UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For quarterly period ended March 31, 2012
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period
from to
Commission file number: 000-28882
WORLD HEART
CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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52-2247240
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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4750 Wiley Post Way, Suite 120, Salt Lake City, UT 84116 USA
(Address of principal executive offices)
(801) 355-6255
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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. Yes
x
No
¨
Indicate by a checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
x
No.
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer, 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.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Indicate the number of stock outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The number of common shares outstanding as of May 9, 2012 was
27,517,749.
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WORLD HEART CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
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March 31, 2012
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December 31, 2011 (1)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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5,581,552
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$
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5,413,782
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Marketable investment securities
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1,670,113
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3,848,408
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Other receivables
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1,483,594
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1,606,489
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Prepaid expenses
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130,482
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156,320
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8,865,741
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11,024,999
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Long-term assets
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Property and equipment, net
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588,193
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640,217
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Other long-term assets
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14,756
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14,756
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602,949
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654,973
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Total assets
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$
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9,468,690
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$
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11,679,972
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities
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Accounts payable
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$
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175,288
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$
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195,796
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Accrued liabilities
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370,232
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171,840
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Accrued royalties
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162,558
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126,213
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Accrued compensation
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161,561
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146,966
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Accrued restructuring charges
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667,219
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375,173
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Note payable - short term, net
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156,149
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139,703
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1,693,007
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1,155,691
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Long-term liabilities
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Warrant liability
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1,520,969
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1,105,890
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Note payable - long term, net
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328,400
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328,400
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Other long term liabilities
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10,434
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11,167
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Total liabilities
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3,552,810
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2,601,148
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Commitments and Contingencies
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Shareholders’ equity (deficit)
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Preferred stock $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding
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—
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—
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Common stock $.001 par value, 50,000,000 shares authorized, 27,517,749 shares issued and outstanding at March 31, 2012 and
December 31, 2011
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27,517
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27,517
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Additional paid-in-capital
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366,235,402
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366,132,126
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Cumulative other comprehensive income (loss)
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1,360
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(4,753
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Accumulated deficit
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(360,348,399
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(357,076,066
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)
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Total shareholders’ equity
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5,915,880
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9,078,824
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Total liabilities and shareholders’ equity
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$
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9,468,690
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$
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11,679,972
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(1)
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Derived from the Company’s audited consolidated financial statements as of December 31, 2011.
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(See accompanying notes to the unaudited condensed consolidated financial statements)
1
WORLD HEART CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
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For the three months ending March 31,
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2012
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2011
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Revenue, net
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$
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—
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$
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(136,000
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Cost of goods sold
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—
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(647,603
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Gross loss
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—
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(783,603
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Operating expenses
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Research and development
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979,421
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2,564,543
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Selling, general and administrative
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954,340
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873,314
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Restructuring charges
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907,101
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—
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Total operating expenses
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2,840,862
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3,437,857
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Operating loss
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(2,840,862
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(4,221,460
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Other income (expenses)
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Foreign exchange loss
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(103
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—
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Investment and other income
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7,070
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15,745
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Gain (loss) on change in fair value of warrant liability
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(415,079
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8,298,751
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Interest expense
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(23,359
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(31,430
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Net income (loss)
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(3,272,333
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4,061,606
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Other comprehensive income:
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Net unrealized gain in marketable investment securities
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6,113
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11,257
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Comprehensive income (loss)
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$
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(3,266,220
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$
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4,072,863
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Weighted average number of common shares outstanding:
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Basic
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27,517,749
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26,682,332
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Diluted
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27,517,749
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26,682,332
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Basic net income (loss) per common share
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$
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(0.12
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$
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0.15
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Diluted net income (loss) per common share
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$
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(0.12
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$
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0.15
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(See accompanying notes to the unaudited condensed consolidated financial statements)
2
WORLD HEART CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31,
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2012
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2011
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Operating Activities
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Net income (loss) for the period
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$
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(3,272,333
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$
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4,061,606
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Adjustments to reconcile net loss to net cash used in operations:
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Amortization and depreciation
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52,024
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54,505
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Non-cash stock compensation expense
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103,276
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326,676
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Imputed interest on debt
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23,165
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20,624
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Non-cash loss (gain) on change in fair value of warrant liabiltiy
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415,079
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(8,298,751
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Amortization of premium on marketable investment securities
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24,410
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87,350
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Change in operating components of working capital:
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Other receivables
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122,895
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(57,254
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Prepaid expenses and other current assets
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25,838
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146,360
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Inventory
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—
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(835,098
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Accounts payable, accrued liabilities and accrued royalties
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225,787
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87,128
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Accrued compensation
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(2,563
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(77,145
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)
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Accrued restructuring
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292,046
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—
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Cash used in operating activities
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(1,990,376
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(4,483,999
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Investing activities
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Purchase of marketable investment securities
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—
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(4,528,784
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Sales of marketable investment securities
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2,160,000
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1,290,000
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Purchase of property and equipment
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—
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(167,733
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Cash provided by (used in) investing activities
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2,160,000
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(3,406,517
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)
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Financing activities
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Private placement fees
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—
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(3,698
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)
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Capital lease repayments
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(1,854
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(14,804
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)
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Cash used in financing activities
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(1,854
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(18,502
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Increase (decrease) in cash and cash equivalents for the period
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167,770
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(7,909,018
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)
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Cash and cash equivalents, beginning of the period
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5,413,782
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9,500,921
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Cash and cash equivalents, end of the period
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$
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5,581,552
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$
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1,591,903
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Supplementary cash flow information:
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Interest paid on financing
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$
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163
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$
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1,805
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Non-cash financing activities:
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Change in unrealized gain on marketable investment securities
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$
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6,113
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$
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11,257
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(See accompanying notes to the unaudited condensed consolidated financial statements)
3
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Operation of the
Company
World Heart Corporation, together with its subsidiaries (collectively referred to as WorldHeart
or the Company), is focused on developing and commercializing implantable ventricular assist devices (VADs), which are mechanical pumps that allow for the restoration of normal blood circulation to patients suffering from advanced heart failure.
World Heart’s facility is located in Salt Lake City, Utah. The Company is developing the MiFlow™ VAD for use in adults and the PediaFlow
®
VAD for use in children and infants. All of its devices in development utilize a magnetically levitated rotor resulting in no moving parts subject to wear and a
potentially better blood handling outcome. The MiFlow VAD is designed to provide up to six liters of blood flow per minute and is aimed at providing partial to full circulatory support in both early-stage and late-stage heart failure patients. The
Company has been historically developing the PediaFlow VAD in conjunction with a consortium under a grant provided by the National Institutes of Health (NIH).
On March 29,2012, the Company entered into an Agreement and Plan of Merger and Reorganization(Merger Agreement), with HeartWare International Inc. (HeartWare) which sets forth the terms and
conditions of the proposed merger of WorldHeart and HeartWare. Under the terms and subject to the conditions set forth in the Merger Agreement, HeartWare will either issue, and stockholders of WorldHeart will receive, shares of HeartWare common
stock or cash, at HeartWare’s election, that will approximate $8.0 million at closing. Pursuant to the Merger Agreement, WorldHeart will merge with and become a subsidiary of HeartWare. The Company currently plans to complete the proposed
merger in the third quarter of 2012 although the Company cannot predict the exact timing of the completion of the merger, because it is subject to governmental and regulatory review processes and other conditions, many of which are beyond the
Company’s control.
2. Summary of Significant Account Policies
(a) Basis of Presentation and Principles of Consolidation
These unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (U.S. GAAP), and include
all assets, liabilities, revenues and expenses of the Company and its wholly owned subsidiaries; World Hearts Incorporated (WHI) and World Heart B.V. (WHBV). All material intercompany transactions and balances have been eliminated.These interim
unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes
thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the SEC.
The results for the period ended March 31, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2012 or for any future period.
(b) Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include allowance for doubtful
accounts, sales and other allowances, inventory reserves, income taxes, realizability of deferred tax assets, stock-based compensation, warrant liability, deferred revenues, and warranty, legal and restructuring reserves. The Company bases its
estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from these estimates.
(c) Cash Equivalents
Cash equivalents include money market fund and highly liquid and highly rated investments with maturity periods of three months or less when purchased. The composition and maturities are regularly
monitored by management.
(d) Fair Value Measurement
The Company’s financial instruments are cash and cash equivalents, marketable investment securities, other receivables, accounts
payable, accrued liabilities, warrant liability and notes payable. The recorded values of cash, other receivables, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The fair value of cash
equivalents and marketable investment securities is estimated based upon quoted market prices. The fair value of the warrant liability represents its estimated fair value based upon a Black-Scholes option pricing model. The recorded values of notes
payable, net of the discount, approximate the fair value as the interest approximates market rates.
4
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Company measures certain financial assets and liabilities (cash equivalents,
marketable investment securities, and warrant liability) at fair value on a recurring basis. The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as
follows:
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•
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Level 1 measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at
the measurement date.
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•
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Level 2 measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.
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•
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Level 3 measurements are unobservable inputs.
|
(e) Marketable Investment Securities
The Company classifies its marketable
investment securities as either short-term or long-term available for sale securities based on expected cash flow needs and maturities of specific securities. Available for sale securities are recorded at fair value. Investments in available for
sale securities consist of certificates of deposits, corporate bonds, government municipal bonds and commercial paper. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate
component of stockholder’s equity (deficit) until realized. A decline in the market value below cost that is deemed other than temporary is charged to results of operations resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted into the cost basis over the life of the related security as adjustments to yield using the effective interest method. Interest income is recognized when earned. Realized gains and losses from the
sale of marketable investment securities are included in results of operations and are determined on the specific identification basis.
