UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number 001-09585

 

ABIOMED, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

04-2743260

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

22 CHERRY HILL DRIVE

DANVERS, MASSACHUSETTS 01923

(Address of principal executive offices, including zip code)

(978) 646-1400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark 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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       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. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of October 26, 2016, 43,380,993 shares of the registrant’s common stock, $.01 par value, were outstanding.

 

 

 

 


 

ABIOMED, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

Page

PART I - FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and March 31, 2016

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2016 and 2015

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2016 and 2015

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

PART II - OTHER INFORMATION:

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

30

 

 

 

 

Item 4.

Mine Safety Disclosures

 

31

 

 

 

 

Item 5.

Other Information

 

31

 

 

 

 

Item 6.

Exhibits

 

32

 

 

 

 

SIGNATURES

 

34

 

 

NOTE REGARDING COMPANY REFERENCES

Throughout this report on Form 10-Q (the “Report”), “Abiomed, Inc.,” the “Company,” “we,” “us” and “our” refer to ABIOMED, Inc. and its consolidated subsidiaries.

 

NOTE REGARDING TRADEMARKS

ABIOMED, IMPELLA, IMPELLA CP and IMPELLA RP are trademarks of ABIOMED, Inc., and are registered in the U.S. and certain foreign countries. AB5000, IMPELLA 2.5, IMPELLA 5.0, IMPELLA LD and cVAD REGISTRY are trademarks of ABIOMED, Inc.  RECOVER is a trademark of Abiomed Europe GmbH, a subsidiary of ABIOMED, Inc., and is registered in certain foreign countries.

2


 

PART 1. FINANCI AL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

 

 

September 30, 2016

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,709

 

 

$

48,231

 

Short-term marketable securities

 

 

178,236

 

 

 

163,822

 

Accounts receivable, net

 

 

46,607

 

 

 

42,821

 

Inventories

 

 

31,491

 

 

 

26,740

 

Prepaid expenses and other current assets

 

 

8,827

 

 

 

6,778

 

Total current assets

 

 

319,870

 

 

 

288,392

 

Long-term marketable securities

 

 

4,004

 

 

 

1,000

 

Property and equipment, net

 

 

50,207

 

 

 

23,184

 

Goodwill

 

 

32,582

 

 

 

33,003

 

In-process research and development

 

 

15,199

 

 

 

15,396

 

Long-term deferred tax assets, net

 

 

48,614

 

 

 

58,534

 

Other assets

 

 

4,422

 

 

 

4,422

 

Total assets

 

$

474,898

 

 

$

423,931

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,066

 

 

$

9,381

 

Accrued expenses

 

 

28,013

 

 

 

28,382

 

Deferred revenue

 

 

9,103

 

 

 

8,778

 

Current portion of capital lease obligation

 

 

740

 

 

 

 

Total current liabilities

 

 

51,922

 

 

 

46,541

 

Other long-term liabilities

 

 

4

 

 

 

220

 

Contingent consideration

 

 

7,749

 

 

 

7,563

 

Long-term deferred tax liabilities

 

 

821

 

 

 

832

 

Capital lease obligation, net of current portion

 

 

15,961

 

 

 

 

Total liabilities

 

 

76,457

 

 

 

55,156

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class B Preferred Stock, $.01 par value

 

 

 

 

 

 

Authorized - 1,000,000 shares; Issued and outstanding - none

 

 

 

 

 

 

 

 

Common stock, $.01 par value

 

 

433

 

 

 

426

 

Authorized - 100,000,000 shares; Issued - 44,905,284 shares at September 30, 2016 and 43,973,119 shares at March 31, 2016

 

 

 

 

 

 

 

 

Outstanding - 43,333,607 shares at September 30, 2016 and 42,596,228 shares at March 31, 2016

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

536,859

 

 

 

508,624

 

Accumulated deficit

 

 

(77,290

)

 

 

(99,075

)

Treasury stock at cost - 1,571,677 shares at September 30, 2016 and 1,376,891 shares

at March 31, 2016

 

 

(46,266

)

 

 

(26,660

)

Accumulated other comprehensive loss

 

 

(15,295

)

 

 

(14,540

)

Total stockholders' equity

 

 

398,441

 

 

 

368,775

 

Total liabilities and stockholders' equity

 

$

474,898

 

 

$

423,931

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

3


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

 

102,928

 

 

$

 

76,354

 

 

$

 

205,917

 

 

$

 

149,780

 

Funded research and development

 

 

 

27

 

 

 

 

5

 

 

 

 

33

 

 

 

 

11

 

 

 

 

 

102,955

 

 

 

 

76,359

 

 

 

 

205,950

 

 

 

 

149,791

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

 

17,309

 

 

 

 

12,144

 

 

 

 

32,379

 

 

 

 

23,012

 

Research and development

 

 

 

18,052

 

 

 

 

11,569

 

 

 

 

33,712

 

 

 

 

21,779

 

Selling, general and administrative

 

 

 

53,086

 

 

 

 

39,829

 

 

 

 

104,118

 

 

 

 

77,152

 

 

 

 

 

88,447

 

 

 

 

63,542

 

 

 

 

170,209

 

 

 

 

121,943

 

Income from operations

 

 

 

14,508

 

 

 

 

12,817

 

 

 

 

35,741

 

 

 

 

27,848

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

 

342

 

 

 

 

62

 

 

 

 

611

 

 

 

 

125

 

Other (expense) income, net

 

 

 

(114

)

 

 

 

87

 

 

 

 

(191

)

 

 

 

140

 

 

 

 

 

228

 

 

 

 

149

 

 

 

 

420

 

 

 

 

265

 

Income before income taxes

 

 

 

14,736

 

 

 

 

12,966

 

 

 

 

36,161

 

 

 

 

28,113

 

Income tax provision

 

 

 

5,861

 

 

 

 

5,231

 

 

 

 

14,376

 

 

 

 

11,519

 

Net income

 

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.51

 

 

$

 

0.40

 

Basic weighted average shares outstanding

 

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

 

0.20

 

 

$

 

0.17

 

 

$

 

0.49

 

 

$

 

0.37

 

Diluted weighted average shares outstanding

 

 

 

44,580

 

 

 

 

44,922

 

 

 

 

44,493

 

 

 

 

44,778

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

4


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

8,875

 

 

$

7,735

 

 

$

21,785

 

 

$

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

 

812

 

 

 

710

 

 

 

(887

)

 

 

2,308

 

Net unrealized gains (losses) on marketable securities

 

 

(18

)

 

 

6

 

 

 

132

 

 

 

16

 

Other comprehensive income (loss)

 

 

794

 

 

 

716

 

 

 

(755

)

 

 

2,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

9,669

 

 

$

8,451

 

 

$

21,030

 

 

$

18,918

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

5


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

21,785

 

 

$

16,594

 

Adjustments required to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

2,958

 

 

 

1,352

 

Bad debt expense

 

 

(13

)

 

 

(18

)

Stock-based compensation

 

 

18,047

 

 

 

15,592

 

Write-down of inventory

 

 

1,354

 

 

 

952

 

Excess tax benefit from stock-based awards

 

 

(3,631

)

 

 

(383

)

Deferred tax provision

 

 

9,777

 

 

 

10,803

 

Change in fair value of contingent consideration

 

 

186

 

 

 

307

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,807

)

 

 

(5,214

)

Inventories

 

 

(6,284

)

 

 

(6,855

)

Prepaid expenses and other assets

 

 

(2,029

)

 

 

456

 

Accounts payable

 

 

1,906

 

 

 

(1,817

)

Accrued expenses and other liabilities

 

 

3,157

 

 

 

(2,674

)

Deferred revenue

 

 

330

 

 

 

(239

)

Net cash provided by operating activities

 

 

43,736

 

 

 

28,856

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(134,235

)

 

 

(99,002

)

Proceeds from the sale and maturity of marketable securities

 

 

116,685

 

 

 

101,453

 

Purchase of other investment

 

 

 

 

 

(750

)

Purchases of property and equipment

 

 

(10,453

)

 

 

(3,419

)

Net cash used for investing activities

 

 

(28,003

)

 

 

(1,718

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

5,764

 

 

 

7,971

 

Excess tax benefit from stock-based awards

 

 

3,631

 

 

 

383

 

Taxes paid related to net share settlement of vesting of stock awards

 

 

(19,608

)

 

 

(3,810

)

Proceeds from the issuance of stock under employee stock purchase plan

 

 

769

 

 

 

451

 

Principal payments on capital lease obligation

 

 

(83

)

 

 

 

Net cash (used for) provided by financing activities

 

 

(9,527

)

 

 

4,995

 

Effect of exchange rate changes on cash

 

 

272

 

 

 

(113

)

Net increase in cash and cash equivalents

 

 

6,478

 

 

 

32,020

 

Cash and cash equivalents at beginning of period

 

 

48,231

 

 

 

22,401

 

Cash and cash equivalents at end of period

 

$

54,709

 

 

$

54,421

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

560

 

 

$

576

 

Cash paid for interest on capital lease obligation

 

 

89

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment under capital lease obligation

 

 

16,784

 

 

 

 

Property and equipment in accounts payable and accrued expenses

 

 

3,810

 

 

 

396

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

6


 

ABIOMED, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

 

 

Note 1. Nature of Business and Basis of Preparation

Abiomed, Inc. (the “Company” or “Abiomed”) is a provider of mechanical circulatory support devices and offers a continuum of care to heart failure patients. The Company develops, manufactures and markets proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. The Company’s products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting and in accordance with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 that has been filed with the Securities and Exchange Commission (the “SEC”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature and are necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period may not be indicative of results for the full fiscal year or any other subsequent period.

There have been no changes in the Company’s significant accounting policies for the three and six months ended September 30, 2016 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 that has been filed with the SEC, except as follows:

Leases

Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC 840, Leases . When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease. Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the term of the capital lease obligation in relation to the carrying value of the capital lease.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers to provide updated guidance on revenue recognition. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for the Company beginning in fiscal 2019 under either full or modified retrospective adoption, with early adoption permitted as of the original effective date of ASU 2014-09.  The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which applies to inventory that is measured using first-in, first-out or average cost methods. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out. ASU-2015-11 is effective for annual and interim periods beginning after December 15,

7


 

2016, and should be applied prospectively with early adoption permitted at the beginning of an in terim or annual reporting period. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases . This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. ASU 2016-02 must be adopted using a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09,   Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.

 

 

Note 2. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of dilutive common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted average shares outstanding any potential dilutive securities outstanding for the period. Potential dilutive securities include stock options, restricted stock units, performance-based stock awards and shares to be purchased under the Company’s employee stock purchase plan. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same. The Company’s basic and diluted net income per share for the three and six months ended September 30, 2016 and 2015 were as follows (in thousands, except per share data):

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net

   income per share

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.51

 

 

$

 

0.40

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Diluted Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net

   income per share

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

Effect of dilutive securities

 

 

1,451

 

 

 

 

2,694

 

 

 

 

1,522

 

 

 

 

2,815

 

Weighted average shares used in computing diluted

   net income per share

 

 

44,580

 

 

 

 

44,922

 

 

 

 

44,493

 

 

 

 

44,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted

$

 

0.20

 

 

$

 

0.17

 

 

$

 

0.49

 

 

$

 

0.37

 

 

For the three and six months ended September 30, 2016, approximately 1,500 and 8,800 shares underlying out-of-the-money stock options, respectively, were excluded in the computation of diluted earnings per share because their effect would have been anti-dilutive. Also, approximately 186,000 restricted shares in each of the three and six months ended September 30, 2016, respectively, related to performance-based awards for which milestones have not been met, were not included in the computation of diluted earnings per share.

8


 

For the three and six months ended September 30, 2015, approximatel y 1,000 shares underlying out-of-the-money stock options, respectively, were excluded in the computation of diluted earnings per share because their effect would have been anti-dilutive. Also, approximately 227,000 and 226,000 restricted shares in each of the three and six months ended September 30, 2015, respectively, related to performance-based awards for which milestones had not been met were not included in the computation of diluted earnings per share.

 

 

Note 3. Marketable Securities and Fair Value Measurements

Marketable Securities

The Company’s marketable securities are classified as available-for-sale securities and, accordingly, are recorded at fair value. The difference between amortized cost and fair value is included in stockholders’ equity.

