| Balance Sheet Information | Note 3. Balance Sheet Information
Accounts Receivable
Accounts receivable consists of amounts due from the sale of our
HeartWare Ventricular Assist System (the “HVAD System”)
to our customers, which include hospitals, health research
institutions and medical device distributors. We grant credit to
customers in the normal course of business, but generally do not
require collateral or any other security to support credit sales.
Our receivables are geographically dispersed, with a significant
portion from customers located in Europe and other foreign
countries. We had one customer with an accounts receivable balance
representing approximately 23% and 17% of our total accounts
receivable at June 30, 2016 and December 31, 2015,
respectively. A portion of this account receivable was classified
as long-term as of June 30, 2016 and December 31, 2015 in
accordance with our payment terms with this customer.
We maintain allowances for doubtful accounts for estimated losses
that may result from an inability to collect payments owed to us
for product sales. We regularly review the allowance by considering
factors such as historical experience, the age of the accounts
receivable balances and local economic conditions that may affect a
customer’s ability to pay. Account balances are charged off
against the allowance after appropriate collection efforts have
been exhausted and we feel it is probable that the receivable will
not be recovered.
The following table summarizes the change in our allowance for
doubtful accounts for the six months ended June 30, 2016 and
2015:
2016 2015
(in
thousands)
Beginning balance $ 676 $ 671
Accrual/(Reversal) of expense 67 (41 )
Charge-offs
—
—
Ending balance $ 743 $ 630
As of June 30, 2016 and December 31, 2015, we recorded
customer sales allowances of $73,000 and $81,000, respectively.
Inventories, net
Components of inventories are as follows:
June 30,
December 31,
2016 2015
(in
thousands)
Raw material $ 12,394 $ 17,940
Work-in-process 9,826 8,858
Finished goods 15,644 13,149
$ 37,864 $ 39,947
Finished goods inventories includes inventory held on consignment
at customer sites of approximately $7.9 million at June 30,
2016 and $6.2 million at December 31, 2015. The increase in
consignment inventory as of June 30, 2016 is due to
pre-shipment of batteries to execute a field action announced in
September 2015 (see Accrued Field Action Costs for more
information).
Beginning in the period ending March 31, 2016 we reassessed
certain inventory policies based on recent trends, including sales,
usage and forecasted usage of specific inventory items. As a
result, we expect that certain inventory to be held beyond one
year. As of June 30, 2016, approximately $7.3 million of raw
material inventory was classified as non-current inventory and
included within other assets on the accompanying consolidated
balance sheet. To reflect the result of this change, for
consistency we reclassified approximately $7.7 million of raw
material inventory as of December 31, 2015 from current assets
to non-current and included within other assets on the consolidated
balance sheet.
Property, Plant and Equipment, Net
Property, plant and equipment, net consists of the following:
Estimated
June 30,
December 31,
Useful Lives 2016 2015
(in
thousands)
Machinery and equipment
1.5 to 7 years $ 22,575 $ 21,785
Leasehold improvements 3 to 10 years 8,923 8,891
Office equipment, furniture and fixtures 5 to 7 years 2,105 2,105
Purchased software 1 to 7 years 8,986 7,575
42,589 40,356
Less: accumulated depreciation (28,054 ) (25,258 )
$ 14,535 $ 15,098
Long-Term Investment
Long-term investment consists of an investment in Valtech Cardio,
Ltd.
As of June 30, 2016, we have invested approximately $49.4
million in Valtech Cardio, Ltd (“Valtech”), an
early-stage, privately held company headquartered in Or Yehuda,
Israel specializing in the development of devices for mitral and
tricuspid valve repair and replacement. Our investment is carried
in long-term investments and other assets and consists of the
following:
June 30,
December 31,
2016 2015
(in
thousands)
Preferred Stock $ 10,495 $ 10,495
Convertible Promissory Notes Receivable, due July 10, 2017 8,320 7,125
Convertible Promissory Notes Receivable, due February 1,
2019 30,613
—
$ 49,428 $ 17,620
In October 2013, we invested $10 million in Valtech in the form of
a convertible promissory note with an interest rate of 6% per
annum (the “2013 Note”), which, along with net accrued
interest, has since been converted to Valtech equity pursuant to
the terms of the 2013 Note.
In July 2015, we invested an additional $5 million in Valtech in
the form of a convertible promissory note with an interest rate of
6% per annum.
On September 1, 2015, we entered into a Business Combination
Agreement (the “BCA”) by and among the Company,
Valtech, HW Global, Inc. (“Holdco”), HW Merger Sub,
Inc., Valor Merger Sub Ltd. and Valor Shareholder Representative,
LLC, pursuant to which we and Valtech proposed to effect a
strategic combination of our respective businesses under Holdco,
subject to certain closing conditions. Effective January 28,
2016, we terminated the BCA pursuant to the terms of the BCA by
delivering written notice to the other parties. After entering into
the BCA and pursuant to the terms of the BCA, we loaned Valtech an
aggregate principal amount of $3 million in interim funding at an
interest rate of 6% per annum in $1 million increments in each
of November 2015, December 2015 and January 2016. In
connection with the termination provisions of the BCA, we loaned
Valtech an additional $30 million on February 1, 2016 also in
the form of a convertible promissory note with an interest rate of
6% per annum. We have no current contractual obligations to
further fund Valtech.
