Note 3. Balance Sheet Information

Accounts Receivable

Accounts receivable consists of amounts due from the sale of our HeartWare^® Ventricular Assist System (the “HVAD System”) to our customers, which include hospitals, health research institutions and medical device distributors. We grant credit to customers in the normal course of business, but generally do not require collateral or any other security to support credit sales. Our receivables are geographically dispersed, with a significant portion from customers located in Europe and other foreign countries. No customer had an accounts receivable balance greater than 10% of total accounts receivable at March 31, 2015 or December 31, 2014.

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

The following table summarizes the change in our allowance for doubtful accounts for the three months ended March 31, 2015 and 2014:


	2015			2014
	(in thousands)
Beginning balance	$	671		$	495
Reversal of expense		(26	)		—
Charge-offs		—			—

Ending balance	$	645		$	495

As of March 31, 2015 and December 31, 2014, we did not have an allowance for returns.

Inventories

Components of inventories are as follows:


	March 31, 2015		December 31, 2014
	(in thousands)
Raw material	$	28,773	$	28,688
Work-in-process		10,032		10,240
Finished goods		13,551		15,118

	$	52,356	$	54,046

Finished goods inventories includes inventory held on consignment at customer sites of approximately $5.7 million at March 31, 2015 and $5.8 million at December 31, 2014.

Property, Plant and Equipment, Net

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


	Estimated Useful Lives	March 31, 2015			December 31, 2014
		(in thousands)
Machinery and equipment	1.5 to 7 years	$	20,504		$	21,279
Leasehold improvements	3 to 10 years		8,917			9,070
Office equipment, furniture and fixtures	5 to 7 years		2,014			2,206
Purchased software	1 to 7 years		6,694			6,474

			38,129			39,029
Less: accumulated depreciation			(21,109	)		(19,993	)

		$	17,020		$	19,036

In the first quarter of 2015, we ceased activities at our facility in Aachen, Germany. We recorded an impairment charge of $1.1 million related to leasehold improvements and equipment at the facility upon their discontinued use. This amount is included in research and development expenses on our condensed consolidated statements of operations.

In the first quarter of 2014, we ceased activities at our facility in Teaneck, New Jersey and vacated the facility. We recorded an impairment charge of $0.6 million related to office equipment and software at the facility upon their discontinued use. This amount is included in selling, general and administrative expenses on our condensed consolidated statements of operations.

Long-Term Investment

In October 2013, we invested $10 million in an early-stage, privately-held company focused on the development of novel, minimally invasive heart therapies in the form of a convertible promissory note with an interest rate of 6% per annum (the “Note”). Pursuant to the terms of the Note, on October 7, 2014 (the maturity date), the privately held company elected to convert all unpaid principal and interest on the Note (less applicable taxes) into shares of its preferred stock. This investment is carried at cost and is included in long-term investments and other assets on our condensed consolidated balance sheets. The carrying value of this investment was $10.5 million at March 31, 2015 and December 31, 2014.

The fair value of this investment has not been estimated as of March 31, 2015 and December 31, 2014. As of March 31, 2015, the investee company had limited liquidity and is in the process of raising additional capital to continue its operations. However, there can be no assurance this effort will be successful or that the investee company will be able to raise a sufficient amount of capital to conduct their operations at a level that would allow for commercial development of their products. We considered determination of the fair value of this investment to be impracticable as it represents an equity interest in an early-stage, privately-held company. We believe there have been no significant events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Events may occur or information may become available, including the inability of the investee company to raise sufficient additional capital, that could require us to write-off all or a portion of this asset, which could have a material adverse effect on our consolidated results of operations.

Other Accrued Liabilities

Other accrued liabilities consist of the following:


	March 31, 2015		December 31, 2014
	(in thousands)
Accrued payroll and other employee costs	$	9,578	$	13,404
Accrued material purchases		4,251		4,284
Accrued warranty		4,815		4,685
Accrued research and development costs		2,772		2,663
Other accrued expenses		12,255		11,553

	$	33,671	$	36,589

Accrued payroll and other employee costs

Accrued payroll and other employee costs included estimated year-end employee bonuses of approximately $2.4 million and $7.9 million at March 31, 2015 and December 31, 2014, respectively.

Accrued Warranty

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

The following table summarizes the change in our warranty liability for the three months ended March 31, 2015 and 2014:


	2015			2014
	(in thousands)
Beginning balance	$	4,685		$	2,498
Accrual for warranty expense		785			2,105
Warranty costs incurred during the period		(655	)		(341	)

Ending balance	$	4,815		$	4,262

The accrual for warranty expense in the three months ended March 31, 2014 reflected an anticipated increase in battery returns as a result of a field safety corrective action in April 2014, following an observed increase in complaints related to earlier-than-expected battery depletion and routine battery handling. The Company provided information to assist patients and clinicians to monitor battery performance, recognize abnormal behaviors and reinforce proper power management of the HVAD System. We increased our warranty liability as of March 31, 2014 to account for an anticipated higher level of battery returns likely to be associated with increased battery performance awareness.