The Company’s marketable securities at September 30, 2016 and March 31, 2016 are invested in the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Gross

Unrealized

 

 

Gross

Unrealized

 

 

Fair Market

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(in $000's)

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term US Treasury mutual fund securities

 

$

37,141

 

 

$

9

 

 

$

(1

)

 

$

37,149

 

Short-term government-backed securities

 

 

90,823

 

 

 

39

 

 

 

(3

)

 

 

90,859

 

Short-term corporate debt securities

 

 

50,079

 

 

 

165

 

 

 

(16

)

 

 

50,228

 

Long-term US Treasury mutual fund securities

 

 

2,003

 

 

 

1

 

 

 

-

 

 

 

2,004

 

Long-term government-backed securities

 

 

1,999

 

 

 

1

 

 

 

-

 

 

 

2,000

 

 

 

$

182,045

 

 

$

215

 

 

$

(20

)

 

$

182,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Gross

Unrealized

 

 

Gross

Unrealized

 

 

Fair Market

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(in $000's)

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury mutual fund securities

 

$

45,635

 

 

$

21

 

 

$

 

 

$

45,656

 

Short-term government-backed securities

 

 

118,125

 

 

 

45

 

 

 

(4

)

 

 

118,166

 

Long-term government-backed securities

 

 

999

 

 

 

1

 

 

 

-

 

 

 

1,000

 

 

 

$

164,759

 

 

$

67

 

 

$

(4

)

 

$

164,822

 

 

Fair Value Hierarchy

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose values are based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

9


 

Level 3 is comprised of unobservable inputs that are supported by little or no market activity. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flows, or similar techniques, and at least one significant model assumption or input is unobserv able.

The following table presents the Company’s financial instruments recorded at fair value in the condensed consolidated balance sheets, classified according to the three categories described above:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2016:

 

(in $000's)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term U.S. Treasury mutual fund securities

 

$

 

 

$

37,149

 

 

$

 

 

$

37,149

 

Short-term government-backed securities

 

 

 

 

 

90,859

 

 

 

 

 

 

90,859

 

Short-term corporate debt securities

 

 

 

 

 

50,228

 

 

 

 

 

 

50,228

 

Long-term U.S. Treasury mutual fund securities

 

 

 

 

 

2,004

 

 

 

 

 

 

2,004

 

Long-term government-backed securities

 

 

 

 

 

2,000

 

 

 

 

 

 

2,000

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

7,749

 

 

 

7,749

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2016:

 

(in $000's)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury mutual fund securities

 

$

 

 

$

45,656

 

 

$

 

 

$

45,656

 

Short-term government-backed securities

 

 

 

 

 

118,166

 

 

 

 

 

 

118,166

 

Long-term government-backed securities

 

 

 

 

 

1,000

 

 

 

 

 

 

1,000

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

7,563

 

 

 

7,563

 

 

The Company’s investments in U.S. Treasury mutual fund securities, short-term government-backed securities, short-term corporate debt securities and long-term government-backed securities are reported as Level 2 financial assets as they are not exchange-traded instruments.

The Company’s financial liabilities consisted of contingent consideration potentially payable related to the acquisition of ECP Entwicklungsgesellschaft mbH (“ECP”) and AIS GmbH Aachen Innovative Solutions (“AIS”), in July 2014. This liability is reported as Level 3 as the estimated fair value of the contingent consideration related to the acquisition of the ECP requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome.

The following table summarizes the change in fair value, as determined by Level 3 inputs, of the contingent consideration for the three and six months ended September 30, 2016 and 2015:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

 

(in $000's)

 

 

(in $000's)

 

Level 3 liabilities, beginning balance

 

$

7,739

 

 

$

6,661

 

 

$

7,563

 

 

$

6,510

 

Additions

 

 

 

 

 

 

 

 

 

 

 

 

Payments

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value

 

 

10

 

 

 

156

 

 

 

186

 

 

 

307

 

Level 3 liabilities, ending balance

 

$

7,749

 

 

$

6,817

 

 

$

7,749

 

 

$

6,817

 

 

The change in fair value of the contingent consideration was primarily due to the passage of time on the fair value measurement of milestones related to the ECP acquisition. Adjustments associated with the change in fair value of contingent consideration are included in research and development expenses in the Company’s condensed consolidated statements of operations.

10


 

The following table presents quantitative info rmation about the inputs and valuation methodologies used for the Company’s fair value measurements as of September 30, 2016 classified as Level 3:

 

 

 

Fair Value at

 

 

 

 

 

 

Weighted Average

 

 

September 30, 2016

 

 

 

 

Significant

 

(range, if

 

 

(in $000's)

 

 

Valuation Methodology

 

Unobservable Input

 

applicable)

Contingent consideration

 

$

7,749

 

 

Probability weighted income approach

 

Milestone dates

 

2018 to 2021

 

 

 

 

 

 

 

 

Discount rate

 

8% to 12%

 

 

 

 

 

 

 

 

Probability of occurrence

 

Probability adjusted level

of 50% for the base case

scenario and 5% to 20%

for various upside and

downside scenarios

 

Other Investments

The Company periodically makes investments in private medical device companies that focus on heart failure and heart pump technologies.  The aggregate carrying amount of the Company’s other investments was $4.4 million at each of September 30, 2016 and March 31, 2016, respectively, and is classified within other assets in the unaudited condensed consolidated balance sheets. These investments are accounted for using the cost method and are measured at fair value only if there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of these investments.

 

 

Note 4. Property and Equipment

The components of property and equipment are as follows:

 

 

 

September 30, 2016

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

Machinery and equipment

 

 

27,045

 

 

 

25,211

 

Capital lease assets

 

$

16,784

 

 

$

-

 

Leasehold improvements

 

 

10,863

 

 

 

11,833

 

Furniture and fixtures

 

 

2,117

 

 

 

1,510

 

Construction in progress

 

 

14,145

 

 

 

3,712

 

Total cost

 

 

70,954

 

 

 

42,266

 

Less accumulated depreciation

 

 

(20,747

)

 

 

(19,082

)

 

 

$

50,207

 

 

$

23,184

 

 

In August 2016, the Company entered into a new lease agreement for its existing corporate headquarters in Danvers, Massachusetts (see Note 9). The Company recorded $16.8 million as a capital lease asset with depreciation expense being recorded on a straight line basis over 15 years.  

 

 

Note 5. Goodwill and In-Process Research and Development

The carrying amount of goodwill at September 30, 2016 and March 31, 2016 was $32.6 million and $33.0 million, respectively, and has been recorded in connection with the Company’s acquisition of Impella Cardiosystems AG (“Impella Cardiosystems”), in May 2005 and ECP and AIS in July 2014. The goodwill activity is as follows:

 

 

 

(in $000's)

 

Balance at March 31, 2016

 

$

33,003

 

Foreign currency translation impact

 

 

(421

)

Balance at September 30, 2016

 

$

32,582

 

 

The Company evaluates goodwill and in-process research and development assets (“IPR&D”) assets at least annually at October 31, as well as whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.  The Company has no accumulated impairment losses on goodwill or IPR&D assets.

11


 

The carrying amount o f IPR&D assets at September 30, 2016 and March 31, 2016 was $15.2 million and $15.4 million, respectively, and has been recorded in conjunction with the Company’s acquisition of ECP and AIS, in July 2014. The estimated fair value of IPR&D assets at the acq uisition date was determined using a probability-weighted income approach, which discounts expected future cash flows to present value. The projected cash flows from the expandable catheter pump technology were based on certain key assumptions, including e stimates of future revenue and expenses, taking into account the stage of development of the technology at the acquisition date and the time and resources needed to complete development. The Company used a discount rate of 22.5% and cash flows that have be en probability adjusted to reflect the risks of product commercialization, which the Company believes are appropriate and representative of market participant assumptions.

The carrying value of the Company’s IPR&D assets and the change in the balance for the six months ended September 30, 2016 are as follows:

 

 

 

(in $000's)

 

Balance at March 31, 2016

 

$

15,396

 

Foreign currency translation impact

 

 

(197

)

Balance at September 30, 2016

 

$

15,199

 

 

 

Note 6. Accrued Expenses

Accrued expenses consist of the following:

 

 

 

September 30, 2016

 

 

March 31, 2016

 

 

 

(in $000's)

 

Employee compensation

 

$

17,319

 

 

$

18,359

 

Research and development

 

 

2,946

 

 

 

1,587

 

Sales and income taxes

 

 

2,675

 

 

 

2,527

 

Professional, legal and accounting fees

 

 

1,810

 

 

 

1,764

 

Marketing

 

 

1,092

 

 

 

1,146

 

Warranty

 

 

802

 

 

 

998

 

Other

 

 

1,369

 

 

 

2,001

 

 

 

$

28,013

 

 

$

28,382

 

 

Employee compensation consists primarily of accrued bonuses, accrued commissions and accrued employee benefits at September 30, 2016 and March 31, 2016.

 

 

Note 7. Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s condensed consolidated statements of operations for the three and six months ended September 30, 2016 and 2015:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

 

(in $000's)

 

 

(in $000's)

 

Cost of product revenue

 

$

221

 

 

$

218

 

 

$

520

 

 

$

455

 

Research and development

 

 

2,638

 

 

 

989

 

 

 

3,893

 

 

 

1,920

 

Selling, general and administrative

 

 

6,791

 

 

 

9,586

 

 

 

13,634

 

 

 

13,217

 

 

 

$

9,650

 

 

$

10,793

 

 

$

18,047

 

 

$

15,592

 

 

12


 

Stock Options

The following table summarizes the stock option activity for the six months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

Aggregate

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Intrinsic

 

 

 

Options

 

 

Exercise

 

 

Contractual

 

 

Value

 

 

 

(in thousands)

 

 

Price

 

 

Term (years)

 

 

(in thousands)

 

Outstanding at beginning of period

 

 

2,244

 

 

$

20.55

 

 

 

5.19

 

 

 

 

 

Granted

 

 

138

 

 

 

103.32

 

 

 

 

 

 

 

 

 

Exercised

 

 

(434

)

 

 

13.29

 

 

 

 

 

 

 

 

 

Cancelled and expired

 

 

(12

)

 

 

53.34

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

 

1,936

 

 

$

27.87

 

 

 

5.52

 

 

$

195,015

 

Exercisable at end of period

 

 

1,448

 

 

$

17.16

 

 

 

4.56

 

 

$

161,380

 

Options vested and expected to vest at end of period

 

 

1,893

 

 

$

27.12

 

 

 

5.45

 

 

$

192,059

 

 

The aggregate intrinsic value of options exercised was $42.6 million for the six months ended September 30, 2016. The total fair value of options that vested during the six months ended September 30, 2016 was $3.6 million.

The remaining unrecognized stock-based compensation expense for unvested stock option awards at September 30, 2016 was approximately $8.9 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.6 years.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The weighted average grant-date fair values and weighted average assumptions used in the calculation of fair value of options granted during the three and six months ended September 30, 2016 and 2015 was as follows:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Weighted average grant-date fair value

 

$

46.50

 

 

$

30.12

 

 

$

41.60

 

 

$

28.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.11

%

 

 

1.63

%

 

 

1.32

%

 

 

1.59

%

Expected option life (years)

 

 

4.14

 

 

 

4.13

 

 

 

4.13

 

 

 

4.14

 

Expected volatility

 

 

49.0

%

 

 

48.3

%

 

 

49.6

%

 

 

49.7

%

Restricted Stock Units

 

The following table summarizes activity of restricted stock units for the six months ended September 30, 2016:

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

 

(in thousands)

 

 

(per share)

 

Restricted stock units at beginning of period

 

 

1,263

 

 

$

57.95

 

Granted

 

 

277

 

 

$

101.13

 

Vested

 

 

(489

)

 

$

34.36

 

Forfeited

 

 

(18

)

 

$

63.57

 

Restricted stock units at end of period

 

 

1,033

 

 

$

81.52

 

 

The remaining unrecognized compensation expense for outstanding restricted stock units, including performance and market-based awards, as of September 30, 2016 was $40.7 million and the weighted-average period over which this cost will be recognized is 2.3 years.

13


 

Performance-Based Awards

In May 2016, performance-based awards of restricted stock units for the potential issuance of up to 190,890 shares of common stock were issued to certain executive officers and employees, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of September 30, 2016, the Company is recognizing compensation expense based on the probable outcome related to the prescribed performance targets on the outstanding awards.

In June 2011, performance-based awards of restricted stock units for the potential issuance of 100,000 shares of common stock was issued to a certain senior executive officer of the Company that would vest upon achievement of prescribed service milestones by the award recipient and performance milestones by the Company.  As of September 30, 2016, the Company has met the prescribed milestones for 100,000 shares of this award and the awards are fully vested.