Upon maturity, each of the convertible promissory notes become due
and payable in cash or Valtech preferred stock, at the option of
Valtech, pursuant to terms of the convertible promissory notes. If
the convertible promissory notes become due and payable upon an
event of default (as defined in the notes), we determine whether
the notes are paid in cash or Valtech preferred stock.
Our investment in Valtech was deemed to be realizable as of
June 30, 2016. The fair value of this investment has not been
estimated as of June 30, 2016 and December 31, 2015 as no
impairment indicators were identified.
Other Assets
Other assets consist of the following:
June 30,
December 31,
2016 2015
(in
thousands)
Long-term inventory 7,287 7,739
Long-term receivables 3,659 2,539
Security deposits 2,407 2,586
Other assets
— 980
$ 13,353 $ 13,844
Other Accrued Liabilities
Other accrued liabilities consist of the following:
June 30,
December 31,
2016 2015
(in
thousands)
Accrued payroll and other employee costs $ 12,031 $ 14,068
Accrued field action 4,175 8,503
Accrued warranty 5,505 6,116
Accrued material purchases 967 4,107
Accrued professional fees 2,940 2,685
Accrued research and development costs 1,335 2,191
Accrued restructuring costs 1,329 1,955
Accrued VAT 1,286 1,238
Other accrued expenses 5,457 5,026
$ 35,025 $ 45,889
Accrued payroll and other employee costs
Accrued payroll and other employee costs included estimated
year-end employee bonuses of approximately $5.2 million and $8.0
million at June 30, 2016 and December 31, 2015,
respectively.
Accrued Warranty
Certain patient accessories sold with the HVAD System are covered
by a limited warranty ranging from one to two years. Estimated
warranty obligations are recorded as an expense when the related
revenue is recognized and are included in cost of revenue on our
condensed consolidated statements of operations. Factors that
affect the estimated warranty liability include the number of units
sold, historical and anticipated rates of warranty claims, cost per
claim, and vendor-supported warranty programs. We periodically
assess the adequacy of our recorded warranty liabilities and adjust
the amounts as necessary. The amount of the liability recorded is
equal to the estimated costs to repair or otherwise satisfy claims
made by customers.
The following table summarizes the change in our warranty liability
for the six months ended June 30, 2016 and 2015:
2016 2015
(in
thousands)
Beginning balance $ 6,116 $ 4,685
Accrual for warranty expense 637 2,097
Warranty costs incurred during the period (1,248 ) (1,381 )
Ending balance $ 5,505 $ 5,401
Accrued Field Action Costs
The costs to repair or replace products associated with field
actions and voluntary service campaigns are recorded when they are
determined to be probable and reasonably estimable as a cost of
revenue. Costs associated with field actions are not included in
our warranty liability. The following table summarizes the change
in field action liability for the six months ended June 30,
2016 and 2015:
2016 2015
(in
thousands)
Beginning balance $ 8,503 $ 1,888
Accrual for field action costs 3,339 470
Field action costs incurred during the period (7,667 ) (1,746 )
Ending balance $ 4,175 $ 612
In February 2015, we expanded a 2013 voluntary field safety
corrective action, by initiating a voluntary medical device recall
of certain older controllers distributed in the U.S. during the
ADVANCE and ENDURANCE clinical trial periods. The action had been
initiated in certain foreign markets around the end of 2014. The
affected controllers exhibit a higher susceptibility to
electrostatic discharge than newer, commercial
controllers. This recall was ongoing as of June 30,
2016.
In September 2015, we announced planned field actions to replace
certain older AC adapters in use outside the United States and
older batteries with new, more reliably designed product
improvements. We also announced plans to implement a controller
software update intended to improve controller performance
reliability. These actions began on January 7, 2016 following
requisite regulatory approvals. Recall costs incurred during the
six months ended June 30, 2016 were associated with these
actions.
In March 2016, we announced a planned field action related to the
anticipated replacement of certain controllers based upon the
potential for the power or driveline connectors to become loose.
During the six months ended June 30, 2016, the Company
recorded a total charge of $3.3 million related to this planned
field action. The Company’s estimated liability for
replacements is based upon assumptions which it considers
reasonable in light of known circumstances.
As further discussed in Note 13, on July 12, 2016 the Company
adopted a voluntary controller replacement plan pursuant to which
it will introduce a new and improved HVAD System controller to be
implemented effective once the new controller attains applicable
regulatory approvals. The program is expected to result in a
controller replacement liability of approximately $24 million to
$27 million for prospective replacement of HVAD controllers in the
field beginning in the third or fourth quarter of 2016.
Accrued Restructuring Costs
The following table summarizes changes in our accrued restructuring
costs for the six months ended June 30, 2016:
Facility Leases
(in thousands)
Beginning balance $ 1,955
Restructuring charges
—
Payments (358 )
Adjustments to estimated obligations (310 )
Change in fair value 42
Ending balance $ 1,329
The restructuring obligations reflected above resulted from the
closure of CircuLite, Inc.’s former headquarters in Teaneck,
New Jersey, which we ceased to occupy in 2014. The Teaneck
operating lease runs through September 2020. The remaining
obligation as of June 30, 2016 reflects recent events
including entry into a sublease agreement for approximately 43% of
the leased space, taking into consideration the applicable sublet
terms, and a termination payment made to the landlord related to
the recapture of approximately 57% by the landlord which became
effective on July 15, 2016. The termination payment of
approximately $0.9 million was accrued as of June 30, 2016 and
included in selling, general and administrative expenses on our
condensed consolidated statements of operations. This obligation
was paid during July 2016. ( see |