The Company has established guidelines relative to credit ratings, diversification and maturities that are intended to mitigate risk and provide liquidity.
(f) Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable investment securities and trade accounts
receivable. Substantially, all of the Company’s liquid cash equivalents are invested primarily in money market funds. Additionally, the Company has investments in marketable investment securities, primarily comprised of certificates of deposit,
corporate bonds, government municipal bonds and commercial paper. Cash and cash equivalents held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (FDIC) on such deposits. Marketable
investments are subject to credit risk although there are some protected by FDIC insurance. The Company invests in high-grade instruments and limits its exposure to any one issuer. As of March 31, 2012 and December 31, 2011, the Company
has zeroin trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. There have been nowrite-offs of trade
accounts receivable during the periods presented.
(g) Concentration of Suppliers
The Company has entered into agreements with contract developers to design certain aspects of its product candidates, including the MiFlow
VAD. In some instances, the Company is dependent upon a single vendor. The loss of one of these vendors could have a material adverse effect upon the Company’s operations.
(h) Property and Equipment
Capital assets are recorded at cost. Depreciation is calculated over estimated useful lives ranging from 5 to 7 years. Leasehold improvements are amortized over the lesser of the useful life or the
remaining term of the lease.
|
|
|
|
|
Furniture and fixtures
|
|
Straight-line over 7 years
|
|
|
|
|
Computer equipment and software
|
|
Straight-line over 5 years
|
|
|
|
|
Manufacturing and research equipment
|
|
Straight-line over 5 years
|
|
|
|
|
Leasehold improvements
|
|
Straight-line ranging from 3 to 7 years
|
The carrying value of property and equipment is assessed when factors indicating a possible impairment
are present. The Company records an impairment loss in the period when it is determined that the carrying amounts may not be recoverable. The impairment loss would be calculated as the amount by which the carrying amount exceeds the undiscounted
future cash flows from the asset.
5
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(i) Income Taxes
Income taxes are provided for using the asset and liability method whereby deferred tax assets and liabilities are recognized using
current tax rates on the difference between the financial statement carrying amounts and the respective tax basis of the assets and liabilities. The Company provides a valuation allowance on deferred tax assets when it is more likely than not that
such assets will not be realized.
The Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than
50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognized interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying
statements of operation. Accrued interest and penalties are included within the related tax liability in the consolidated balance sheets.
(j) Revenue Recognition, Trade Receivables and Deferred Revenue
The
Company recognizes revenue from product sales in accordance with ASC 605,
Revenue Recognition.
Pursuant to purchase agreements or orders, the Company ships product to our customers. Revenue from product sales is only recognized when
substantially all the risks and rewards of ownership have transferred to its customers, the selling price is fixed and collection is reasonably assured. Beginning in 2010, a majority of product sales were made on a consignment basis and as such,
pursuant to the terms of the consignment arrangements, revenue is generally recognized on the date the consigned product is implanted or otherwise consumed. Revenue from product sales not sold on a consignment basis is generally recognized upon
customer receipt and acceptance of the product. Beginning in 2010, revenue was recognized from sales of the Levacor VAD in connection with the Company’s BTT clinical trial. The Company does not expect to generate significant revenue in the near
term due to its decision in July 2011 to end commercialization efforts on the Levacor VAD.
Trade receivables are recorded for
product sales and do not bear interest. The Company regularly evaluates the collectability of its trade receivables. An allowance for doubtful accounts is maintained for estimated credit losses. When estimating credit losses, the Company considers a
number of factors including the aging of a customer’s account, credit worthiness of specific customers, historical trends and other information. The Company reviews its allowance for doubtful accounts monthly. The Company did not incur any
losses related to customer bad debts during the three months ended March 31, 2012 and 2011. At March 31, 2012 and December 31, 2011, the allowance for doubtful accounts was zero for both periods.
During the three months ended March 31, 2011, the Company agreed to allow one customers to return two units which had been
previously sold and paid for. This decision was made as a result of the pause in enrollment of the Company’s BTT clinical study in February 2011 and expiring shelf lives of kits. The impact of this was a reduction of revenues, net, through
sales returns and allowances by approximately $136,000 for the three months ended March 31, 2011. During the three months ended March 31, 2012, the Company did not recognize any revenue from product candidate sales or any returns and
allowances.
(k) Warranty
The Company warrants its products for various periods against defects in material or installation workmanship. Warranty costs are based on historical experience and estimated and recorded when the related
sales are recognized. Any additional costs are recorded when incurred or when they can reasonably be estimated.
The Company
provided for a six month warranty related to the sale of its Levacor VAD system peripherals. The warranty reserve, which is included in accounts payable and accrued liabilities, was zero at March 31, 2012 and December 31, 2011. Accrued warranty
is expected to be at zero in future periods with the 2011 decision by the Company to terminate its efforts to commercialize the Levacor VAD.
(l) Research and Development Costs
Research and development (R&D)
costs, including research performed under contract by third parties, are expensed as incurred. Major components of R&D expenses consist of personnel costs including salaries and benefits, prototype manufacturing, testing, clinical trials,
material purchases and regulatory affairs. For the purchase of research and development technology under an assignment or license agreement or other collaborative agreements, the Company analyzes how to characterize payment based on the relevant
facts and circumstances related to each agreement.
(m) Stock-based Compensation
The Company accounts for stock based compensation by recognizing the fair value of stock compensation as an expense in the calculation of
net income (loss). The Company recognizes stock compensation expense in the period in which the employee is required to provide service, which is generally over the vesting period of the individual equity instruments. Stock options issued in lieu of
cash to non-employees for services performed are recorded at the fair value of the options at the time they are issued and are expensed as service is provided.
6
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(n) Restructuring Expense
The Company records costs and liabilities associated with exit and disposal activities based on estimates of fair value in the period the
liabilities are incurred. In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free discount rate applied in the initial period. The liability is evaluated and adjusted as appropriate for
changes in circumstances. On February 23, 2012 the Company announced a workforce reduction in an effort to preserve cash and reduce the Company’s fixed operating costs (2012 Restructuring Plan). The restructuring plan resulted in a
reduction in workforce of approximately 20 full-time positions and 1 part-time position, or approximately 81% of its workforce and additional restructuring charges related to contract and purchase order cancellation fees and facility related
charges. On July 29, 2011, the Company announced the termination of its efforts to commercialize the Levacor VAD technology and efforts to focus its resources on developing and commercializing its smaller, next-generation MiFlow and PediaFlow
VADs (2011 Restructuring Plan). This resulted in a reduction in its workforce of approximately 21 full-time positions, or approximately 42% of its workforce and additional restructuring charges related to inventory and equipment write-offs, contract
and purchase order cancellation fees, facility related charges and clinical trial wind-down costs. Restructuring expense related to the 2012 Restructuring Plan was $919,446 and zero for the three months ended March 31, 2012 and 2011,
respectively. Restructuring expense related to the 2011 Restructuring Plan was a negative $12,345 resulting from a settlement on a purchase order commitment and zero for the three months ended March 31, 2012 and 2011. See Note 6.
(o) Government Assistance
Government assistance is recognized when the expenditures that qualify for assistance are made and the Company has complied with the conditions for the receipt of government assistance. Government
assistance is applied to reduce the carrying value of any assets acquired or to reduce eligible expenses incurred. A liability to repay government assistance, if any, is recorded in the period when conditions arise that causes the assistance to
become repayable. The Company’s submission of expense reimbursements are subject to review and adjustment. As of March 31, 2012, the Company believes all outstanding amounts will be fully reimbursed.
On February 2010, the Company announced that it was part of a consortium awarded a $5.6 million, 4-year contract by the National
Institutes of Health (NIH) to further develop the PediaFlow VAD to clinical trial readiness. For the three months ended March 31, 2012 and 2011, the Company recorded a reduction on R&D expenses of $89,900 and $315,468, respectively, related
to the NIH grant. As of March 31, 2012 and December 31, 2011, $1,459,800 and $1,521,582, respectively, are included in other receivables related to the NIH grant. The Company expects it will not record R&D expense reductions under the
NIH grant in the future due to the funding expiring on January 14, 2012.
(p) Foreign Currency Translation and
Functional Currency
Since January 1, 2004, the functional currency of the Company has been the U.S. dollar. Exchange
gains and losses are included in the net loss for the year.
(q) Comprehensive Loss
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting stockholders’ equity (deficit) that,
under U.S. GAAP, are excluded from net income (loss). The accumulated other comprehensive income (loss) as of March 31, 2012 and 2011 is related to net unrealized gains on marketable investment securities.
(r) Earnings per Share
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share are computed using
the weighted average number of common shares outstanding during the periods plus the effect of dilutive securities outstanding during the periods. For the three months ended March 31, 2012 and 2011, basic earnings per share are the same as
diluted earnings per share as a result of the Company’s common stock equivalents being anti-dilutive.