 

 

Note 8. Income Taxes

The income tax provision represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s income tax provision was $5.9 million and $14.4 million for the three and six months ended September 30, 2016, respectively.  The Company’s income tax provision was $5.2 million and $11.5 million for the three and six months ended September 30, 2015, respectively. The estimated annual effective income tax rate is based upon estimated income before income taxes for the year, the geographical composition of the estimated income before taxes and estimated permanent differences. The estimated annual effective income tax rate can fluctuate and may differ from the actual tax rate recognized in fiscal 2017 for various reasons, including estimates of income before taxes, tax legislation, permanent differences, discrete items, and any adjustments between tax provision calculations and filed tax returns.

The significant differences between the statutory tax rate and effective tax rate for the three and six months ended September 30, 2016 and 2015 were as follows:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

Statutory income tax rate

 

 

35.0

 

%

 

35.0

 

%

 

35.0

 

%

 

35.0

 

%

Increase resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credits

 

 

(1.3

)

 

 

(1.2

)

 

 

(1.3

)

 

 

(1.4

)

 

State taxes, net

 

 

3.4

 

 

 

3.3

 

 

 

3.3

 

 

 

3.3

 

 

Permanent differences

 

 

2.7

 

 

 

3.0

 

 

 

2.8

 

 

 

3.5

 

 

Other

 

 

-

 

 

 

0.2

 

 

 

-

 

 

 

0.6

 

 

Effective tax rate

 

 

39.8

 

%

 

40.3

 

%

 

39.8

 

%

 

41.0

 

%

 

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax in multiple states and other countries, including Germany. All tax years remain subject to examination by the Internal Revenue Service and state and foreign tax authorities. The Company has net operating loss and tax credit carryforwards which may be utilized in future years to offset taxable income, and those years may also be subject to review by relevant taxing authorities if the carryforwards are utilized. Fiscal years 2012 through 2016 remain open to examination in Germany.

 

 

Note 9. Commitments and Contingencies

Leases

The Company’s corporate headquarters is located in Danvers, Massachusetts. This facility encompasses most of the Company’s U.S. operations, including research and development, manufacturing, sales and marketing and general and administrative departments. On August 12, 2016, the Company entered into a new lease agreement to expand its existing corporate headquarters which covers 163,560 square feet of space. The initial term of the lease agreement commenced on August 12, 2016 and terminates on August 31, 2026. The Company has options to extend the initial term for three separate periods of five years each. In connection with the entry into this new lease agreement, the Company terminated the previously existing lease for the facility dated February 24, 2014, as amended by the First Amendment to Lease dated April 30, 2015 and the Second Amendment to Lease effective January 1, 2016. The Company also terminated the purchase and sale agreement it had entered into to acquire the facility for $16.5 million in December 2015 when it entered into this new lease agreement in August 2016.

14


 

The Danvers, Massachusetts building lease is treated as a capital lease.  The payments under the lease are accounted for as interest and principal payments over 15 years.  

A summary of future lease commitments related to the capital lease obligation is as follows:
 

 

 

 

 

 

 

 

 

 

 

 

(in $000s)

 

2017, remaining portion

 

 

 

 

 

 

 

 

 

 

$

 

628

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

1,311

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

1,349

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

1,349

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

1,373

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

15,137

 

Total minimum lease payments

 

 

 

 

 

 

 

 

 

 

 

 

21,147

 

Less amounts representing interest

 

 

 

 

 

 

 

 

 

 

 

 

(4,446

)

Total lease obligations

 

 

 

 

 

 

 

 

 

 

$

 

16,701

 

Less current capital lease obligation

 

 

 

 

 

 

 

 

 

 

 

 

(740

)

Capital lease obligation, net of current portion

 

 

 

 

 

 

 

 

 

 

 

 

15,961

 

 

The lease agreement provides the Company with an exclusive option to purchase the building on or before August 31, 2022, subject to certain conditions set forth therein. In addition, the lease agreement grants the Company a one-time right of first offer to purchase the building from September 1, 2022 until August 31, 2026, if the lessor decides to sell the building or receives an offer to purchase the building from a third-party buyer.

The Company’s European headquarters is located in Aachen, Germany and consists of approximately 33,000 square feet of space under an operating lease. In July 2013, the Company entered into a lease agreement to continue renting its existing space in Aachen, Germany through July 31, 2023. In October 2015, the Company entered into an amendment to this lease agreement to lease 9,000 square feet of additional space effective July 1, 2015.  The Company also entered into another lease agreement in October 2015 to lease approximately 30,000 square feet of additional space adjacent to its Aachen facility from July 1, 2015 through June 30, 2016. This agreement also provided the Company with options to extend the lease through July 31, 2033.  The Company exercised the first option under this agreement to extend the lease through June 30, 2017.  The Aachen, Germany building lease is recorded as an operating lease with the related rent expense being recorded on a straight line basis over the lease term.  The lease payments under these agreements are approximately 64,500€ (euro) (approximately U.S. $72,000 at September 30, 2016 exchange rates) per month. The Aachen facility encompasses manufacturing, certain research and development activities and the European sales, marketing and general and administrative functions.

License Agreements

In April 2014, the Company entered into an exclusive license agreement for the rights to certain optical sensor technologies in the field of cardio-circulatory assist devices. The Company made a $1.5 million upfront payment upon execution of the agreement and could make additional payments of up to $4.5 million upon the achievement of certain development milestones.

In November 2015, the Company entered into an exclusive license agreement for the rights to certain vascular closure device technologies. The Company made a $0.5 million upfront payment upon execution of the agreement and a milestone payment of $0.6 million in December 2015.  In July 2016, the Company cancelled this agreement and provided a $0.2 million termination fee in the quarter ending September 30, 2016.

Litigation

From time to time, the Company is involved in legal and administrative proceedings and claims of various types. In some actions, the claimants seek damages, as well as other relief, which, if granted, would require significant expenditures. The Company records a liability in its condensed consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its condensed consolidated financial statements.

15


 

On April 25, 2014, the Company received a subpoena from the Boston regional office of the United States Department of Health and Human Services, or HHS, Office of Inspector General requesting materials relevant to the Company’s reimbursement of employee expenses and remuneration to healthcare pro viders for a six month period from July 2012 through December 2012 in connection with a civil investigation under the False Claims Act (the “FCA Investigation”).  The Company submitted the requested documents to HHS and believes that it substantially compl ied with the subpoena.  On November 6, 2014, the Company received notice from the U.S. Department of Justice, U.S. Attorney’s Office for the District of Massachusetts, or DOJ, in the form of a Civil Investigative Demand, or CID, requesting additional mater ials relating to this matter for the time period of January 1, 2012 through December 31, 2013.  The Company responded to the CID, and believes that it substantially complied with the requests contained therein.  On September 19, 2016, the Company received notice from the DOJ in the form of an additional CID requesting additional document production and information relating to this matter for the time period January 1, 2011 through September 14, 2016.  The Company is responding to the CID, and continues to c ooperate fully with the U.S. Attorney’s Office in its FCA investigation.

Thoratec Corporation, or Thoratec, (acquired by St. Jude Medical, Inc. in October 2015) has challenged a number of Company owned patents in the European Patent Office or EPO, in Germany, and in the United Kingdom in connection with the launch of their HeartMate PHP medical device, or PHP, in Europe.  These actions all relate to Thoratec’s ability to manufacture and sell their PHP product in Europe.  None of these matters impact the Company’s ability to manufacture or sell its Impella products.  

In October 2012, Thoratec filed a notice of opposition in the EPO to a Company owned European patent covering a ‘pigtail’ feature.  In October 2014, the EPO dismissed Thoratec’s opposition, and in December 2014, Thoratec filed a notice of appeal.  The appeal is scheduled to be heard at the EPO in January 2017.  

In December 2014, Thoratec filed a nullity suit in German Federal Court against a German pigtail patent owned by the Company.  The validity hearing for the German pigtail patent is scheduled for November 2016. In August 2015, Thoratec filed a nullity action in German Federal Court against two Company owned patents covering a “magnetic clutch” feature.  These magnetic clutch patents were acquired by the Company in July 2014, in connection with its acquisition of ECP and AIS.  The validity hearing for the magnetic clutch patents is scheduled for June 2017. In September 2015, the Company filed counterclaims in the magnetic clutch action in Germany asserting that the PHP product infringes the two magnetic clutch patents and the two pigtail patents.  The infringement trial is scheduled for January 2017.  

In July 2015, Thoratec filed a nullity action in the High Court of Justice of England and Wales against the Company’s U.K. “magnetic clutch” patents acquired from ECP and AIS.  In October 2015, Thoratec added a non-infringement claim seeking a declaration that their PHP product does not infringe the patents in the United Kingdom.  Thoratec’s claims in the U.K. were heard at trial in early October 2016.  While the English Court found on October 28, 2016, that the PHP would infringe a number of claims contained within the Company’s patents, the Court found those claims to be invalid because of obviousness or lack of novelty.    

In December 2015, the Company received a letter from Maquet Cardiovascular LLC, or Maquet, a subsidiary of the Getinge Group, and maker of the intra-aortic balloon pump, asserting that the Company’s Impella products infringe certain claims having guidewire, lumen and sensor features and which are in two Maquet patents and one pending patent application in the U.S. and elsewhere, and encouraged the Company to discuss taking a license from Maquet.  In January 2016, the Company responded to Maquet stating that it believed that the cited claims were invalid and that its Impella products did not infringe the cited patents.  In May 2016, Maquet sent an additional letter notifying the Company that the pending patent application had been issued as a U.S. patent and repeated their earlier assertion and encouraged the Company to discuss taking a license from Maquet.  The three patents expire September 2020, December 2020 and October 2021.  On May 19, 2016, the Company filed suit in U.S. District Court for the District of Massachusetts, or D. Mass., against Maquet seeking a declaratory judgment that the Company’s Impella products do not infringe Maquet’s cited patent rights.  

On August 24, 2016, Maquet sent another letter to the Company identifying four new continuation patent filings with claims that Maquet alleges are infringed by the Company’s Impella products.  Those U.S. continuation filings have not issued as patents; three of them have not yet published, the fourth is published but has not begun substantive prosecution.  If the patent filings were to issue, they will expire in September 2020.  On September 23, 2016, Maquet filed an answer to the Company’s suit in D. Mass., including various counterclaims alleging that the Company’s Impella 2.5, Impella CP, Impella 5.0, and Impella RP heart pumps infringe certain claims of the three issued U.S. patents.  The D. Mass. court has not yet set a schedule for the case.

The Company is unable to estimate a potential liability with respect to the legal matters noted above. There are numerous factors that make it difficult to meaningfully estimate possible loss or range of loss at this stage of the legal proceedings, including that the FCA Investigation and patent disputes with Thoratec and Maquet remain in relatively early stages, there are significant factual and legal issues to be resolved and information obtained or rulings made during any potential lawsuits or investigations could affect the methodology for calculation. Therefore, the Company is unable at this time to estimate a possible loss or range of possible loss, and no adjustment has been made to the financial statements to reflect the outcome of these uncertainties.

16


 

 

 

Note 10. Segment and Enterprise Wide Disclosures

The Company operates in one business segment—the research, development and sale of medical devices to assist or replace the pumping function of the failing heart. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s consolidated operating results. International sales (sales outside the U.S. and primarily in Europe) accounted for 9% of total product revenue during each of the three and six months ended September 30, 2016, respectively, and 7% of total product revenue for each of the three and six months ended September 30, 2015, respectively. The Company’s long-lived assets, which are its property, plant and equipment, are located primarily in the U.S. except for $7.1 million and $5.9 million at September 30, 2016 and March 31, 2016, respectively, which are located primarily in Germany.

 

 

17


 

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Report contains forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements other than one conveying solely historical facts is a forward-looking statement. These forward-looking statements may be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “target,” “will” and other words and terms of similar meaning. These forward-looking statements address various matters including, among others, future actions related to ongoing investigations and litigation and expenditures related thereto; the development and commercialization of new and existing products and anticipated costs, including research and development, sales and marketing and training costs associated with product development and commercialization; expected capital expenditures for the fiscal year ending March 31, 2017; commercial plans for our products into new markets such as Japan; demand and expected shipments of our products; anticipated shifts in the revenue mix associated with our products; our ability to increase revenue from our Impella® line of products and the sufficiency of revenue to fund future operations; and the impact of market factors such as changes in interest rates, currency exchange rates on our securities and the fair value of our financial instruments. Each forward-looking statement in this Report is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. Applicable risks and uncertainties include, among others, our inability to predict the outcome of investigations and litigation and associated expenses; possible delays in our research and development programs; our ability to obtain regulatory approvals and market our products, and uncertainties related to regulatory processes; greater government scrutiny and regulation of the medical device industry and our ability to respond to changing laws and regulations affecting our industry, including any reforms to the regulatory approval process administered by the U.S Food and Drug Administration, or FDA, and changing enforcement practices related thereto; the inability to manufacture products in commercial quantities at an acceptable cost; the acceptance by physicians and hospitals of our products; the impact of competitive products and pricing; uncertainties associated with future capital needs and the risks identified under Item 1A of Part I of our Annual Report on Form 10-K, for the year ended March 31, 2016, as well as the other information we file with the Securities and Exchange Commission. Readers are cautioned not to place considerable reliance on any forward-looking statements contained in this Report, which speak only as of the date of this Report. We undertake no obligation to update or revise these forward-looking statements whether as a result of new information, future events or otherwise, unless required by law. Our business is subject to substantial risks and uncertainties, including those referenced above. Investors, potential investors, and others should give careful consideration to these risks and uncertainties.