Accrued Product Recall Costs

The costs to repair or replace products associated with product recalls and voluntary service campaigns are recorded when they are determined to be probable and reasonably estimable as a cost of revenue and are not included in our warranty liability. No such costs were incurred in the three months ended March 31, 2014. The following table summarizes the change in product recall liability for the three months ended March 31, 2015:


	2015
	(in thousands)
Beginning balance	$	1,888
Accrual for recall costs		505
Recall costs incurred during the period		(1,305	)

Ending balance	$	1,088

As noted above, in April 2014, we implemented a field action following an observed increase in complaints related to earlier-than-expected battery depletion and routine battery handling. On July 30, 2014, we extended the field action to include a voluntary recall of certain older batteries. The recall instructs sites to replace certain older batteries in the field upon patients’ routine visits in order to further mitigate the potential risks associated with premature battery depletion. This recall was ongoing as of March 31, 2015.

In February 2015, we expanded a 2013 voluntary field safety corrective action, by initiating a voluntary medical device recall of certain older controllers distributed in the U.S. during the ADVANCE and ENDURANCE clinical trial periods. The action had been initiated in certain foreign markets around the end of 2014. The affected controllers exhibit a higher susceptibility to electrostatic discharge than newer, commercial controllers. This recall was ongoing as of March 31, 2015.

Accrued Restructuring Costs

The following table summarizes changes in our accrued restructuring costs for the three months ended March 31, 2015:


	Facility Leases			Severance and Related			Contract Termination		Total
	(in thousands)
Beginning balance	$	1,266		$	—		$	—	$	1,266
Restructuring charges		139			598			310		1,047
Payments		(191	)		(217	)		—		(408	)
Adjustments to estimated obligations		456			—			—		456
Change in fair value		11			—			—		11

Ending balance	$	1,681		$	381		$	310	$	2,372

The restructuring obligations reflected above resulted from the following actions:

Facility Closures

In the three months ended March 31, 2015, we ceased activities at our facility in Aachen, Germany, which is subject to an operating lease that runs through October 2017. In connection with this action, we recorded a $0.1 million liability equal to the lease termination payment that has been negotiated with the landlord. This amount is included in research and development expenses on our condensed consolidated statements of operations.

In the three months ended March 31, 2014, we ceased the use of CircuLite’s former headquarters in Teaneck, New Jersey, which is subject to an operating lease that runs through the end of 2020. In connection with this action, we recorded a $1.7 million liability equal to the estimated fair value of the remaining lease obligation as of the cease-use date. In the three months ended March 31, 2015, this liability was increased by $0.5 million as a result of a change in our estimated sublease start date (see Note 6). These amounts are included in selling, general and administrative expenses on our condensed consolidated statements of operations.

In the three months ended March 31, 2014, we also relocated our corporate headquarters and ceased activities at our former headquarters in Framingham, Massachusetts. In connection with this action, we recorded a $0.5 million liability equal to the aggregate of the remaining payments on the lease for our former headquarters as of the cease-use date. This amount is included in selling, general and administrative expenses on our condensed consolidated statements of operations.

Severance Agreements

In the three months ended March 31, 2015, we incurred severance costs aggregating $0.6 million in connection with our decision to cease activities at our facility in Aachen, Germany. This amount is included in research and development expenses on our condensed consolidated statements of operations.

In the three months ended March 31, 2014, we incurred various costs related to the integration of CircuLite’s operations, including severance costs aggregating $0.6 million. We recorded $0.4 million in research and development expenses and the remaining $0.2 million in selling, general and administrative expenses on our condensed consolidated statements of operations.

Contract Termination

As a result of our decision to cease activities at our facility in Aachen, Germany, we terminated supply agreements with vendors for the purchase of supplies. In connection with the termination of these supply agreements, we recorded a charge of $0.3 million in the three months ended March 31, 2015, which is included in research and development expenses on our condensed consolidated statements of operations.

As a result of design modifications to the SYNERGY System and our decision to move manufacturing of the SYNERGY System to our Miami Lakes facility, we terminated a supply agreement with a vendor in Germany for the purchase of components necessary to produce the prior version of the SYNERGY System. In connection with the termination of this supply agreement, we recorded a charge of $0.7 million in the three months ended March 31, 2014, which is included in research and development expenses on our consolidated statements of operations.