The following
reconciliation shows the anti-dilutive shares excluded from the calculation of basic and diluted earnings (loss) per common share attributable to the Company for the three months ended March 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March, 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Gross numbers of shares excluded:
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
13,269,261
|
|
|
|
14,712,986
|
|
|
Stock options
|
|
|
1,361,489
|
|
|
|
2,159,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,630,750
|
|
|
|
16,872,308
|
|
|
|
|
|
|
|
|
|
|
|
7
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
3. Marketable Investment Securities and Fair Value
The Company’s marketable investment securities consist primarily of investments in certificates of deposit, commercial paper,
corporate bonds and municipal bonds which are classified as available for sale. Marketable investment securities as of March 31, 2012 and December 31, 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized
Holding
Gains
|
|
|
Gross Unrealized
Holding Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
20,711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,711
|
|
|
Commercial paper
|
|
|
599,655
|
|
|
|
141
|
|
|
|
—
|
|
|
|
599,795
|
|
|
Corporate bonds
|
|
|
1,048,388
|
|
|
|
1,379
|
|
|
|
(159
|
)
|
|
|
1,049,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities
|
|
$
|
1,668,754
|
|
|
$
|
1,520
|
|
|
$
|
(159
|
)
|
|
$
|
1,670,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Amortized Cost
|
|
|
Gross Unrealized
Holding
Gains
|
|
|
Gross Unrealized
Holding Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
120,683
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
120,688
|
|
|
Commercial paper
|
|
|
599,003
|
|
|
|
10
|
|
|
|
(110
|
)
|
|
|
598,903
|
|
|
Municipal bonds
|
|
|
110,000
|
|
|
|
29
|
|
|
|
—
|
|
|
|
110,029
|
|
|
Corporate bonds
|
|
|
3,275,735
|
|
|
|
32
|
|
|
|
(4,719
|
)
|
|
|
3,271,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities
|
|
|
4,105,421
|
|
|
|
76
|
|
|
|
(4,829
|
)
|
|
|
4,100,668
|
|
|
Less cash equivalents
|
|
|
252,496
|
|
|
|
—
|
|
|
|
(236
|
)
|
|
|
252,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net marketable investment securities
|
|
$
|
3,852,925
|
|
|
$
|
76
|
|
|
$
|
(4,593
|
)
|
|
$
|
3,848,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable investment securities available for sale in an unrealized loss position as of March 31,
2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
|
Held for less than 12 months
|
|
|
Held for more than 12 months
|
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Corporate bonds
|
|
$
|
481,606
|
|
|
$
|
(159
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net marketable investment securities
|
|
$
|
481,606
|
|
|
$
|
(159
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Held for less than 12 months
|
|
|
Held for more than 12 months
|
|
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Commercial paper
|
|
$
|
299,296
|
|
|
$
|
(110
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Corporate bonds
|
|
|
2,966,962
|
|
|
|
(4,719
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities
|
|
|
3,266,258
|
|
|
|
(4,829
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Less cash equivalents
|
|
|
(252,260
|
)
|
|
|
236
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net marketable investment securities
|
|
$
|
3,013,998
|
|
|
$
|
(4,593
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of marketable securities as of March 31, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Due within one year
|
|
$
|
1,648,042
|
|
|
$
|
1,649,402
|
|
|
$
|
4,084,801
|
|
|
$
|
4,080,048
|
|
|
Due after one year through five years
|
|
|
20,711
|
|
|
|
20,711
|
|
|
|
20,620
|
|
|
|
20,620
|
|
|
Due after ten years
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable investment securities
|
|
$
|
1,668,753
|
|
|
$
|
1,670,113
|
|
|
$
|
4,105,421
|
|
|
$
|
4,100,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The proceeds from maturities and sales of marketable securities and resulting realized
gains and losses for the three months ended March 31, 2012 and 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Proceeds from maturities and sales
|
|
$
|
2,160,000
|
|
|
$
|
1,290,000
|
|
|
Realized gains
|
|
|
—
|
|
|
|
—
|
|
|
Realized losses
|
|
|
—
|
|
|
|
—
|
|
The following table presents the placement in the fair value hierarchy of assets and liabilities that are
measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
Quoted prices
in active
markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents-money market funds
|
|
$
|
3,042,975
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Certificates of deposits
|
|
|
—
|
|
|
|
20,711
|
|
|
|
—
|
|
|
Commercial paper
|
|
|
—
|
|
|
|
599,795
|
|
|
|
—
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
1,049,607
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities
|
|
$
|
3,042,975
|
|
|
$
|
1,670,113
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,520,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents-money market funds
|
|
$
|
4,718,966
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash equivalents-corporate bonds
|
|
|
—
|
|
|
|
252,260
|
|
|
|
—
|
|
|
Certificates of deposits
|
|
|
—
|
|
|
|
120,688
|
|
|
|
—
|
|
|
Commercial paper
|
|
|
—
|
|
|
|
598,903
|
|
|
|
—
|
|
|
Municipal bonds
|
|
|
—
|
|
|
|
110,029
|
|
|
|
—
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
3,018,788
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities
|
|
$
|
4,718,966
|
|
|
$
|
4,100,668
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,105,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between levels during the three months ended March 31, 2012.
9
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Interest rate risk
The Company is subject to minimal interest rate risk in relation to its investments in certificates of deposits, corporate bonds, government municipal bonds and commercial paper as of March 31, 2012
and December 31, 2011.
Interest rate risk on debt
The Company’s debt obligations consist of $600,000 in principal remaining under a convertible note issued to LaunchPoint Technologies Inc. (LaunchPoint) which carries a fixed interest rate. The
Company is not exposed to interest rate market risk on the LaunchPoint note. The carrying value of the LaunchPoint note approximates its fair value at March 31, 2012. See Note 7.
Foreign exchange risk
The Company has minimal assets and liabilities in
foreign currencies; primarily the Euro dollar. The Company’s current foreign currency exposure is not significant due to the nature of the underlying assets and liabilities.
4. Property and Equipment
As of March 31, 2012 and December 31,
2011, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation/
Amortization
|
|
|
Net Book Value
|
|
|
Furniture & fixtures
|
|
$
|
78,721
|
|
|
$
|
(50,057
|
)
|
|
$
|
28,664
|
|
|
Computer equipment & software
|
|
|
261,336
|
|
|
|
(144,292
|
)
|
|
|
117,044
|
|
|
Manufacturing & research equipment
|
|
|
753,038
|
|
|
|
(438,571
|
)
|
|
|
314,467
|
|
|
Leasehold improvements
|
|
|
374,008
|
|
|
|
(245,990
|
)
|
|
|
128,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,467,103
|
|
|
$
|
(878,910
|
)
|
|
$
|
588,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation/
Amortization
|
|
|
Net Book Value
|
|
|
Furniture & fixtures
|
|
$
|
78,721
|
|
|
$
|
(48,358
|
)
|
|
$
|
30,363
|
|
|
Computer equipment & software
|
|
|
261,336
|
|
|
|
(135,842
|
)
|
|
|
125,494
|
|
|
Manufacturing & research equipment
|
|
|
753,038
|
|
|
|
(413,294
|
)
|
|
|
339,744
|
|
|
Leasehold improvements
|
|
|
374,008
|
|
|
|
(229,392
|
)
|
|
|
144,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,467,103
|
|
|
$
|
(826,886
|
)
|
|
$
|
640,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the three months ended March 31, 2012 and 2011 was $52,024
and $54,505, respectively.
5. Current Liabilities
Accrued Compensation
Accrued compensation includes accruals for year-end
employee wages, severance payments not associated with a restructuring, vacation pay, and performance bonuses. The components of accrued compensation, inclusive of payroll taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
Wages
|
|
$
|
21,168
|
|
|
$
|
—
|
|
|
Vacation
|
|
|
94,452
|
|
|
|
146,966
|
|
|
Bonuses
|
|
|
45,941
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation
|
|
$
|
161,561
|
|
|
$
|
146,966
|
|
|
|
|
|
|
|
|
|
|
|
10
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Annually, the Compensation Committee of the Board of Directors, in conjunction with the
entire Board of Directors, approves the corporate goals and objectives for the year with corresponding weighting and payout. Subsequent to each yearend, typically in the first quarter of the year following, the Compensation Committee reviews
accomplishment of corporate goals and recommends bonus payout, including executive officer payouts. The Board of Directors reviews the Compensation Committee recommendation, modifies as appropriate, and approves the performance bonus payouts. As of
March 31, 2012 and December 31, 2011, accrued performance bonuses were $45,941 and zero, respectively, and were payable in cash. Accrued severance related to the Company’s 2012 Restructuring Plan and the 2011 Restructuring Plan is
included in Accrued Restructuring Charges. See Note 6.
6. Restructuring Charges
On February 15, 2012, the Board of Directors made the decision to initiate a workforce reduction in an effort to preserve cash and
reduce the Company’s fixed operating costs as the Company explored various corporate strategic options. On February 23, 2012, the Company notified employees affected by the workforce reduction. The approved restructuring plan resulted in a
reduction in its workforce of approximately 20 full-time positions and 1 part-time position, or approximately 81% of its workforce. Personnel reductions were made across the Company’s entire organization, including the following departments:
research and development, manufacturing, quality, facilities, human resources and accounting. The reduction was effective immediately upon such notification, though certain employees remained in brief transition roles with the Company. Affected
employees are eligible to receive severance payments ranging between one and nine months and payment by the Company of each affected employee’s COBRA premiums for up to a similar period, in exchange for a customary release of claims against the
Company. In addition to the severance benefits noted, the Company recorded additional restructuring charges related to contract and purchase order cancellation fees and facility related charges. The charges related to the restructuring plan during
the three months ended March 31, 2012 and 2011 were $919,446 and zero, respectively. The total anticipated restructuring charge as a result of the 2012 Restructuring Plan will be approximately $950,000 to $1.0 million. As a result of the 2012
Restructuring Plan, the Company will realize cost savings from the reduced headcount.