Overview

We are a leading provider of temporary mechanical circulatory support devices and we offer a continuum of care to heart failure patients. We develop, manufacture and market proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow to the coronary arteries and end-organs and/or temporarily performing the pumping function of the heart. Our products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists, the electrophysiology lab, the hybrid lab and in the heart surgery suite by heart surgeons. A physician may use our devices for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures. We believe that heart recovery is the optimal clinical outcome for a patient experiencing heart failure because it enhances the potential for the patient to go home with the patient’s own native heart, facilitating restoration of quality of life. In addition, we believe, that for the care of such patients, heart recovery is often the most cost-effective solution for the healthcare system.

Our strategic focus and the driver of the majority of our revenue growth is the market penetration of our family of Impella® products. The Impella product portfolio, which includes the Impella 2.5™, Impella CP®, Impella RP®, Impella LD™ and Impella 5.0™ devices, has supported thousands of patients in the U.S. We expect that almost all of our product and service revenue in the near future will be from our Impella devices. Revenue from our non-Impella products, largely focused on the heart surgery suite, have been decreasing over the past several years as we have strategically shifted our sales and marketing efforts towards our Impella devices and the cath lab.

In March 2015, we received a Pre-Market Approval, or PMA, from the FDA for use of the Impella 2.5 device during elective and urgent high-risk percutaneous coronary intervention, or PCI, procedures. With this PMA indication, the Impella 2.5 device is the first FDA-approved hemodynamic support device indicated for use during high-risk PCI procedures. In April 2016, the FDA approved a PMA supplement for our Impella 2.5, Impella CP, Impella 5 .0 and Impella LD devices to provide treatment for ongoing cardiogenic shock. The intent of the Impella system therapy is to reduce ventricular work and to provide the circulatory support necessary to allow heart recovery and early assessment of residual myocardial function.

We expect to continue to make additional PMA supplement submissions for our Impella suite of devices for additional indications.

18


 

Our Impella 2.5, Impella 5.0, Impella LD, Impella CP and Impella RP devices also have CE Mark approval and Health Canada approval which allows us to market these devices in the European Union and Canada.

In September 2016, we received Pharmaceuticals and Medical Devices Agency, or PMDA, approval from the Japanese Ministry of Health, Labour & Welfare for our Impella 2.5 and Impella 5.0 heart pumps to provide treatment of drug-resistant acute heart failure in Japan. We are preparing for the market launch in Japan, including working with Japanese government authorities to obtain appropriate reimbursement for these products.  We do not expect to have any material revenue in Japan during fiscal 2017.

Effective October 1, 2016, the American Hospital Association, or AHA, published simplified ICD-10 coding guidance for the Impella device. The Centers for Medicare and Medicaid Services, or CMS, has assigned all uses of the Impella product to a dedicated heart assist implant MS-DRG, MS-DRG 215, for percutaneous Heart Assist System Implant, a change from MS-DRG 216 – 221 “Cardiac Valve and Other”.  The Impella heart pump is now assigned to a dedicated DRG category for left side, right side and biventricular hemodynamic support.

In October 2016, we received FDA approval of a prospective 50 patient feasibility study to evaluate the use of the Impella CP heart pump for unloading of the left ventricle prior to primary PCI in patients presenting with ST segment elevation myocardial infarction, or STEMI, without cardiogenic shock. This trial will focus on feasibility and safety, and lay the groundwork for a potential future trial, designed to measure the impact that unloading may have on infarct size related to reperfusion injury, an acceleration of myocardial damage at the time of revascularization, in STEMI patients.

Our Products

Impella 2.5

The Impella 2.5 catheter is a percutaneous micro heart pump with an integrated motor and sensors. The device is designed primarily for use by interventional cardiologists to support patients in the cath lab who may require assistance to maintain circulation. The Impella 2.5 catheter can be quickly inserted via the femoral artery to reach the left ventricle of the heart where it is directly deployed to draw blood out of the ventricle and deliver it to the circulatory system. This function is intended to reduce ventricular work and provide flow to vital organs. The Impella 2.5 is introduced with normal interventional cardiology procedures and can pump up to 2.5 liters of blood per minute.

The Impella 2.5 device received 510(k) clearance from the FDA in June 2008 for partial circulatory support for up to six hours. In March 2015, we received a PMA from the FDA for the use of the Impella 2.5 device during elective and urgent high-risk PCI procedures. With this PMA indication, the Impella 2.5 device became the first FDA approved hemodynamic support device for use during high-risk PCI procedures. Under this first PMA, the Impella 2.5 is a temporary (up to six hours) ventricular support device indicated for use during high-risk PCI performed in elective or urgent hemodynamically stable patients with severe coronary artery disease and depressed left ventricular ejection fraction, when a heart team, including a cardiac surgeon, has determined high-risk PCI is the appropriate therapeutic option. Use of the Impella 2.5 device in these patients may prevent hem odynamic instability that may occur during planned temporary coronary occlusions and may reduce periprocedural and post-procedural adverse events. The product labeling allows for the clinical decision to leave the Impella 2.5 device in place beyond the int ended duration of up to six hours due to unforeseen circumstances. Pursuant to our PMA approval, we are conducting a single-arm, post-approval study on the Impella 2.5 device, collecting data on high-risk PCI patients. The study is a prospective, multi-center study comprised of 369 patients from up to 70 sites supported with the Impella 2.5 system.

In April 2016, following the Company’s submission of a request that the FDA supplement the March 2015 PMA to include the use of Impella technologies in the treatment of patients experiencing cardiogenic shock, the FDA approved the use of our Impella 2.5, Impella CP, Impella 5.0 and Impella LD devices to provide treatment for ongoing cardiogenic shock. This PMA supplement covers a set of indications related to the use of the Impella devices in patients suffering cardiogenic shock following acute myocardial infarction or cardiac surgery and for a longer duration of support. The intent of the Impella system therapy is to reduce ventricular work and to provide the circulatory support necessary to allow heart recovery and early assessment of residual myocardial function.

The data submitted to the FDA in support of the PMA supplement included an analysis of 415 patients from the RECOVER 1 study and the U.S. Impella regist ry (cVAD Registry™), as well as a literature review using the Impella devices in 692 patients from 17 clinical studies. A safety analysis reviewed over 24,000 Impella patients who had used an Impella device, as documented in the FDA medical device reportin g, or MDR, database, which draws from seven years of experience using the Impella devices in the U.S. We believe this is the most comprehensive review ever submitted to the FDA for circulatory support in the cardiogenic shock population.

Pursuant to the A pril 2016 PMA, the Impella 2.5, Impella CP, Impella 5.0 and Impella LD catheters, in conjunction with the Automated Impella Controller, or AIC, are temporary ventricular support devices intended for short term use (≤ 4 days for the Impella

19


 

2.5 and Impella CP, and ≤ 6 days for the Impella 5.0 and LD) and indicated for the treatment of ongoing cardiogenic shock that occurs immediately (< 48 hours) following acute myocardial infarction or open heart surgery as a result of isolated left ventricular failure that is not responsive to optimal medical management and conventional treatment measures. The intent of the Impella system therapy is to reduce ventricular work and to provide the circulatory support necessary to allow heart recovery and early assessment of re sidual myocardial function.  Optimal medical management and convention treatment measures include volume loading and use of pressors and inotropes, with or without an intraortic balloon pump , or IABP.

A November 2011 update to the American College of Cardiology Foundation (ACCF) /American Heart Association (AHA) Task Force on Practice Guidelines and the Society for Cardiovascular Angiography and Interventions Guidelines for Percutaneous Coronary Intervention included Impella devices in both the emergent and prophylactic hemodynamic support settings. In addition, a December 2012 update to the AHA’s Recommendations for the Use of Mechanical Circulatory Support: Device Strategies and Patient Selection recommended Impella devices for use in mechanical circulatory support; a December 2012 update to the ACCF / AHA Guidelines for the Management of ST-Elevation Myocardial Infarction , or STEMI, included the Impella 2.5 device for use in patients requiring urgent coronary artery bypass grafting with STEMI and in treatment of patients with cardiogenic shock complications after STEMI. A January 2013 update to the International Society for Heart and Lung Transplantation Guidelines for Mechanical Circulatory Support included Impella devices for patients with multi-organ failure. In addition, Impella devices were included in a January 2013 update to the ACCF / AHA Task Force on Practice Guidelines for the Management of ST-Elevation Myocardial Infarction and a September 2014 AHA / the American College of Cardiology Task Force on Practice Guidelines for the Management of Patients with Non-ST-Elevation Acute Coronary Syndromes .

The Impella 2.5 device has CE Mark approval in Europe for up to five days of use and is approved for use in up to 40 countries .  Impella 2.5 device also has Health Canada approval which allows us to market the device in Canada.

In September 2016, we received PMDA approval from the Japanese Ministry of Health, Labour & Welfare for our Impella 2.5 and Impella 5.0 heart pumps to provide treatment of drug-resistant acute heart failure in Japan. We are preparing for the market launch in Japan, including working with Japanese government authorities to obtain reimbursement for these products.  We do not expect to have any material revenue in Japan during fiscal 2017.

Impella CP ®

In September 2012, we announced that the Impella CP device received 510(k) clearance from the FDA. The Impella CP device provides blood flow of approximately one liter more per minute than the Impella 2.5 device and is primarily used by either interventional cardiologists to support patients in the cath lab or by surgeons in the heart surgery suite.

As previously discussed, in April 2016, the FDA approved the PMA supplement for certain of our devices, including our Impella CP device to provide treatment for ongoing cardiogenic shock.

In October 2016, we received FDA approval of a prospective 50 patient feasibility study to evaluate the use of the Impella CP heart pump for unloading of the left ventricle prior to primary PCI in patients presenting with ST segment elevation myocardial infarction, or STEMI, without cardiogenic shock. This trial will focus on feasibility and safety, and lay the groundwork for a potential future trial, designed to measure the impact that unloading may have on infarct size related to reperfusion injury, an acceleration of myocardial damage at the time of revascularization, in STEMI patients.

We expect to continue to make additional PMA supplement submissions for our Impella suite of products for additional marketing indications, including to expand the current PMA that we have for the Impella 2.5 device to the Impella CP device for elective and urgent high-risk PCI procedures.  

Impella 5.0 and Impella LD

The Impella 5.0 device and Impella LD device are percutaneous micro heart pumps with integrated motors and sensors for use primarily in the heart surgery suite. These devices are designed to support patients who require higher levels of circulatory support as compared to the Impella 2.5.

The Impella 5.0 device can be inserted into the left ventricle via femoral cut down or through the axillary artery. The Impella 5.0 device is passed into the ascending aorta, across the valve and into the left ventricle. The Impella LD device is similar to the Impella 5.0 device , but it is implanted directly into the ascending aorta through an aortic graft.  Both of these procedures are normally performed with the assistance of heart surgeons in the surgery suite. The Impella 5.0 device and Impella LD device can pump up to five liters of blood per minute, potentially providing full circulatory support.

20


 

The Impella 5.0 and Impella LD devices originally received 510(k) clearance in April 2009, for circulatory support for up to six hours.  As pr eviously discussed, the FDA approved the PMA supplement certain of our devices, including our Impella 5.0 and Impella LD devices to provide treatment for ongoing cardiogenic shock.

The Impella 5.0 and Impella LD devices have CE Mark approval in Europe for up to ten days’ duration and are approved for use in over 40 countries.

In September 2016, we received PMDA approval from the Japanese Ministry of Health, Labor & Welfare for our Impella 2.5 and Impella 5.0 heart pumps to provide treatment of drug-resistant acute heart failure in Japan. We are preparing for the market launch in Japan, including working with Japanese government authorities to obtain reimbursement for these products.  We do not expect to have any material revenue in Japan during fiscal 2017.

