exercise of an overallotment option by the underwriter) at a price to the public of $35.50 per share, or an aggregate offering price of $62.8 million. The offer and sales of the shares in the offering were registered under the Securities Act of 1933 pursuant to a shelf registration statement on Form S-3 (File No. 333-164004), which became effective on January 20, 2010 and which registered up to $100 million of our common stock.

We raised approximately $58.5 million in the offering, after deducting underwriting discounts and commissions of $3.8 million and other estimated offering costs of $470,000. No payments were made by us to our directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates. Through September 30, 2011, we have used approximately $56.8 million of the net proceeds of the offering, including approximately $20.1 million for the purchase and manufacture of inventories, approximately $24.0 million for general working capital and approximately $12.7 million for purchases of property, plant and equipment.

ITEM 6. EXHIBITS

3.1	Certificate of Incorporation of HeartWare International, Inc. (1)
3.2	Bylaws of HeartWare International, Inc. (1)
31.1	Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act
31.2	Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the respective exhibits filed with the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2008.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HEARTWARE INTERNATIONAL, INC.
Date: November 3, 2011	/s/ Douglas GodshallDouglas Godshall
	Chief Executive Officer
Date: November 3, 2011	/s/ David McIntyreDavid McIntyre
	Chief Financial Officer and Chief Operating Officer
	(Principal Financial Officer)
Date: November 3, 2011	/s/ Lauren FarrellLauren Farrell
	Vice President, Finance (Principal Accounting Officer)

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EXHIBIT INDEX

31.1	Certification of Chief Executive Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act
31.2	Certification of Chief Financial Officer pursuant to Rule 13A-14(a) or Rule 15d-14(a) of the Securities Exchange Act
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

37