A summary of accrued restructuring
costs related to the 2012 Restructuring Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Restructuring Plan
|
|
Balance at
January 1, 2012
|
|
|
Charged to
Expense in
Fiscal 2012
|
|
|
Cash Paid
|
|
|
Non-Cash
|
|
|
Balance at
March 31, 2012
|
|
|
Severance
|
|
$
|
—
|
|
|
$
|
694,376
|
|
|
$
|
(370,388
|
)
|
|
$
|
—
|
|
|
$
|
323,988
|
|
|
Contract and purchase order cancellation fees
|
|
|
—
|
|
|
|
13,500
|
|
|
|
(13,500
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Facility related costs
|
|
|
—
|
|
|
|
211,569
|
|
|
|
(13,806
|
)
|
|
|
—
|
|
|
|
197,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
919,446
|
|
|
$
|
(397,694
|
)
|
|
$
|
—
|
|
|
$
|
521,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 29, 2011, the Company announced that it ended its efforts to commercialize the Levacor VAD
technology and would focus its resources on developing and commercializing its smaller, next-generation MiFlow and PediaFlow VADs. On July 26, 2011, in conjunction with this decision, the Board of Directors of the Company approved a
restructuring plan that resulted in a reduction in its workforce of approximately 21 full-time positions, or approximately 42% of its workforce. Affected employees are eligible to receive severance payments ranging between one and nine months and
payment by the Company of each affected employee’s COBRA premiums for up to a similar period, in exchange for a customary release of claims against the Company. The reduction in workforce involved all functional disciplines including, research
and development personnel, as well as general and administrative employees. In addition to the severance benefits noted, the Company recorded additional restructuring charges related to inventory and equipment write-offs, contract and purchase order
cancellation fees, facility related charges, and clinical trial wind-down costs. The charges related to the 2011 Restructuring Plan during the three months ended March 31, 2012 and 2011 were a negative $12,345 and zero, respectively. The
Company estimates it may incur additional restructuring expenses of up to $500,000 related to a cancellation of a contract. Although the timing and exact amounts are unknown, the Company expects to have a more definitive understanding on this
additional charge by mid-2012. Thus total anticipated restructuring charge as a result of the 2011 Restructuring Plan will be approximately $7.0 million. As a result of the 2011 Restructuring Plan, the Company will realize cost savings from the
reduced headcount, as well as reduced clinical trial and manufacturing costs, including inventory build related to the Levacor VAD.
11
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
A summary of accrued restructuring costs related to the 2011 Restructuring Plan is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Restructuring Plan
|
|
Balance at
January 1, 2011
|
|
|
Charged to
Expense in
Fiscal 2011
|
|
|
Cash Paid
|
|
|
Non-Cash
|
|
|
Balance at
December 31, 2011
|
|
|
Inventory and equipment write downs
|
|
$
|
—
|
|
|
$
|
5,467,355
|
|
|
$
|
—
|
|
|
$
|
5,467,355
|
|
|
$
|
—
|
|
|
Severance
|
|
|
—
|
|
|
|
874,469
|
|
|
|
635,974
|
|
|
|
—
|
|
|
|
238,495
|
|
|
Facility related costs
|
|
|
—
|
|
|
|
22,668
|
|
|
|
22,668
|
|
|
|
—
|
|
|
|
—
|
|
|
Clinical trial wind down costs
|
|
|
—
|
|
|
|
18,309
|
|
|
|
18,309
|
|
|
|
—
|
|
|
|
—
|
|
|
Contract and purchase order cancellation fees
|
|
|
—
|
|
|
|
155,700
|
|
|
|
19,022
|
|
|
|
—
|
|
|
|
136,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
6,538,501
|
|
|
$
|
695,973
|
|
|
$
|
5,467,355
|
|
|
$
|
375,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Restructuring Plan
|
|
Balance at
January 1, 2012
|
|
|
Charged to
Expense in
Fiscal 2012
|
|
|
Cash Paid
|
|
|
Non-Cash
|
|
|
Balance at
March 31, 2012
|
|
|
Severance
|
|
$
|
238,495
|
|
|
$
|
—
|
|
|
$
|
(176,362
|
)
|
|
$
|
—
|
|
|
$
|
62,134
|
|
|
Contract and purchase order cancellation fees
|
|
|
136,678
|
|
|
|
(12,345
|
)
|
|
|
(41,000
|
)
|
|
|
—
|
|
|
|
83,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,173
|
|
|
$
|
(12,345
|
)
|
|
$
|
(217,362
|
)
|
|
$
|
—
|
|
|
$
|
145,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Equity and Debt Transaction
LaunchPoint Note
On December 2, 2009 (Issuance Date) the
Company issued to LaunchPoint a note (LaunchPoint Note) in the principal amount of $1.0 million, with interest at 4.5% per annum, maturing five years from the Issuance Date. Twenty percent of the principal amount of the LaunchPoint Note,
together with accrued interest, will be converted into restricted shares of the Company’s common stock, on each anniversary of the Issuance Date for five years. LaunchPoint’s right of resale for each annual issuance of restricted
shares will be limited to no more than one-twelfth of such shares in each of the next 12 months with the restrictions lifted after 12 months. The stock price used for determining the conversion rate will be the publicly traded weighted
average closing price of the Company’s common stock for the three month period preceding the relevant anniversary date. The Company will have the right to repurchase, at any time prior to November 9, 2011, any outstanding balance of the
LaunchPoint Note at a 15% discount. The effective interest rate on the LaunchPoint Note is 20%. On December 2, 2010, the first twenty percent of the note plus accrued interest totaling $245,000 became due and the Company issued 101,282
restricted shares of its common stock to LaunchPoint. On December 2, 2011, the second twenty percent of the LaunchPoint note plus accrued interest totaling $236,000 became due, and the Company issued 835,417 restricted shares of its common
stock to LaunchPoint. As of March 31, 2012, the current and long term portions of the note are $156,149 and $328,400, respectively, net of a total discount of $115,451.
Warrant Liability
The Company accounts for its common stock
warrants under ASC 480,
Distinguishing Liabilities from Equity
, which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed
to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability. The guidance required the Company’s outstanding warrants from the
October 19,2010 private placement of common stock (October Offering) to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as gain (loss) on change in fair value of warranty
liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in the October Offering allow the warrant holder the option to elect to receive an amount of cash equal to the value of the warrants as
determined in accordance with the Black-Scholes option pricing model with certain defined assumptions upon a change of control.
As of March 31, 2012 and December 31, 2011, the Company had 11,850,118 warrants outstanding to purchase an equal number of
common stock from the October Offering. The fair value of these warrants on March 31, 2012 and December 31, 2011 was determined using the Black-Scholes option pricing model as defined in the October Offering with the following Level 3
inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
Risk-free interest rate
|
|
|
0.78
|
%
|
|
|
0.60
|
%
|
|
Expected life in years
|
|
|
3.55
|
|
|
|
3.80
|
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
Volatility
|
|
|
125
|
%
|
|
|
125
|
%
|
|
Stock price
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
12
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
During the three months ended March 31, 2012, the Company recorded a loss related
to the change in fair value of warrants of $415,079, and a gain of $8.3 million during the same period in 2011, related to the October Offering warrants. The following table is a reconciliation of the warrant liability measured at fair value using
level 3 inputs:
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
Balance at December 31, 2010
|
|
$
|
13,569,663
|
|
|
Change in fair value of common stock warrants during 2011
|
|
|
(12,463,773
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
1,105,890
|
|
|
|
|
|
|
|
|
Change in fair value of common stock warrants during the three months ended March 31, 2012
|
|
|
415,079
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
1,520,969
|
|
|
|
|
|
|
|
8. Shareholders’ Equity
Common Stock
Authorized common shares of the Company consist of
50.0 million shares of common stock with a par value of $.001 per share.
Preferred Stock
Authorized preferred shares of the Company consist of 1.0 million shares of preferred stock with a par value of $.01 per share. The
Company had no outstanding preferred shares at March 31, 2012 and December 31, 2011.
Equity Plan
The Company has issued share-based option awards to employees, non-executive directors and outside consultants through our approved
incentive plan, the 2006 Equity Incentive Plan (Incentive Plan). The exercise price for all equity awards issued under the Incentive Plan is based on the fair market value of the common share price which is the closing price quoted on the NASDAQ
Stock Exchange on the last trading day before the date of grant. The stock options generally vest over a four-year or three-year period, first year cliff vesting with monthly vesting thereafter on the four-year awards and annually in equal portions
on the three-year awards, and have a ten year life. Options outstanding are subject to time-based vesting as described above and thus are not performance-based.
The Incentive Plan allows for the issuance of restricted stock awards, restricted stock unit awards, stock appreciation rights, performance shares and other share-based awards, in addition to stock
options. As of March 31, 2012, there were 1,361,489 option shares outstanding and 1,555,178 shares are available for future grants under the Incentive Plan.