Impella RP ®

The Impella RP is a percutaneous catheter-based axial flow pump that is designed to allow greater than four liters of flow per minute and is intended to provide the flow and pressure needed to compensate for right side heart failure. The Impella RP is the first percutaneous single access heart pump designed for right heart support to receive FDA approval.  The Impella RP device is approved to provide support of the right heart during times of acute failure for certain patients who have received a left ventricle assist device or have suffered heart failure due to acute myocardial infarction, or AMI, or a failed heart transplant.

In November 2012, the Impella RP device received U.S. investigational device exemption, or IDE, approval from the FDA for use in RECOVER RIGHT, a pivotal clinical study in the U.S. In March 2014, we completed enrollment of 30 patients that presented signs of right side heart failure, required hemodynamic support, and were capable of being treated in the catheterization lab or cardiac surgery suite. The study collected safety and effectiveness data on the percutaneous use of the Impella RP device and was submitted to the FDA in support of a Humanitarian Device Exemption, or HDE, submission.  An HDE is similar to a PMA application but is intended for patient populations of 4,000 or less per year in the U.S. and is subject to certain profit and use restrictions. An HDE approval requires demonstration of the safety and probable benefit of the product, which is a lower standard than is applied to a PMA. In order to receive an HDE, there must be no comparable devices approved under a PMA that are available to treat the targeted population. An approved HDE authorizes sales of the device to any hospital after review and approval by the hospital’s Institutional Review Board.

In January 2015, we received FDA approval for the Impella RP device under an HDE. As part of the HDE approval, we are required to conduct two post approval studies for the Impella RP device. One includes an adult patient population of 30 patients and the other includes a pediatric patient population of a maximum of 15 patients. These studies are designed to monitor the post-market safety and probable benefit of the Impella RP device. Both studies will be single-arm multicenter studies that will follow the respective patients at 30 and 180 days post device explant.  We have completed 18 patients to date on the adult patient population study, and we expect to complete this study in fiscal 2017. In April 2014, the Impe lla RP device received CE Mark approval which allows for commercial sales of the Impella RP device in the European Union and other countries that require a CE Mark approval for commercial sales.

AB5000

We manufacture and sell the AB5000 Circulatory Support System for the temporary support of acute heart failure patients in profound shock, including patients suffering from cardiogenic shock after a heart attack, post-cardiotomy cardiogenic shock, or myocarditis. The AB5000 device was approved by the FDA in 2003.  We believe the AB5000 is the only commercially available cardiac assist device that is approved by the FDA for all indications where heart recovery is the desired outcome, including patients who have undergone successful cardiac surgery and subseque ntly develop low cardiac output, or patients who suffer from acute cardiac disorders leading to hemodynamic instability. Revenue from the AB5000 device have been declining in recent years, and we expect to only have minimal revenue from the AB5000 in the f uture as we focus our efforts on the Impella family of devices.

ECP

In July 2014, we acquired all of the issued shares of ECP Entwicklungsgesellschaft mbH, or ECP, a German limited liability company, for $13.0 million in cash, with additional potential payments up to a maximum of $15.0 million based on the achievement of certain technical, regulatory and commercial milestones. In connection with our acquisition of ECP, ECP acquired all of the issued shares of AIS GmbH Aachen Innovative Solutions, or AIS, a German limited liability company, for $2.8 million in cash which was provided by us. AIS, based in Aachen, Germany, holds certain intellectual property useful to ECP’s business, and, prior to being acquired by ECP, had licensed such intellectual property to ECP.

21


 

ECP, based in Berlin, Germany, is engaged in research, development, prototyping and the pre-serial production of a percutaneous expandable catheter pump which increases blood circulation from the heart with an external drive shaft. The ECP pump is designed for blood flow of >3 liters/minute.  It is intended to be delivered on the standard Impella 9 Fr catheter and will include an 18 Fr expandable inflow in the left ventricle with a smooth membrane crossing the left ventricle. The ECP pump is still in early stages of research and development and has not been approved for commercial use or sale.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies during the three and six months ended September 30, 2016, as compared to the critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is included in “Note 1. Nature of Business and Basis of Preparation” to our condensed consolidated financial statements and are incorporated herein by reference.

Results of Operations

The following table sets forth certain condensed consolidated statements of operations data for the periods indicated as a percentage of total revenue:

 

 

For the Three Months Ended September 30,

 

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

100.0

 

%

 

 

100.0

 

%

 

 

100.0

 

%

 

 

100.0

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses as a percentage of total revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

16.8

 

 

 

 

15.9

 

 

 

 

15.7

 

 

 

 

15.4

 

 

Research and development

 

17.5

 

 

 

 

15.1

 

 

 

 

16.4

 

 

 

 

14.5

 

 

Selling, general and administrative

 

51.6

 

 

 

 

52.2

 

 

 

 

50.5

 

 

 

 

51.5

 

 

Total costs and expenses

 

85.9

 

 

 

 

83.2

 

 

 

 

82.6

 

 

 

 

81.4

 

 

Income from operations

 

14.1

 

 

 

 

16.8

 

 

 

 

17.4

 

 

 

 

18.6

 

 

Income tax provision and other

 

5.5

 

 

 

 

6.7

 

 

 

 

6.8

 

 

 

 

7.5

 

 

Net income as a percentage of total revenue

 

8.6

 

%

 

 

10.1

 

%

 

 

10.6

 

%

 

 

11.1

 

%

 

Three and six months ended September 30, 2016 compared with the three and six months ended September 30, 2015

Revenue

Our revenues are comprised of the following:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

 

(in $000's)

 

 

(in $000's)

 

Impella product revenue

 

$

97,915

 

 

$

71,701

 

 

$

195,734

 

 

$

140,506

 

Service and other revenue

 

 

4,455

 

 

 

3,929

 

 

 

8,944

 

 

 

8,082

 

Other products

 

 

558

 

 

 

724

 

 

 

1,239

 

 

 

1,192

 

Total product revenue

 

 

102,928

 

 

 

76,354

 

 

 

205,917

 

 

 

149,780

 

Funded research and development

 

 

27

 

 

 

5

 

 

 

33

 

 

 

11

 

Total revenue

 

$

102,955

 

 

$

76,359

 

 

$

205,950

 

 

$

149,791

 

 

Impella product revenue encompasses Impella 2.5, Impella CP, Impella 5.0, Impella LD and Impella RP device sales. Service and other revenue represents revenue earned on service maintenance contracts and preventive maintenance calls. Other product revenue includes AB5000 and product accessory revenue.

22


 

Total revenue for the three months ended September 30, 2016 increased $26.6 million, or 35%, to $103.0 million from $76.4 million for three months ended September 30, 2015. Total revenue for the six months ended September 30, 2016 increased $56.2 million, or 38%, to $206.0 million from $149.8 million for the six months ended September 30, 2015. The increase in total re venue was primarily due to higher Impella product revenue from increased utilization in the U.S.  Sales of Impella 2.5 devices were higher as a result of PMA approval in March 2015 for elective and high risk PCI procedures and the Impella CP device has con tinued to experience higher utilization by those interventional cardiologists who prefer higher blood flow.  Revenue from our Impella products also increased with our recent PMA approval of these products for cardiogenic shock in April 2016.

Impella product revenue for three months ended September 30, 2016 increased by $26.2 million, or 37%, to $97.9 million from $71.7 million for three months ended September 30, 2015. Impella product revenue for the six months ended September 30, 2016 increased by $55.2 million, or 39%, to $195.7 million from $140.5 million for the six months ended September 30, 2015.  Most of the increase in Impella product revenue was from increased device sales in the U.S. of all of our Impella products, as we focus on increasing utilization of our disposable catheter products through continued investment in our field organization and physician training programs. Impella product revenue outside of the U.S. also increased primarily due to increased utilization in Germany as we expand our field organization in that country. We expect product revenue from our Impella line to continue to increase due to our recent PMAs in the U.S. for our Impella devices to provide treatment for ongoing cardiogenic shock, continued utilization for high risk PCI procedures, continued controlled launch of Impella RP devices in the U.S. and expansion efforts in Europe, particularly Germany.

Service and other revenue for three months ended September 30, 2016 increased by $0.6 million, or 15%, to $4.5 million from $3.9 million for three months ended September 30, 2015.  Service and other revenue for the six months ended September 30, 2016 increased by $0.8 million, or 10%, to $8.9 million from $8.1 million for the six months ended September 30, 2015. The increase in service revenue was primarily due to an increase in preventative maintenance service contracts.  We have expanded the number of Impella AIC consoles to most of our using sites and placed more consoles at existing higher using sites. We expect revenue growth for service revenue to be slower in fiscal 2017 as we have service contracts that normally have three year terms at most of our sites in the U.S.

Other product revenue for three months ended September 30, 2016 decreased by $0.1 million, or 14%, to $0.6 million from $0.7 million for three months ended September 30, 2015.  Other product revenue remained flat at $1.2 million for the six months ended September 30, 2016 and 2015. We expect that AB5000 revenue will be minimal in the future we focus our sales efforts in the surgical suite on our Impella devices and we focus more of our attention on the cath lab.

Costs and Expenses

Cost of Product Revenue

Cost of product revenue for three months ended September 30, 2016 increased by $5.2 million, or 43%, to $17.3 million from $12.1 million for three months ended September 30, 2015. Gross margin was 83% for the three months ended September 30, 2016 and 84% for the three months ended September 30, 2015. Cost of product revenue for the six months ended September 30, 2016 increased $9.4 million, or 41%, to $32.4 million from $23.0 million for the six months ended September 30, 2015. Gross margin was 84% for the six months ended September 30, 2016 and 85% for the six months ended September 30, 2015. The increase in cost of product revenue was related to higher demand for our Impella devices and higher production volume and costs to support growing demand for our Impella devices. The decrease in gross margin was primarily due to larger number of shipments of AICs during the three months ended September 30, 2016.

Research and Development Expenses

Research and development expenses for three months ended September 30, 2016 increased by $6.5 million, or 56%, to $18.1 million from $11.6 million for three months ended September 30, 2015. Research and development expenses for the six months ended September 30, 2016 increased by $11.9 million, or 55%, to $33.7 million from $21.8 million for the six months ended September 30, 2015. The increase in research and development expenses was primarily due to product development initiatives on our existing products and new technologies as we expanded our engineering organization, increased clinical spending primarily related to our cVAD Registry™ and our continued focus on quality initiatives for our Impella devices.

We expect research and development to increase for the remainder of fiscal 2017 as we continue to increase clinical spending related to our cVAD Registry™ and incur additional costs as we continue to focus on engineering initiatives to improve our existing products and develop new technologies.

23


 

Selling, General and Administrative Expenses

Selling, general and administrative expenses for three months ended September 30, 2016 increased by $13.3 million, or 33%, to $53.1 million from $39.8 million for three months ended September 30, 2015. Selling, general and administrative expenses for the six months ended September 30, 2016 increased by $26.9 million, or 35%, to $104.1 million from $77.2 million for the six months ended September 30, 2015.

The increase in selling, general and administrative expenses was primarily due to the hiring of additional U.S. field sales and clinical personnel, increased spending on marketing initiatives as we continue to educate physicians on the benefits of hemodynamic support after receiving PMAs in the U.S. for Impella 2.5, Impella CP, Impella 5.0 and Impella LD devices, higher stock-based compensation expense, higher legal expenses related to the FCA Investigation and patent related matters discussed in “Note 9. Commitments and Contingencies—Litigation,” to our condensed consolidated financial statements and higher professional fees to support the growth of our business.  

We expect to continue to increase our expenditures on sales and marketing activities, with particular investments in field sales and clinical personnel with cath lab expertise to drive recovery awareness for acute heart failure patients. We also plan to increase our marketing, service and training investments as a result of recent PMA approvals in the U.S. for our Impella devices and as we expand to new markets outside of the U.S., such as Japan. We also expect to continue to incur significant legal expenses for the foreseeable future related to the FCA Investigation and patent related matters.  We expect that this increase in selling, general and administrative expense will be offset somewhat by the moratorium of the medical device tax in the U.S. for the two calendar years beginning in January 2016.

Income Tax Provision

We recorded an income tax provision of $5.9 million and $14.4 million for the three and six months ended September 30, 2016, respectively, compared to $5.2 million and $11.5 million for the three and six months ended September 30, 2015, respectively. The increase in income tax provision for the three months ended September 30, 2016 was due primarily to an increase in income before taxes for the three months ended September 30, 2016 due to higher Impella product revenue.  