Stock-based Compensation
The Company accounts for stock based compensation
in accordance with ASC 718,
Stock Based Compensation
, which requires the recognition of the fair value of stock compensation as an expense in the calculation of net income. ASC 718 requires that stock-based compensation expense be based on
awards that are ultimately expected to vest. Stock-based compensation for the three months ended March 31, 2012 and 2011 have been reduced for estimated forfeitures. When estimating forfeitures, voluntary termination behaviors, as well as
trends of actual option forfeitures, are considered. To the extent actual forfeitures differ from the Company’s current estimates, cumulative adjustments to stock-based compensation expense are recorded.
Except for transactions with employees and directors that are within the scope of ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
13
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
The Company uses the Black-Scholes valuation model for estimating the fair value of
stock compensation. The stock-based compensation expense for the three months ended March 31, 2012 and 2011 respectively were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Selling, general and administrative
|
|
$
|
147,829
|
|
|
$
|
105,359
|
|
|
Research and development
|
|
|
(44,553
|
)
|
|
|
221,317
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,276
|
|
|
$
|
326,676
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense decreased for the three months ended March 31, 2012 due to the
equity award forfeitures as a result of the Company’s 2012 Restructuring Plan and the 2011 Restructuring Plan.
The
Company calculates the fair value of each equity award on the date of grant using the Black-Scholes option pricing model. The Company did not grant any equity awards during the three months ended March 31, 2012. For the three months ended
March 31, 2011 the following weighted average assumptions were utilized:
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
Expected life (in years)
|
|
|
6.08
|
|
|
Expected volatility
|
|
|
126
|
%
|
|
Average risk free interest rate
|
|
|
2.7
|
%
|
|
Dividend yield
|
|
|
—
|
|
The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no
present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common shares over the period commensurate with the expected life of the options. Expected life in years is based on the
“simplified” method as permitted by ASC Topic 718. The Company believes that all stock options issued under its stock option plans meet the criteria of “plain vanilla” stock options The Company uses a term of 5.5 years for Board
of Director stock option grants and 6.08 years for all employee stock options. No grants were issued during the three months ended March 31, 2012. The risk free interest rate is based on average rates for five and seven-year treasury notes as
published by the Federal Reserve.
The following table summarizes the number of options outstanding and the weighted average
exercise price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted average
exercise price
|
|
|
Weighted average
remaining contratual
life
|
|
|
Aggregate intrinsic
value
|
|
|
Outstanding at December 31, 2011
|
|
|
1,601,420
|
|
|
$
|
3.47
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(66,223
|
)
|
|
|
14.67
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(173,708
|
)
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
|
|
1,361,489
|
|
|
$
|
3.06
|
|
|
|
6.9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2012
|
|
|
793,797
|
|
|
$
|
3.89
|
|
|
|
5.7
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of all
outstanding options and the quoted price of the Company’s common shares that were in the money at March 31, 2012.
At December 31, 2011, the aggregate options outstanding was 1,361,489 of which 793,797 options were vested and exercisable, with a
weighted average remaining contractual life of 6.9 years and 567,692 options were unvested, with a weighted average remaining contractual life of 8.7 years.
14
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
No options were granted in the three months ended March 31, 2012. The weighted
average grant date fair value per share of options granted in the three months ended March 31, 2011 was $1.47.
At
March 31, 2012 and 2011, the aggregate intrinsic value of all outstanding options was zero. No options were exercised under the Company’s Incentive Plan during the three months ended March 31, 2012 and 2011.
As of March 31, 2012, approximately $2.5 million of total unrecognized compensation expense related to stock options is expected to
be recognized over a period of approximately fourteen quarters.
Warrant Activity
The following table summarizes the number of warrants outstanding and the weighted average exercise price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Weighted average
exercise price
|
|
|
Weighted average
remaining contratual
life
|
|
|
Aggregate intrinsic
value
|
|
|
Outstanding at December 31, 2011
|
|
|
13,269,261
|
|
|
$
|
2.59
|
|
|
|
3.7
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
|
|
13,269,261
|
|
|
$
|
2.59
|
|
|
|
3.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2012
|
|
|
13,269,261
|
|
|
$
|
2.59
|
|
|
|
3.5
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Recent Accounting Pronouncement
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU
2011-05). ASU 2011-05 allows an entity the option 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. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a
total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 does not change the items that must be
reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the effective date of provisions included in ASU 2011-05
that require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both
interim and annual financial statements. ASU 2011-12 further states that entities must continue to report reclassification adjustments out of accumulated comprehensive income consistent with the presentation requirements in effect before ASU
2011-05. Effective January 1, 2012, the Company adopted the applicable provisions included in ASU 2011-05 and elected to present a single continuous statement of comprehensive income. The Company continues to monitor the FASB’s
deliberations regarding ASU 2011-12.
In May 2011, the FASB issued 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 2011-04). ASU 2011-04 was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure
requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurement and disclosure requirements, changes certain fair value
measurement principles and enhances fair value disclosure requirements. Effective January 1, 2012, the Company adopted the disclosure provisions included in ASU 2011-04. The adoption of ASU 2011-04 had no impact on our financial position or
results of operations.
10. Subsequent Events
Effective April 20, 2012, the employment of Mr. J. Alex Martin, the Company’s President and Chief Executive Officer, was terminated in connection with our Merger Agreement with HeartWare
and the contemplated termination of the Company’s executive officers as part of the transaction. In accordance with Mr. Martin’s Change of Control and Severance Agreement dated as of September 8, 2009, subject to executing a
waiver and release of claims by Mr. Martin, Mr. Martin will receive severance benefits, including: (i) a cash
15
WORLD HEART CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
payment equal to twelve months of his current base salary plus 100% of his target annual bonus ($432,807), (ii) 100% vesting acceleration of each of his unvested options, (iii) payments
of his health insurance premiums under COBRA for a period of up to twelve months, and (iv) a pro-rata bonus based on months worked by Mr. Martin during 2012, payable upon the successful closing of the HeartWare merger ($33,293).
Mr. Martin will remain as a member of the Board of Directors until the HeartWare Merger has closed.
16
WORLD HEART CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION
World Heart Corporation and its subsidiaries are collectively referred to as “WorldHeart” or the “Company”. The
following Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared by management and discusses material changes in our financial condition and results of operations and cash flows for the three
months ended March 31, 2012 and 2011. Such discussion and comments on the liquidity and capital resources should be read in conjunction with the information contained in our audited consolidated financial statements for the year ended
December 31, 2011, prepared in accordance with U.S. GAAP, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. In this discussion, all amounts are in United States dollars (U.S. dollars) unless
otherwise stated.
The discussion and comments contained hereunder include both historical information
and forward-looking information. The forward-looking information, which generally is information stated to be anticipated, expected, or projected by management, involves known and unknown risks, uncertainties and other factors that may cause the
actual results and performance to be materially different from any future results and performance expressed or implied by such forward-looking information. Potential risks and uncertainties include, without limitation: our ability to consummate the
proposed merger with HeartWare; our ability to continue as a stand-alone company; our need for additional significant financing in the future; our ability to realize the benefits of our cost control measures and restructuring initiatives; costs and
delays associated with research and development, manufacturing, pre-clinical testing and clinical trials for our products and next-generation candidates, such as the MiFlow™ VAD and the
PediaFlow
®
VAD; our dependence on a limited number of products; our ability to manufacture, sell and market our
products; decision, and the timing of decisions made by health regulatory agencies regarding approval of our products; competition from other products and therapies for heart failure; continued slower than anticipated destination therapy (DT)
adoption rate for VADs; limitations on third-party reimbursements; our ability to obtain and enforce in a timely manner patent and other intellectual property protection for our technology and products; our ability to avoid, either by product
design, licensing arrangement or otherwise, infringement of third parties’ intellectual property; our ability to enter into corporate alliances or other strategic relationships relating to the development and commercialization of our technology
and products; loss of commercial market share to competitors due to our financial condition, timing of restarting or completing our clinical studies, and future product development by competitors; our ability to remain listed on the NASDAQ Capital
Market; as well as other risks and uncertainties set forth under the heading “Risk Factors” in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 .
OVERVIEW
On
March 29, 2012, we entered into an Agreement and Plan of Merger and Reorganization, or Merger Agreement, with HeartWare International Inc., or HeartWare, which sets forth the terms and conditions of the proposed merger of WorldHeart and
HeartWare. Under the terms and subject to the conditions set forth in the Merger Agreement, HeartWare will either issue, and stockholders of WorldHeart will receive, shares of HeartWare common stock or cash, at HeartWare’s election, that
will approximate $8.0 million at closing. Pursuant to the Merger Agreement, WorldHeart will merge with and become a subsidiary of HeartWare. We currently plan to complete the proposed merger during the third quarter of 2012. However, we can
neither assure you that the merger will be completed nor can we predict the exact timing of the completion of the merger because it is subject to governmental and regulatory review processes and other conditions, many of which are beyond our
control. The merger is intended to qualify as a tax-free reorganization under the provisions of Section 368(a) of the US Tax Code if HeartWare elects to purchase the Company with stock. The merger is subject to customary closing
conditions, including approval by our stockholders.