Net Income

For three months ended September 30, 2016, we recognized net income of $8.9 million, or $0.21 per basic share and $0.20 per diluted share, compared to $7.7 million, or $0.18 per basic share and $0.17 per diluted share for three months ended September 30, 2015.  For the six months ended September 30, 2016, we recognized net income of $21.8 million, or $0.51 per basic share and $0.49 per diluted share, compared to $16.6 million, or $0.40 per basic share and $0.37 per diluted share for the six months ended September 30, 2015. Our net income for fiscal 2017 was driven primarily by higher Impella product revenue due to greater utilization of our Impella devices in the U.S. and Germany.

Liquidity and Capital Resources

At September 30, 2016, our total cash, cash equivalents and marketable securities totaled $236.9 million, an increase of $23.8 million compared to $213.1 million at March 31, 2016. The increase in our cash, cash equivalents and marketable securities was due primarily to positive cash flows from operations in the six months ended September 30, 2016.

Following is a summary of our cash flow activities:

 

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

Net cash provided by operating activities

 

$

43,736

 

 

$

28,856

 

Net cash (used for) provided by investing activities

 

 

(28,003

)

 

 

(1,718

)

Net cash (used for) provided by financing activities

 

 

(9,527

)

 

 

4,995

 

Effect of exchange rate changes on cash

 

 

272

 

 

 

(113

)

Net (decrease) increase in cash and cash equivalents

 

$

6,478

 

 

$

32,020

 

 

Cash Provided by Operating Activities

For the six months ended September 30, 2016, cash provided by operating activities consisted of net income of $21.8 million, adjustments for non-cash items of $28.7 million and cash used in working capital of $6.7 million. The increase in net income was

24


 

primarily due to higher revenue from increased utilization of our Impella devices. Adjustments for non-cash items consisted primarily of $18.0 million of stock-based compensation expense, a $9.8 million change in deferred tax provision, $3.6 million in excess tax benefits on stock-based awards, $3.0 million of depreciation expense on property, plant and equipment and $1.4 million in inventory write-downs. The change in cash from working capital included a $3.8 million increase in accounts receivable associated with our higher revenue, a $6.3 million increase in inventory as we build up our inventory safety stock to support growing demand for our Impella devices, $5.1 million increase in accounts payable and accrued expenses and a $0.3 million increase in deferred revenue primarily due to an increase in preventative maintenance service contracts.

For the six months ended September 30, 2015, cash provided by operating activities consisted of net income of $16.6 million, adjustments for non-cash items of $28.6 million and cash used in working capital of $16.3 million. Adjustments for non-cash items primarily consisted of $15.6 million of stock-based compensation expense and a $10.8 million change in deferred tax provision. The change in cash from working capital included a $5.2 million increase in accounts receivable associated with our higher revenue, a $6.9 million increase in inventory to support growing demand for our Impella products and a $4.5 million decrease in accounts payable and accrued expenses and a $0.2 million decrease in deferred revenue.

Cash Used for Investing Activities

For the six months ended September 30, 2016, net cash used for investing activities included $17.6 million in purchases (net of maturities) of marketable securities and $10.5 million for the purchase of property and equipment mostly related to expansion of manufacturing capacity and office space in Danvers, Massachusetts and Aachen, Germany.  

For the six months ended September 30, 2015, net cash provided by investing activities included $2.5 million in maturities (net of purchases) of marketable securities offset by $3.4 million for the purchase of property and equipment mostly related to expansion of manufacturing capacity and office space in Danvers Massachusetts and Aachen, Germany.  We also made a $0.8 million investment in a private medical technology company during the six months ended September 30, 2015.

Capital expenditures for fiscal 2017 are estimated to range from $45 million to $60 million, including approximately $30 million for potential property acquisitions or capital lease assets acquired. We are also expecting to incur significant capital expenditures for manufacturing capacity and office leasehold improvements in both our Danvers, Massachusetts, Aachen, Germany, Berlin, Germany and Tokyo, Japan facilities.

Cash Provided by Financing Activities

For the six months ended September 30, 2016, net cash used for financing activities included $19.6 million in payments in lieu of issuance of common stock for payroll withholding taxes upon vesting of certain equity awards.  These amounts were offset by $5.8 million in proceeds from the exercise of stock options, $3.6 million in excess tax benefits on stock-based awards and $0.8 million in proceeds from the issuance of stock under the employee stock purchase plan.  

For the six months ended September 30, 2015, net cash provided by financing activities included $8.0 million in proceeds from the exercise of stock options, $0.5 million in proceeds from the issuance of stock under the employee stock purchase plan and $0.4 million in excess tax benefits on stock-based awards. These amounts were partially offset by $3.8 million in payments in lieu of issuance of common stock for payroll withholding taxes upon vesting of certain equity awards.

Operating Capital and Liquidity Requirements

We believe that our revenue from product sales together with existing resources will be sufficient to fund our operations for at least the next twelve months, exclusive of activities involving any future acquisitions of products or companies that complement or augment our existing line of products.

Our primary liquidity requirements are to fund the expansion of our commercial and operational infrastructure in the U.S., increase our manufacturing capacity, incur additional capital expenditures as we expand our office space and manufacturing capacity in Danvers and Aachen, increase our inventory levels in order to meet growing customer demand for our Impella devices, fund new product development initiatives, prepare for commercial launches of Impella devices in new markets in the future, such as Japan, increased clinical spending, costs of legal fees related to the FCA Investigation and ongoing patent litigation and to provide for general working capital needs. To date, we have primarily funded our operations through product sales and the sale of equity securities.

Our liquidity is influenced by our ability to sell our products in a competitive industry and our customers’ ability to pay for our products. Factors that may affect liquidity include our ability to penetrate the market for our products, maintain or reduce the length of

25


 

the selling cycle for our products, capital expenditure additions, investments in collaborative ar rangements with other partners, and our ability to collect cash from customers after our products are sold. We also expect to continue to incur legal expenses for the foreseeable future related to the FCA Investigation and ongoing patent litigation. We con tinue to review our short-term and long-term cash needs on a regular basis. At September 30, 2016 we had no long-term debt outstanding.

Marketable securities at September 30, 2016 and March 31, 2016 consisted of $182.2 million and $164.8 million held in funds that invest in U.S. Treasury, government-backed and corporate debt securities, respectively. We are not a party to any interest rate swaps, currency hedges or derivative contracts of any type and have no exposure to commercial paper or auction rate securities markets.

Cash and cash equivalents held by our foreign subsidiaries totaled $6.5 million and $4.5 million at September 30, 2016 and March 31, 2016, respectively. Our operating income outside the U.S. is deemed to be permanently reinvested in foreign jurisdictions. We do not intend or currently foresee a need to repatriate cash and cash equivalents held by our foreign subsidiaries. If these funds are needed in the U.S., we believe that the potential U.S. tax impact to repatriate these funds would not have a material impact on our financial condition.

 

 

26


 

ITEM  3:

QUANTITATIVE AND QUALITAT IVE DISCLOSURE ABOUT MARKET RISK

Primary Market Risk Exposures

Our cash, cash equivalents and marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2016, we believe the decline in fair market value of our investment portfolio would be immaterial.

Currency Exchange Rates

We have foreign currency exposure to exchange rate fluctuations and particularly with respect to the euro, British pound sterling and Japanese yen. Therefore, our investment in our subsidiaries is sensitive to fluctuations in currency exchange rates. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive (loss) income component of stockholders’ equity. If rates of exchange for the euro, British pound and Japanese yen were to have depreciated immediately and uniformly by 10% relative to the U.S. dollar from levels at September 30, 2016, the result would have been a reduction of stockholders’ equity of approximately $6.4 million.

Fair Value of Financial Instruments

At September 30, 2016, our financial instruments consist primarily of cash and cash equivalents, short-term marketable securities, accounts receivable, accounts payable and contingent consideration. The carrying amounts of accounts receivable and accounts payable are considered reasonable estimates of their fair value, due to the short maturity of these instruments. The estimated fair values of the financial instruments have been determined by us using available market information and appropriate valuation techniques. Considerable judgment is required, however, to interpret market data to develop the estimates of fair value. The use of diffe rent market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying value of our capital lease obligations approximates fair value based on the borrowing rates currently available to us for l oans and capital leases with similar terms.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of September 30, 2016. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2016, these disclosure controls and procedures are effective to provide reasonable assurance that material information required to be disclosed by us, including our consolidated subsidiaries, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Changes in Internal Control over Financial Reporting

During the second quarter of our fiscal year ending March 31, 2017, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

27


 

PA RT II — OTHER INFORMATION

Item 1.

Legal Proceedings

We are from time to time involved in various legal actions, the outcomes of which are not within our complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages, as well as other relief, which, if granted, would require significant expenditures. We record a liability in our condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the condensed consolidated financial statements. Material legal proceedings are discussed in “Note 9. Commitments and Contingencies—Litigation” to our condensed consolidated financial statements and are incorporated herein by reference.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2016, which could materially affect our business, financial condition or future results. As of the date of this Report there has been no material change in any of the risk factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, except as noted below:

We must comply with healthcare “fraud and abuse” laws, and we could face substantial penalties for non-compliance and be excluded from government healthcare programs, which would adversely affect our business, financial condition and results of operations.

Certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights may be applicable to our business. We may be subject to healthcare fraud and abuse regulation and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

The federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, to induce (i) the referral of an individual, for an item or service, or (ii) the recommending, purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;

 

The federal False Claims Act, which prohibits, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, including claims made pursuant to an unlawful kickback, and which may apply to entities like us that promote medical devices, provide medical device management services and may provide coding and billing advice to customers;

 

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and

 

State law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ in significant ways from state to state and often are not preempted by HIPAA, thus complicating compliance efforts.

Additionally, the compliance environment is changing, with more states, such as California, Connecticut, Nevada and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, requiring reporting to state governments of gifts, compensation and other remuneration to physicians. The Physician Payments Sunshine Act, or PPSA, which was signed into law on March 23, 2010, requires U.S. manufacturers of drug, device, biologics, and medical supplies covered under Medicare, Medicaid, or State Children’s Health Insurance Program, or SCHIP, to report payments made to physicians and teaching hospitals on an annual basis to the government. These laws all provide for penalties for non-compliance. The shifting regulatory environment, along with the requirement to comply with multiple jurisdictions with different and difficult compliance and reporting requirements, increases the possibility that we may run afoul of one or more laws. The costs to comply with these regulatory requirements are becoming more expensive and will also impact our profitability.

28


 

Many of these requirements are new and their application is uncertain, and regulatory guidance is limited. We could face enforcement action, fines and other penalties and could receive adverse publicity, all of which could harm our business, if it is alleged that we have failed to fully comply with such laws and regulations. Similarly, if the physic ians or other providers or entities that we do business with are found not to comply with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.

On April 25, 2014, the Company received a subpoena from the Boston regional office of the United States Department of Health and Human Services, or HHS, Office of Inspector General requesting materials relevant to the Company’s reimbursement of employee expenses and remuneration to healthcare providers for a six month period from July 2012 through December 2012 in connection with a civil investigation under the False Claims Act (the “FCA Investigation”).  The Company submitted the requested documents to HHS and believes that it substantially complied with the subpoena.  On November 6, 2014, the Company received notice from the U.S. Department of Justice, U.S. Attorney’s Office for the District of Massachusetts, or DOJ, in the form of a Civil Investigative Demand, or CID, requesting additional materials relating to this matter for the time period of January 1, 2012 through December 31, 2013.  The Company responded to the CID, and believes that it substantially complied with the requests contained therein.  On September 19, 2016, the Company received notice from the DOJ in the form of an additional CID requesting additional document production and information relating to this matter for the time period January 1, 2011 through September 14, 2016.  The Company is responding to the CID, and continues to cooperate fully with the U.S. Attorney’s Office in its FCA investigation.

We own patents, trademarks, trade secrets, copyrights and other intellectual property and know-how that we believe give us a competitive advantage. If we cannot protect our intellectual property and develop or otherwise acquire additional intellectual property, competition could force us to lower our prices, which could hurt our profitability.

Our intellectual property rights are and will continue to be a critical component of our success.  We rely and expect to continue to rely on a combination of intellectual property, including patent, trademark, copyright, trade secret and domain name protection laws, as well as confidentiality agreements with our employees and others, to protect our intellectual property and proprietary rights.  If we fail to obtain and maintain adequate intellectual property protection, we may not be able to prevent third parties from using our proprietary technologies or from marketing products that are very similar or identical to ours.