Our business is focused on the development and commercialization of our
ventricular assist devices (VADs) for adults, children and infants suffering from heart failure. VADs are mechanical assist devices that supplement the circulatory function of the heart by re-routing blood flow through a mechanical pump allowing for
the restoration of normal blood circulation. VADs are used for treatment of patients with severe heart failure including patients whose hearts are irreversibly damaged and cannot be treated effectively by medical or surgical means other than
transplant. Bridge-to-Transplant (BTT) therapy involves implanting a VAD in a transplant-eligible patient to maintain or improve the patient’s health until a donor heart becomes available. Destination Therapy (DT) is the implanting of a VAD to
provide long-term support for a patient not currently eligible for a natural heart transplant. Bridge-to-Recovery (BTR) involves the use of VADs to restore a patient’s cardiac function helping the natural heart to recover and thereby allowing
removal of the VAD. We have been developing the MiFlow VAD for use in adults and the PediaFlow VAD for use in children and infants. All of our devices in development utilize a magnetically levitated rotor resulting in no moving parts subject to wear
and potentially better blood handling results. We, in conjunction with a consortium consisting of the University of Pittsburgh, Children’s Hospital of Pittsburgh, Carnegie Mellon University and LaunchPoint Technologies, Inc. (LaunchPoint)
have been developing a small, magnetically levitated, rotary pediatric VAD, the PediaFlow VAD. The PediaFlow VAD is intended for use in children and infants and was primarily funded by the National Institutes of Health (NIH) through 2011. NIH
funding of research and development on the PediaFlow VAD ended on January 14, 2012. Future funding by the NIH may be available once clinical trials commence with the PediaFlow VAD. The PediaFlow VAD has evolved through a series of four
prototype designs of decreasing size and enhanced efficiency. The most recent design is comparable to the size of an AA battery. The PediaFlow VAD has demonstrated bio compatibility in chronic animal implants and laboratory tests, including low
levels of hemolysis (breakdown of red blood cells), fibrinogen and platelet activation. In February 2011, the FDA granted Humanitarian Use Device (HUD) designation for the PediaFlow VAD. The HUD designation is given to devices that are intended to
benefit patients with conditions that affect fewer than 4,000 patients per year. Under the HUD designation, manufacturers are required to demonstrate safety and the probable benefit of their device, but are not required to demonstrate efficacy.
Currently, the consortium has suspended all future development activities associated with the PediaFlow VAD, except for additional animal implants which are anticipated to occur in the first half of 2012.
17
We are currently working on a MiFlow VAD prototype and expect to begin conducting animal
studies, contingent on our ability to obtain future financing and our ability to satisfactorily complete all regulatory requirements. MiFlow VAD development activities are currently focused on pump design rather than peripherals, including the
controller, batteries, and base units.
In July 2011, we announced a restructuring of our operations (2011 Restructuring Plan)
resulting in the decision to end our efforts to commercialize the Levacor VAD which had been the subject to an on-going BTT clinical study. With the lengthening Levacor VAD BTT clinical study delays associated with previously announced device
refinements, we did not believe the Levacor VAD could be competitively commercialized. In conjunction with this decision, we also reduced our workforce by 42% and recognized significant restructuring expenses in the third quarter 2011. We previously
enrolled fifteen subjects in the Levacor VAD BTT study with three subjects still being supported by the Levacor VAD.
In
February 2012, we announced a workforce reduction (2012 Restructuring Plan) in an effort to preserve cash and reduce our fixed operating costs as we explored various corporate strategic options. The approved restructuring plan resulted in a
reduction in our workforce of approximately 20 full-time positions and 1 part-time position, or approximately 81% of our workforce. Personnel reductions were made across the entire organization, including the following departments: research and
development, manufacturing, quality, facilities, human resources and accounting. After the implementation of the 2012 Restructuring Plan we only have five employees remaining. Our remaining research and development personnel continue to move forward
the development on the MiFlow VAD with the aid of outside consultants and contractors.
18
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Revenue, net
|
|
$
|
—
|
|
|
$
|
(136
|
)
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
—
|
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
980
|
|
|
|
2,565
|
|
|
Selling, general and administrative
|
|
|
954
|
|
|
|
873
|
|
|
Restructuring charges
|
|
|
907
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,841
|
|
|
|
3,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,841
|
)
|
|
|
(4,222
|
)
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
Investment and other income
|
|
|
7
|
|
|
|
16
|
|
|
Gain (loss) on change in fair value of warrant liability
|
|
|
(415
|
)
|
|
|
8,299
|
|
|
Interest expense
|
|
|
(23
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
(3,272
|
)
|
|
$
|
4,062
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
27,518
|
|
|
|
26,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share
|
|
$
|
(0.12
|
)
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
:
Sales of Levacor VAD implant kits, capital equipment and related
peripheral equipment and services, accounted for the majority of our revenue during the three months ended March 31, 2011. Additionally, allowances for actual and anticipated sales returns reduced revenue recognized. We do not expect any
further sales of Levacor VAD kits and related equipment due to our decision to terminate all future commercialization efforts of the Levacor VAD in July 2011.
19
The composition of revenue in thousands ($000’s), except for units, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Units
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Units
|
|
|
Product revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implant kits
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Peripherals and other
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
24,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
24,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, returns and allowances
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(160,000
|
)
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
(136,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not recognized any revenue for the three months ended March 31, 2012 compared to negative
revenue, net, for the three months ended March 31, 2011 of $136,000. Negative revenue, net, during the three months ended March 31, 2011 is primarily the result of our decision to allow the return of two implant kits ($160,000) which had
previously been sold to a clinical center. This decision was made as a result of the pause in enrollment of our Levacor VAD BTT study in February 2011. Peripherals and other revenue was zero and $24,000 for the three months ended March 31, 2012
and 2011, respectively. We do not expect any further sales of Levacor VAD kits and related equipment due to our decision to terminate all future commercialization efforts of the Levacor VAD in July 2011.
Cost of goods sold:
For the three months ended March 31, 2012, cost of goods sold was zero compared to $648,000 for
the same period in 2011. Cost of goods sold for the three months ended March 31, 2011, consisted of minimum annual royalties, allowances for warranty and obsolescence reserves and amortization of negative manufacturing variances. We do not
expect to recognize future Levacor VAD related cost of goods sold due to our decision to terminate all future commercialization efforts of the Levacor VAD in July 2011.
Research and development:
Research and development expenses consist principally of salaries and related expenses for research personnel, consulting, prototype manufacturing, testing,
clinical studies, material purchases and regulatory affairs incurred at our Salt Lake City and Oakland facilities. Our Oakland facility was closed during 2011 as part of our 2011 Restructuring Plan. Additionally, a portion of our research and
development expenses are offset by amounts reimbursed to us by the NIH as part of the cost sharing agreement for the development of the PediaFlow VAD. Research and development expenses for the three months ended March 31, 2012 decreased $1.6
million, or 62%, compared with the three months ended March 31, 2011. The decrease is primarily due to the combination of our 2011 Restructuring Plan and termination of our Levacor BTT clinical study and our 2012 Restructuring Plan resulting in
a reduction of research, development, clinical and manufacturing personnel ($1.2 million), a decrease in consulting services ($412,000), a decrease in research supplies used to address Levacor VAD related device refinements ($306,000), a decrease in
stock based compensation ($266,000), a decrease in facility related expenses part of which resulted from the closure of our Oakland facility in 2011 ($163,000), a decrease in research expenses ($156, 000), a decrease in travel and entertainment
related expenses no longer needed to support the clinical trial or multiple locations ($58,000), offset by a decrease in capitalized manufacturing and overhead expenses associated with the termination of our efforts to commercialize the Levacor VAD
($810,000), an increase in royalties to our collaborative partners that previously were included in the cost of goods sold when our Levacor clinical study was operational ($92,000), an increase in research supplies used to develop MiFlow and
PediaFlow ($55,000) and an increase in legal fees related to our intellectual property ($19,000). Additionally, in 2012, we incurred and expect to be reimbursed for our development under our cost-sharing agreement with the NIH for the PediaFlow VAD
relating to labor, benefits, consulting, including services provided by subcontractors, and materials and supplies expenses for the three months ended March 31, 2012 of $89,900 compared to $315,468 for the same period in 2011. For the three
months ended March 31, 2012 and 2011, we recorded a credit to expense of $45,000 and a charge of $221,000, respectively, in stock-based compensation expense. The credit resulted primarily from the forfeiture of options relating to terminated
personnel resulting from the 2011 and 2012 Restructuring Plans. Research and development expenses are expected to decrease during 2012 due to our 2012 Restructuring Plan.
Selling, general and administrative:
Selling, general and administrative expenses consist primarily of payroll and related expenses for executives, marketing, accounting and administrative
personnel. Selling expenses primarily relate to marketing and trade show costs. Our administrative expenses include professional fees, investor communication expenses, insurance premiums, public reporting costs and general corporate expenses.
Selling, general and administrative expenses for the three months ended March 31, 2012 increased by $81,000 or 9%,
compared with the three months ended March 31, 2011. The increase in selling, general and administrative expenses is due to an increase in legal fees primarily relating to the HeartWare Merger ($184,000), an increase in stock based compensation
($43,000), and an increase in general office related expenses ($4,000), offset by a decrease in professional services ($89,000), a decrease in personnel and payroll related expenses resulting from our 2011 and 2012 Restructuring Plans ($36,000), a
decrease in consulting services ($21,000), and a decrease in and a decrease in travel related expenses ($4,000). For the three months ended March 31, 2012 and 2011, we recorded $148,000 and $105, 000, respectively, in stock based compensation.
Selling, general and administrative expenses are expected to continue to decrease in the future due to the 2012 Restructuring Plan.
20
Restructuring costs.
Restructuring costs relate to our 2012 Restructuring Plan
and our 2011 Restructuring Plan. We did not recognize any restructuring costs during the three months ended March 31, 2011. Restructuring charges for the three months ended March 31, 2012 and consist of the following (in thousands):
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Three Months Ended
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March 31, 2012
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2012 Restructuring Plan Charges
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Severance related costs
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$
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695
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Facility related costs
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212
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Contract and purchase order cancellation fees
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13
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Total 2012 Restructuring Charges
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919
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2011 Restructuring Plan Charges
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Contract and purchase order cancellation fees
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(12
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)
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Total Restructuring Charges
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$
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907
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Restructuring costs for the three months ended March 31, 2012 and 2011, were $907,000 and zero,
respectively. In February 2012, we announced a workforce reduction in an effort to preserve cash and reduce our fixed operating costs as we explored various corporate strategic options. The approved restructuring plan resulted in a reduction in our
workforce of approximately 20 full-time positions and 1 part-time position, or approximately 81% of our workforce. Personnel reductions were made across the entire organization, including the following departments: research and development,
manufacturing, quality, facilities, human resources and accounting. After the implementation of the 2012 Restructuring Plan, we only have four employees remaining. In addition to the severance and other termination benefits ($695,000), we recorded
facility related charges, including minimum lease payments ($212,000) and contract and purchase order cancellation fees ($13,000). In July 2011, we announced a termination of our efforts to commercialize the Levacor VAD technology. In conjunction
with this decision, the Board of Directors approved a restructuring plan that resulted in a reduction in our workforce of approximately 21 full-time positions, or approximately 42% of our workforce. During the three months ended March 31, 2012,
we reversed $12,000 of contract termination fees previously recognized in 2011.
We expect we may incur additional
restructuring expenses in the future under our 2012 and 2011 Restructuring Plans of up to $550,000 related to additional severance and termination benefits for an employee that is required to provide future service in order to receive the offered
benefits as well as a cancellation of a contract. As a result of our restructurings, we will realize cost savings from the reduced headcount as well as reduced clinical trial and manufacturing costs, including inventory build, related to the Levacor
VAD.
Investment and other income:
Investment and other income was $7,000 and $16,000 for the three months ended
March 31, 2012 and 2011, respectively. Investment and other income decreased during the three months ended March 31, 2012 compared to the same period in 2011 primarily due to lower average investment balances due to the consumption of cash
to fund operations. We anticipate our investment income to continue to decrease in future periods as a result of consumption of cash to fund operations, unless additional financing is obtained.
Gain on change in fair value of warrant liability:
We recorded a $415,000 non-cash loss on change in fair value of warrant
liability during the three months ended March 31, 2012 compared to a $8.3 million non-cash gain on the change in fair value of warrant liability during the three months ended March 31, 2011 related to warrants issued in our October
Offering. The change in both periods was primarily attributable to fluctuations in our common stock price. The warrants are classified as a liability due to a provision contained within the warrant agreement which allows the warrant holder the
option to elect to receive an amount of cash equal to the value of the warrants as determined in accordance with the Black-Scholes option pricing model with certain defined assumptions upon a change of control. The warrant liability will continue to
fluctuate in the future based on inputs to the Black-Scholes model including our current stock price, the remaining life of the warrants, the volatility of our stock price, and the risk free interest rate.
Interest expense
: For the three months ended March 31, 2012 and 2011, interest expense was $23,000 and $31,000,
respectively. Interest expense primarily relates to the effective interest rate on the note issued to LaunchPoint in December 2009 under the LaunchPoint Agreement. The decrease in interest expense between periods is a result of the principal balance
of the LaunchPoint Note decreasing over time with payments made annually in December.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded losses from operations through the sale of equity and issuance of debt instruments. Combined with revenue and
investment income, these funds have provided us with the resources to operate our business, sell and support our products, attract and retain key personnel, fund our research and development programs and clinical studies, and apply for and obtain
the necessary regulatory approvals.
21
At March 31, 2012, we had cash and cash equivalents of $5.6 million and $1.7 million in
available-for-sale investment securities totaling $7.3 million, compared to a total of $9.3 million as of December 31, 2011. For the three months ended March 31, 2012, cash used in operating activities was $2.0 million, consisting
primarily of the net loss for the period of $3.3 million offset by $415,000 non-cash loss on change in fair value of the warrant liability, $103,000 for non-cash stock compensation expense, a $52,000 for amortization and depreciation expense, a
$24,000 for amortization of premium on marketable investments, and a $23,000 for non-cash interest on the LaunchPoint Note. Additionally, working capital changes consisted of cash increases related to a $123,000 decrease in trade and other
receivables, a $26,000 decrease in prepaid expenses and other current assets, a $226,000 increase in accounts payable and accrued liabilities, and a $292,000 increase in accrued restructuring, offset by a $3,000 decrease in accrued compensation. For
the three months ended March 31, 2012, cash provided by investing activities was $2.2 million related primarily to the maturity and sale of marketable investment securities. For the three months ended March 31, 2011, cash used in financing
activities was $2,000.
At March 31, 2011, we had cash and cash equivalents of $1.6 million and $16.1 million in
available-for-sale investment securities totaling $17.7 million, compared to a total of $22.4 million as of December 31, 2010. For the three months ended March 31, 2011, cash used in operating activities was $4.5 million, consisting
primarily of the net income for the period of $4.1 million, $327,000 for non-cash stock compensation expense, $21,000 for non-cash interest on the LaunchPoint Note, and $55,000 for amortization and depreciation, and $87,000 in accretion/amortization
on marketable securities, offset by $8.3 million for change in the fair value of the warrant liability. Additionally, working capital changes consisted of cash decreases related to a $57,000 increase in trade and other receivables, $835,000
increase in inventory and a $77,000 decrease in accrued compensation, offset by cash increases of an $87,000 increase in accounts payable and accrued liabilities and $146,000 decrease in prepaid expenses and other current assets. For the three
months ended March 31, 2011, cash used in investing activities was $3.4 million related primarily to the net purchase of marketable investment securities of $3.2 million and $168,000 in the purchase of property and equipment. For the three
months ended March 31, 2011, cash used in financing activities was $19,000.
We expect that our existing capital
resources will be sufficient to allow us to maintain our current and planned operations through at least 2012. However, our actual needs will depend on numerous factors, including the progress and scope of our internally funded research and
development activities. In July 2011, we announced that we were ending our efforts to commercialize the Levacor VAD technology and were focusing our resources on the development and commercialization of our next-generation miniature MiFlow and
PediaFlow VADs. As a result, our actual capital needs may substantially exceed our anticipated capital needs and we may have to substantially modify or terminate current and planned development needs, restructure operations further and reduce costs,
enter into strategic relationships or merge or be acquired by another company. As a result, our business may be materially harmed, our stock price may be adversely affected, and our ability to raise additional capital may be impaired.
We will need to raise substantial additional funds to support our long-term research, product development and
commercialization programs. We regularly consider various fund raising and strategic alternatives, including, for example, debt or equity financing and merger and acquisition alternatives. In an effort to preserve our cash position as we explore our
strategic options we announced the 2012 Restructuring Plan. Additionally, on March 29, 2012 we entered into a Merger Agreement with HeartWare. Under the terms of the Merger Agreement, HeartWare will acquire all the outstanding stock in
WorldHeart for approximately $8.0 million in either HeartWare stock or cash, at HeartWare’s election. We currently plan to complete the proposed merger in the third quarter of 2012. However, we can neither assure you that the merger will be
completed nor can we predict the exact timing of the completion of the merger. We may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms to the extent permissible under the
Merger Agreement. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research
and development programs; obtain funds through arrangements with licensees or others that may require us to relinquish rights to certain of our technologies that we might otherwise seek to develop or commercialize on our own; significantly
restructure operations and implement cost saving initiatives, including but not limited to, reductions in salaries and/or elimination of employees and consultants or cessation of operations; or, merge or be acquired by another company, to the extent
permissible under the Merger Agreement.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a discussion of our critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in our 2011 Form 10-K.
NEW ACCOUNTING STANDARDS
Refer to Note 9, in “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of new accounting
standards.
OFF-BALANCE SHEET ARRANGEMENTS
None.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Based on their
evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012, our Chief Financial Officer (principal executive, financial and accounting officer) has concluded
that our disclosure controls and procedures are effective. As required by U.S. Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, of the
effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based on the foregoing, our and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
. As a result of our 2012 Restructuring Plan and the corresponding reduction in
headcount in the accounting department, we have had to make certain changes in our internal control over financial reporting during the three months ended March 31, 2012, including reducing the number of key controls from 85 to 25. Other than
the changes just described, there was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we may be a party to legal proceedings. We are not currently a party to any material legal proceedings.
ITEM 1A. RISK FACTORS
Other than the risk
factors below, there have been no material changes to the risk factors as set forth in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2011.