A substantial portion of our intellectual property rights relating to the Impella products and other products under development is in the form of trade secrets, rather than patents. Unlike patents, trade secrets are only recognized under applicable law if they are kept secret by restricting their disclosure to third parties. We protect our trade secrets and proprietary knowledge in part through confidentiality agreements with employees, consultants and other parties. However, certain consultants and third parties with whom we have business relationships, and to whom in some cases we have disclosed trade secrets and other proprietary knowledge, may also provide services to other parties in the medical device industry, including companies, universities and research organizations that are developing competing products. In addition, some of our former employees who were exposed to certain of our trade secrets and other proprietary knowledge in the course of their employment may seek employment with, and become employed by, our competitors. We cannot be assured that consultants, employees and other third parties with whom we have entered into confidentiality agreements will not breach the terms of such agreements by improperly using or disclosing our trade secrets or other proprietary knowledge, that we will have adequate remedies for any such breach, or that our trade secrets will not become known to or be independently developed by our competitors. The loss of trade secret protection for technologies or know-how relating to our product portfolio and products under development could adversely affect our business and our prospects.

Our business position also depends in part on our ability to maintain and defend our existing patents and obtain, maintain, and defend additional patents and other intellectual property rights. We intend to seek additional patents, but our pending and future patent applications may not result in issued patents or be granted on a timely basis.  In addition, issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage, including exclusivity in a particular product area.  The scope of our patent claims also may vary between countries, as individual countries have distinctive patent laws.  We may be subject to challenges by third parties regarding our intellectual property, including, among others, claims regarding validity, enforceability, scope and effective term. Patent prosecution, related proceedings, and litigation in the U.S. and in other countries may be expensive, time consuming and ultimately unsuccessful. In addition, patents issued by foreign countries may afford less protection than is available under U.S. patent law and may not adequately protect our proprietary information. Our competitors may independently develop proprietary technologies and processes that are the same as or substantially equivalent to ours or design around our patents.  Our competition may also hold or obtain intellectual property rights that would threaten our ability to develop or commercialize our product offerings.  The expiration of patents on which we rely for protection of key products could diminish our competitive advantage and adversely affect our business and our prospects.

29


 

Companies in the medical device industry typically obtain patents and frequently engage in substantial intellectual property litigation. Our products and technologies could infringe on the rights of others. If a third-party successfully asserts a claim for infringement against us, we may be liable for substantial damages, be unable to sell products using that technology, or have to seek a license or redesign the related product. These alternatives may be uneconom ical or impossible. Intellectual property litigation could be costly, result in product development delays and divert the efforts and attention of management from our business.

Thoratec Corporation, or Thoratec, (acquired by St. Jude Medical, Inc. in October 2015) has challenged a number of Company owned patents in the European Patent Office or EPO, in Germany, and in the United Kingdom in connection with the launch of their HeartMate PHP medical device, or PHP, in Europe.  These actions all relate to Thoratec’s ability to manufacture and sell their PHP product in Europe.  None of these matters impact the Company’s ability to manufacture or sell its Impella products.  

In October 2012, Thoratec filed a notice of opposition in the EPO to a Company owned European patent covering a ‘pigtail’ feature.  In October 2014, the EPO dismissed Thoratec’s opposition, and in December 2014, Thoratec filed a notice of appeal.  The appeal is scheduled to be heard at the EPO in January 2017.  

In December 2014, Thoratec filed a nullity suit in German Federal Court against a German pigtail patent owned by the Company.  The validity hearing for the German pigtail patent is scheduled for November 2016. In August 2015, Thoratec filed a nullity action in German Federal Court against two Company owned patents covering a “magnetic clutch” feature.  These magnetic clutch patents were acquired by the Company in July 2014, in connection with its acquisition of ECP and AIS.  The validity hearing for the magnetic clutch patents is scheduled for June 2017. In September 2015, the Company filed counterclaims in the magnetic clutch action in Germany asserting that the PHP product infringes the two magnetic clutch patents and the two pigtail patents.  The infringement trial is scheduled for January 2017.  

In July 2015, Thoratec filed a nullity action in the High Court of Justice of England and Wales against the Company’s U.K. “magnetic clutch” patents acquired from ECP and AIS.  In October 2015, Thoratec added a non-infringement claim seeking a declaration that their PHP product does not infringe the patents in the United Kingdom.  Thoratec’s claims in the U.K. were heard at trial in early October 2016.  While the English Court found on October 28, 2016, that the PHP would infringe a number of claims contained within the Company’s patents, the Court found those claims to be invalid because of obviousness or lack of novelty.    

In December 2015, the Company received a letter from Maquet Cardiovascular LLC, or Maquet, a subsidiary of the Getinge Group, and maker of the intra-aortic balloon pump, asserting that the Company’s Impella products infringe certain claims having guidewire, lumen and sensor features and which are in two Maquet patents and one pending patent application in the U.S. and elsewhere, and encouraged the Company to discuss taking a license from Maquet.  In January 2016, the Company responded to Maquet stating that it believed that the cited claims were invalid and that its Impella products did not infringe the cited patents.  In May 2016, Maquet sent an additional letter notifying the Company that the pending patent application had been issued as a U.S. patent and repeated their earlier assertion and encouraged the Company to discuss taking a license from Maquet.  The three patents expire September 2020, December 2020 and October 2021.  On May 19, 2016, the Company filed suit in U.S. District Court for the District of Massachusetts, or D. Mass., against Maquet seeking a declaratory judgment that the Company’s Impella products do not infringe Maquet’s cited patent rights.  

On August 24, 2016, Maquet sent another letter to the Company identifying four new continuation patent filings with claims that Maquet alleges are infringed by the Company’s Impella products.  Those U.S. continuation filings have not issued as patents; three of them have not yet published, the fourth is published but has not begun substantive prosecution.  If the patent filings were to issue, they will expire in September 2020.  On September 23, 2016, Maquet filed an answer to the Company’s suit in D. Mass., including various counterclaims alleging that the Company’s Impella 2.5, Impella CP, Impella 5.0, and Impella RP heart pumps infringe certain claims of the three issued U.S. patents.  The D. Mass. court has not yet set a schedule for the case.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

 

 

Item 3.

Defaults Upon Senior Securities

None

 

30


 

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

Item 5.

Other Information

None

 

 

31


 

Item 6.

Exhibits

 

Exhibit No.

 

Description

 

Filed with
This
Form 10-Q

 

Incorporated by Reference

 

 

 

 

 

 

Form

 

Filing Date

 

Exhibit No.

 

 

 

 

 

 

 

 

 

 

 

    2.1

 

Agreement on the Sale and Transfer of all shares in ECP Entwicklungsgellschaft mbH

 

 

 

8-K

 

July 7, 2014

(File No. 001-09585)

 

2.1

 

 

 

 

 

 

 

 

 

 

 

    2.2

 

Agreement on the Sale and Transfer of all shares in AIS GmbH Aachen Innovation Solutions

 

 

 

8-K

 

July 7, 2014

(File No. 001-09585)

 

2.2

 

 

 

 

 

 

 

 

 

 

 

    3.1

 

Restated Certificate of Incorporation.

 

 

 

S-3

 

September 29, 1997

 

3.1

 

 

 

 

 

 

 

 

 

 

 

    3.2

 

Restated By-Laws, as amended.

 

 

 

10-K

 

May 27, 2004
(File No. 001-09585)

 

3.2

 

 

 

 

 

 

 

 

 

 

 

    3.3

 

Certificate of Designations of Series A Junior Participating Preferred Stock.

 

 

 

S-3

 

September 29, 1997

 

3.3

 

 

 

 

 

 

 

 

 

 

 

    3.4

 

Amendment to the Company’s Restated Certificate of Incorporation to increase the authorized shares of common stock from 25,000,000 to 100,000,000.

 

 

 

8-K

 

March 21, 2007
(File No. 001-09585)

 

3.4

 

 

 

 

 

 

 

 

 

 

 

  10.1

 

Lease Agreement dated August 12, 2016 between Abiomed, Inc. and Leo C. Thibeault, Jr., Trustee of the Thibeault Nominee Trust

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  10.2

 

Change in Control Severance Agreement with Michael J. Tomsicek dated September 27, 2016

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  31.1

 

Principal Executive Officer Certification pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  31.2

 

Principal Financial Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  32.1

 

Principal Executive Officer and Principal Financial Officer Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

X

 

 

 

 

 

 

32


 

Exhibit No.

 

Description

 

Filed with
This
Form 10-Q

 

Incorporated by Reference

 

 

 

 

 

 

Form

 

Filing Date

 

Exhibit No.

 

 

 

 

 

 

 

 

 

 

 

  101

 

The following financial information from the ABIOMED, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets as of September 30, 2016 and March 31, 2016; (ii) Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2016 and 2015; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2016 and 2015; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015; and (v) Notes to Condensed Consolidated Financial Statements.

 

X

 

 

 

 

 

 

 

 

33


 

ABIOMED, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

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.

 

 

 

ABIOMED, Inc.

 

 

 

Date: November 4, 2016

 

/s/    MICHAEL J. TOMSICEK

 

 

Michael J. Tomsicek

 

 

Vice President and Chief Financial Officer

 

 

(Principal Accounting and Financial Officer)

 

 

34

Exhibit 10.1

LEASE

1. PARTIES . In consideration of the covenants herein contained, Leo C. Thibeault, Jr., Trustee of The Thibeault Nominee Trust u/d/t dated November 20, 1996, recorded with the Essex South Registry of Deeds, Book 13856, Page 290, having a usual place of business at 513 Turtle Hatch Lane, Naples, FL 34103, hereinafter together with his successors and assigns called Lessor, which expression shall include his successors and assigns where the context so admits, does hereby lease to ABIOMED, Inc., a Delaware corporation having a usual place of business at 22 Cherry Hill Drive, Danvers, MA 01923, hereinafter together with its successors and assigns called Lessee, which expression shall include its successors and assigns where the context so admits, the Premises described below dated as of this 12th day of August, 2016. The parties further state that effective as of the date hereof, the existing lease between the parties dated February 24, 2014, as amended by the First Amendment to Lease dated April 30, 2015 and the Second Amendment to Lease effective January 1, 2016 (the “Existing Lease”), is hereby replaced in its entirety by this Lease and is therefore of no further legal force or effect.

2. PREMISES . The Lessor hereby leases to the Lessee the following described premises (the “Premises”): exclusive access to and use of 163,560 square feet of space in the building located at 18-22 Cherry Hill Drive, Danvers, Massachusetts (the “Building), and the 12.21 acres of land (the “Land”) owned by the Lessor on which the Building sits, including the sidewalks, concourses, approaches, parking areas, and all other portions of the land. The Premises are described on the survey attached hereto as Exhibit A. Lessee’s proportionate share of the Building is established as One Hundred and 00/100 Percent (100.00%) percent (the “Proportionate Share”).

The Lessee shall further have exclusive use of the parking areas located on the Land at no cost throughout the term of the Lease. Lessee may add parking spaces to and/or redesign the parking areas, entry ways and drop off areas, subject to Town of Danvers zoning and other applicable regulations, at Lessee’s expense, with the prior written consent of Lessor, which consent shall not be unreasonably conditioned, withheld or delayed.

3. TERM . The term of this Lease shall commence on August 12, 2016 (the “Commencement Date”) and terminate at 11:59 p.m. Eastern Time on August 31, 2026.

4. DELIVERY OF PREMISES . Lessee takes possession of the Premises “as is.”

5. (a) BASE RENT . Commencing on the Commencement Date, and on the first of every month thereafter, the Lessee shall pay to the Lessor the Base Rent (collectively with all Additional Rent, as defined below, and other charges the “Rent”), without set-off or deduction of any kind whatsoever, except as specifically permitted herein, prorated on a per diem basis for any partial month or year. Other charges payable by the Lessee on a monthly basis shall be similarly prorated. Base Rent shall be paid monthly, with the first month’s Base Rent (prorated on a per diem basis for any partial month) paid at the Commencement Date; provided, however, that Lessee shall be entitled to a day for day credit to be applied against the amount of such first month’s Base Rent equal to the prorated amount of any licensing fee paid by Lessee to Lessor for the corresponding month pursuant to Section 1(a) of the Access and License Agreement, dated July 6, 2016, by and between Lessor and Lessee (the “Access Agreement”). Base Rent shall be paid as follows:

(i) For the months of August, 2016, through and including August, 2017, the Base Rent for the Premises shall be One Hundred and Four Thousand Seven Hundred and Five and 83/100 ($104,705.83) Dollars per month (163,560 square feet x 7.68201272 per square foot per year ÷ 12 months).

1


(ii) For the months of September, 2017, through and including August, 2020, the Base Rent for the Premises shall be $112,447.50 per month (163,560 square feet x 8.25 per square foot per year ÷ 12 months).