Risks Related to the Merger
Because the market price of HeartWare
common stock will fluctuate, and because HeartWare may exercise the HeartWare cash election, World Heart stockholders cannot be certain of the type of merger consideration that they will receive upon completion of the merger and the market value of
such merger consideration.
The market price of HeartWare common stock will likely vary at the closing of the merger
from the price of HeartWare common stock as of the date of this filing. The number of shares of HeartWare common stock that World Heart stockholders will be entitled to receive upon completion of the merger will depend on the average of the per
share closing prices of HeartWare common stock during the ten consecutive trading days ending on (and including) the trading day that is one calendar day prior to the effective time of the merger. Furthermore, the market value of such shares of
HeartWare common stock will depend on the per share closing price of HeartWare common stock upon completion of the merger. Finally, HeartWare may exercise, up until three business days prior to the effective date of the merger, the HeartWare cash
election.
Fluctuations in the market price of HeartWare common stock may be the result of general market and economic
conditions, changes in the business, operations or prospects of HeartWare, market assessments of the likelihood that the merger will be completed and the timing of closing of the merger and other factors independent of the merger. In addition to the
adoption of the merger agreement by World Heart stockholders at the World Heart special meeting, completion of the merger is subject to the satisfaction of other conditions that may not occur until sometime after the World Heart special meeting. As
a result, at the time of the World Heart special meeting, World Heart stockholders will not know the number of shares of HeartWare common stock they will be entitled to receive, and they will not know whether they will receive shares of HeartWare
common stock or cash as merger consideration, and thus will not know the precise dollar value of the merger consideration they will be entitled to receive upon completion of the merger.
World Heart will incur substantial expenses related to the merger, and the merger might not be completed if World Heart is unable
to fulfill all of the closing conditions.
World Heart expects to incur substantial expenses in connection with the
merger whether or not the transaction is consummated. Further, the consummation of the merger is conditioned upon the fulfillment of certain conditions by each of the parties, including World Heart’s obligation to have cash or cash equivalents
on hand (net of certain liabilities) in an aggregate amount of not less than $4,000,000, subject to certain adjustments, as of the effective time of the merger. Although World Heart intends to operate its business in a manner to
23
meet this closing condition, World Heart may not be able to meet this closing condition. If any closing condition, including the minimum cash condition, is not met, it is possible that HeartWare
might not consummate the merger. If World Heart stockholders do not adopt the merger agreement, or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to World Heart will be offered,
or that the business, prospects or results of operations of World Heart will not be adversely impacted.
The merger may
be fully taxable to World Heart stockholders for U.S. federal income tax purposes.
If the merger fails to qualify as
a reorganization for U.S. federal income tax purposes (including if the IRS successfully challenges the treatment of the merger as a reorganization), the receipt of shares of HeartWare common stock in the merger will be fully taxable to World Heart
stockholders for U.S. federal income tax purposes. In addition, if HeartWare exercises the HeartWare cash election, the receipt of cash payments in exchange for shares of World Heart common stock will be fully taxable to World Heart stockholders who
are subject to U.S. federal income tax.
Failure to complete the merger could negatively impact the stock price and the
future business and financial results of World Heart.
Completion of the merger is subject to a number of closing
conditions, including the adoption of the merger agreement by World Heart stockholders, and those closing conditions may not be satisfied on a timely basis or at all. If the merger is not completed, the price of World Heart common stock may decline.
In addition, if the merger is not completed, World Heart may be subject to a number of material risks, including the following:
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•
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World Heart may not realize any anticipated benefits from being a part of a combined company;
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•
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World Heart may be required to grant HeartWare a license to certain patents and patent applications if the merger agreement is terminated under certain
circumstances;
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•
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World Heart may be subject to litigation related to the completion of the merger or the failure to complete the merger, which could require substantial
time and resources to resolve;
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•
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the market price of World Heart common stock may be adversely affected to the extent the market price reflects an assumption that the merger will be
completed;
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•
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World Heart may not be able to find another buyer willing to pay an equivalent or higher price in an alternative transaction than the price to be paid
by HeartWare in the merger;
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•
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World Heart will be required to pay certain costs relating to the merger, such as legal, accounting and printing fees whether or not the merger is
completed; and
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•
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matters relating to the merger (including integration planning) require substantial commitments of time and resources by HeartWare and World Heart
management, which could otherwise have been devoted to other opportunities that may have been beneficial to World Heart.
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Certain directors and executive officers of World Heart may have interests in the merger that differ from the interests of World Heart stockholders that may influence these directors and executive
officers to support the merger.
Certain of World Heart’s directors and executive officers may have financial
interests in the merger that are different from, or in addition to, the interests of World Heart stockholders. The members of the World Heart board of directors were aware of and considered these interests, among other matters, in evaluating and
negotiating the merger agreement and the merger, and in recommending to World Heart stockholders that the merger agreement be adopted.
The merger agreement limits World Heart’s ability to pursue alternative transactions to the merger.
The merger agreement contains “no shop” provisions that, subject to limited exceptions, limit World Heart’s ability to discuss, facilitate or commit to competing third-party proposals to
acquire all or a significant part of the company, or to license its intellectual property. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of World Heart, or
acquiring or licensing its intellectual property, from considering or proposing that transaction even if it were prepared to pay consideration with a higher per share market price than that proposed in the merger, or might result in a potential
competing acquirer’s proposing to pay a lower per share price to acquire World Heart than it might otherwise have proposed to pay. World Heart can consider and participate in discussions and negotiations with respect to an alternative proposal
so long as such proposal did not arise from any breach of the “no shop” provisions pertaining to World Heart and the World Heart board of directors determines in good faith (after consultation with outside legal counsel) that failure to
take such action would be inconsistent with its fiduciary duties to World Heart stockholders under applicable law.
24
The market price for HeartWare common stock may be affected by factors different from
those affecting the market price of World Heart common stock. In addition, holders of HeartWare common stock have different rights as stockholders than holders of World Heart common stock.
If the merger is completed, holders of World Heart common stock will become holders of HeartWare common stock. HeartWare’s business
differs from World Heart’s business, and HeartWare’s results of operations and the market price of HeartWare common stock may be affected by factors different from those currently affecting the results of operations of World Heart and the
market price of World Heart common stock. In addition, the results of operations of the combined company and the market price of the combined company’s common stock may be affected by factors different from those currently affecting either
HeartWare or World Heart.
In addition, holders of shares of HeartWare common stock issued in connection with the merger will
have different rights as HeartWare stockholders than the rights they had as World Heart stockholders before the merger.
World Heart stockholders, as a group, will have significantly reduced ownership and voting interests after the merger and will
exercise less influence over management of HeartWare than they currently exercise over management of World Heart.
After the effective time of the merger, World Heart stockholders will own, as a group, in the aggregate, a significantly smaller
percentage of HeartWare than they currently own of World Heart. Immediately following the merger, former stockholders of World Heart are expected to own approximately 1% of the outstanding shares of HeartWare common stock, based on the number of
shares of HeartWare common stock and World Heart common stock outstanding on the record date. Consequently, as a general matter, World Heart stockholders, as a group, will have significantly reduced ownership and voting interests in HeartWare
following the merger than they owned of World Heart prior to the merger and, as a result, they will have less influence over the management and policies of HeartWare than they currently exercise over the management and policies of World Heart.
World Heart will no longer exist as an independent public company following the merger and its stockholders will forego
any increase in its value.
If the merger is successful, World Heart will no longer exist as an independent public
company and World Heart stockholders will forego any increase in World Heart’s value that might have otherwise resulted from its possible growth.
Upon termination of the merger agreement under specified circumstances, the license agreement will become effective.
If the merger agreement is terminated under certain circumstances involving competing transactions, a change in World Heart’s board of directors’ recommendation of the merger to World Heart
stockholders, breaches of representations and warranties in the merger agreement, the failure to meet the minimum cash condition and the merger not having closed by August 31, 2012, World Heart stockholders failing to adopt the merger agreement
at the World Heart special meeting and other triggering events, the license agreement will become effective.
Risk Factors Relating to Our
Business
We may not realize the expected benefits of our initiatives to control costs.
Managing costs is a key element of our business strategy. Consistent with this element of our strategy, in February 2012 and July 2011 we
approved restructuring plans that both resulted in a reduction in our workforce. We currently have four full-time positions remaining.
If we experience excessive unanticipated inefficiencies or incremental costs in connection with restructuring activities, such as unanticipated inefficiencies caused by reducing headcount, we may be
unable to meaningfully realize cost savings and we may incur expenses in excess of what we anticipate. Either of these outcomes could prevent us from meeting our strategic objectives and could adversely impact our results of operations and financial
condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITOES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
25
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit 31.1
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Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit 32.1
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Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
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101.INS*
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XBRL Instance Document
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101.SCH*
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XBRL Taxonomy Extension Schema Document
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101.CAL*
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.LAB*
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE*
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XBRL Taxonomy Extension Presentation Document
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(*)
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Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data
files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data
files after becoming aware that the interactive data files fail to comply with the submission requirements. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability
under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing
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SIGNATURES
Pursuant to 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.
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World Heart Corporation
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(Registrant)
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Dated: May 9, 2012
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/s/ M
ORGAN
R.
B
ROWN
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Morgan R. Brown, Executive Vice President
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and Chief Financial Officer
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(Principal Executive, Financial and Accounting Officer)
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26
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