(iii) For the months of September, 2020, through and including August, 2023, the Base Rent for the Premises shall be $115,855.00 per month (163,560 square feet x 8.50 per square foot per year ÷ 12 months).

(iv) For the months of September, 2023, through and including August, 2026, the Base Rent for the Premises shall be $122,670.00 per month (163,560 square feet x 9.00 per square foot per year ÷ 12 months).

(b) ADDITIONAL RENT . In addition to Base Rent, the Lessee shall pay, as “Additional Rent” the Lessee’s Proportionate Share of Operating Costs of the Premises for each Lease Year or portion thereof during the Term hereof. Upon receipt of a bill for a service or expense that is an Operating Cost, the Lessor shall forward a copy of the bill to the Lessee, and Lessee shall pay the Lessor the amount of such bill within thirty (30) days of receipt of such bill.

(c) DEFINITIONS . Other than in relation to the Lessee’s Option to Buy set forth in Section 35, for the purpose of this Lease, “Lease Year” shall mean any fiscal year from January 1 to December 31, except that the first Lease Year during the term of this Lease shall commence on the Commencement Date and end on the next following December 31 and the last Lease Year during the term of this Lease shall end on the date this Lease terminates (each of such first and last Lease Years are referred to in the immediately preceding paragraph (b) as a “Partial Lease Year”). “Operating Costs” shall be limited to:

(i) Insurance premiums for the Premises, including without limitation, premiums for such property and casualty insurance and liability insurance, each with such endorsements (but expressly excluding a loss of rent endorsement), as the Lessor deems reasonably necessary, but excluding any insurance premiums for insurance acquired by any other tenant located at the Property, whether or not controlled by the Lessor;

(ii) {Reserved}

(iii) {Reserved}

(iv) Real estate taxes and all other general and special taxes, including assessments for local improvements and other governmental charges which may be lawfully charged, assessed or imposed upon the Building and the Premises during any tax year during the term of this Lease, equitably adjusted in the event the term of this Lease does not coincide with the tax (collectively the “Taxes”). If some method or type of taxation or assessment shall replace in whole or in part, the current method of assessment of Taxes, or the type thereof, Lessee agrees that Lessee shall pay Lessee’s Proportionate Share of the same. The Lessee shall have the right to file on its own behalf (or, if applicable or necessary, to require the Lessor to file on behalf of Lessee) for an abatement of real estate taxes and assessments, and shall be credited with its Proportionate Share of any savings resulting therefrom, net of any reasonable expenses incurred by the Lessor in relation to the abatement application; and

(v) {Reserved}

(vi) {Reserved}

(vii) {Reserved}

(viii) {Reserved}

(ix) Taxes (other than a Federal or State net income tax) assessed on account of the rents or other charges payable by Lessee to Lessor under this Lease.

2


Operating Costs shall be computed on a cash basis and shall be determined in accordance with United States generally accepted accounting principles consistently applied. They may be incurred directly or by way of reimbursement. The following shall be excluded from Operating Costs:

(aa) Salaries of officers and executives of the Lessor;

(bb) Depreciation;

(cc) Expenses relating to tenants’ alterations;

(dd) Interest, principal, fees and other charges on indebtedness;

(ee) Expenses for which the Lessor, by the terms of this Lease or any other lease, makes a separate charge;

(ff) Leasing fees or commissions;

(gg) Cleaning for all leasable portions of the Premises which shall be the responsibility of the Lessee;

(hh) Expenses for repairs or other work occasioned by fire storm or other casualty to the extent covered by insurance;

(ii) Expenses incurred in leasing or procuring new occupants including but not limited to legal fees, advertising expenses or expenses of renovating space for new occupants;

(jj) Legal or other expenses incurred in enforcing the terms of any lease or other occupancy arrangement;

(kk) Principal, interest payments, fees and other charges pursuant to any mortgage or other security or financing instrument or ground rent under any lease;

(ll) Extra premiums for insurance covering the Premises or Building occasioned by the use or activities of other occupants;

(mm) Expenses incurred due to the negligence or willful misconduct of Lessor or Lessor’s agents or employees or the negligence or willful misconduct of other tenants or their agents or employees;

(nn) Costs of service related to an individual occupant of the Building or Premises or to a particular tenant to the extent those services are not generally available to all tenants;

(oo) Any costs, fees, fines or penalties, or interest thereon, incurred due to violations of any law ordinance, code, rule or regulation by Lessor or any other occupant of the Building or Premises;

(pp) Any transfer tax imposed by reason of the sale of the Building or Premises; and

(qq) Expenses for repairs or replacements for which Lessor has received reimbursement from contractors under guarantees or warranties.

All Operating Costs shall be reduced by the amount (net of collection costs) of any insurance reimbursement, discount or allowance received by the Lessor in connection with such costs or any real estate tax abatements received to the extent applicable to a Lease Year.

(d) NET LEASE . This Lease shall be deemed and construed to be a triple net lease and, except as herein otherwise expressly provided, the Lessor shall receive the Base Rent, and Additional Rent and all other

3


payments hereunder to be made by the Lessee free from any charges, assessments, impositions, expenses, or deductions of any and every kind or nature whatsoever, except unless otherwise herein expressly provided.

6. {Reserved}

7. UTILITIES, SNOW PLOWING AND LANDSCAPING . The Lessee shall pay for water, electricity and other utilities (whether used for furnishing heat or other purposes) that are furnished to the Premises. Lessor shall in no event be liable for failure to perform any of its obligations when prevented from doing so due to any accident, to the making of repairs, alterations or improvements, to labor difficulties, to trouble in obtaining fuel, electricity, service or supplies from the sources from which they are usually obtained for the Building, or to any other cause beyond the Lessor’s reasonable control.

The Lessee agrees at its sole cost to maintain the parking areas, walkways and driveways free of snow and ice and to maintain the quality of the landscaping in all material respects to at least the standard that existed at the commencement of this Lease.

8. USE OF THE PREMISES . The Lessee shall use the Premises for any use permitted by law including applicable zoning provisions (the “Permitted Use”). Such Permitted Use may include, but is not limited to, medical and non-medical research and development, manufacturing, sales, warehousing and related office use, and mixing, examination, manufacturing, development and/or research of chemicals and/or biological materials.

Lessee further agrees to conform to the following provisions during the entire term of this Lease:

(a) Lessee will not place on the exterior of exterior walls (including both interior and exterior surfaces of windows and doors) or on any part of the Building outside the Premises, any signs, symbols, advertisement or the like visible to public view outside of the Premises without the prior consent of Lessor, which consent shall not be unreasonably withheld. Without limitations, lettering on windows is expressly prohibited. Notwithstanding the preceding provisions, but subject to Town of Danvers zoning and other applicable regulations, it is understood and agreed that the Lessee has the Lessor’s permission, at Lessee’s expense, (a) to attach an ABIOMED sign to the face of the Premises of at least the same size as is presently attached to 33 Cherry Hill Drive, (b) to install a flag pole, and (c) to install additional exterior building and monument signage from time to time through the term of this Lease.

(b) The Lessee, at its expense, shall comply with all rules, ordinances, orders, regulations and requirements of any Board of Fire Underwriters, or any other body hereafter constituted exercising similar functions and governing insurance rating bureaus; and shall not do or permit anything to be done in or upon the Premises, or bring or keep anything therein, except as now or hereafter permitted by any governmental authority, Board of Fire Underwriters or any other similar body having jurisdiction, or insurance rating bureau; and shall keep the Premises equipped with all safety appliances or equipment required by any governmental authority, Board of Fire Underwriters or other similar body or governing insurance rating bureau by reason of the Lessee’s particular use of the Premises or the location of partitions, trade fixtures or other contents of the Premises; and shall procure all licenses, permits or other approvals required because of such use, it being understood that the foregoing provisions shall not be construed to broaden in any way the Permitted Use of the Premises;

(c) The Lessee, at its expense, shall comply with all rules, ordinances, orders, permit conditions and regulations of governmental authorities now or hereafter in force and with any lawful direction of any public officer, in each case to the extent the same are applicable to the Premises or the use and maintenance thereof. If the Lessee receives notice of any violation of law, ordinance, order, permit conditions or regulation applicable to the Premises or the use and maintenance thereof, it shall give prompt written notice thereof to the Lessor. Additionally, the Lessee shall comply with any reasonable rules and regulations imposed by the Lessor,

4


provided that such rules and regulations do not materially interfere with Lessee’s use of the Premises, Building or Land as of this date and do not materially change any term of the Lease.

9. COMPLIANCE WITH LAWS . The Lessee acknowledges that no trade or occupation shall be conducted in the Premises, or use made thereof, which will be unlawful, noisy or offensive, or contrary to any law or any municipal bylaw or ordinance in force in the city or town in which the Premises are situated.

10. FIRE INSURANCE . The Lessee shall not permit any use of the Premises which will make voidable any insurance on the Building, or on the contents of said Building or which shall be contrary to any law or regulation from time to time established by the New England Fire Insurance Rating Association or any similar body succeeding to its power. The Lessee shall, promptly after demand, reimburse the Lessor all extra insurance premiums caused by the Lessee’s use of the Premises, provided Lessor provides Lessee with notice of such extra premiums promptly upon receipt by Lessor of notice from Lessor’s insurer.

11. MAINTENANCE OF PREMISES .

(a) The Lessee agrees at its sole expense, to maintain the Premises in the same condition in which they exist as of the Commencement Date, as improved by the Lessor or the Lessee, including the maintenance, repair and replacement (subject to Section 11(b) and Exhibit B) of all mechanical, electrical, HVAC, plumbing, life safety and other building systems within the Premises serving the Premises, in good condition reasonable wear and tear, damage by fire and other casualty and condemnation only excepted, which maintenance shall require, without limiting the generality of the foregoing, that all maintenance of the HVAC equipment (including but not limited to the equipment listed on Exhibit B) be performed by a qualified HVAC contractor on a periodic basis but not less frequently than annually. Additionally, Lessee shall, whenever necessary, replace plate glass and other glass thereon. The Lessee shall not permit, to the extent within the reasonable control of Lessee, the Premises to be overloaded, damaged, stripped, or defaced, nor suffer any waste. Lessee will maintain an adequate and systematic program to ensure that the Premises are maintained free of rodent and vermin infestation. Lessee shall cause garbage and refuse to be removed from the Premises at Lessee’s sole expense. Notwithstanding the foregoing provisions to the contrary, Lessee shall not be responsible for any damages or repairs resulting from the willful acts or negligence of Lessor and Lessee shall not be required to make any repairs or pay for any damages which is covered by insurance maintained by Lessor.

Notwithstanding the foregoing, if any building system other than (i) a system installed by the Lessee to support its specific operations or (ii) HVAC equipment included in Exhibit B which is covered under Section 11(b) below, requires replacement during the last two years of the Original Term or during the last two years of an Extended Term, and the Term is not extended beyond the Original Term or such Extended Term by the Lessee pursuant to Section 34, the Lessee shall be responsible for the cost of such replacement multiplied by a fraction, the numerator of which shall be the number of whole months left in the Original Term or such Extended Term as of the completion of such replacement and the denominator of which shall be the number of months of such replacement system’s useful life, and the Lessor shall reimburse the Lessee for the balance of the cost of such replacement. The Lessor shall reimburse the Lessee such balance within thirty (30) days after the later of (i) the completion of such system replacement and (ii) the expiration without exercise of the Extension Option that follows the determination of the need for such system replacement or, in the event the Lessee has already exercised its third Extension Option, within thirty (30) days after the completion of such system replacement. Any dispute relating to this paragraph shall be resolved by binding arbitration conducted in accordance with the rules of the American Arbitration Association before an arbitrator with construction dispute experience mutually selected by the parties. If the parties cannot mutually agree on an arbitrator, each shall select an arbitrator with construction dispute experience and such arbitrators shall select a third arbitrator with construction dispute experience to conduct the arbitration. Each party shall bear its own arbitration costs and shall equally share the cost of the arbitrator.

5


(b) Pursuant to the Existing Lease, the Lessor replaced the HVAC equipment identified on Exhibit B hereto (Exhibit C of the Existing Lease). So long as the Lessee has met its maintenance obligations under Section 11(a), if any of such equipment needs to be replaced during the Original Term (as defined below) or, if applicable Extended Term(s) (as defined below) of this Lease, the Lessor will do so at its expense.

Subject to the succeeding sentences, the Lessor agrees to maintain in good condition (reasonable wear and tear, damage by fire and other casualty only excepted), repair and replace at Lessor’s expense the structural portions of the Building, including, without limitation, the foundation, footers, slabs, weight bearing walls and columns and the roof of which the Premises are a part, unless such maintenance, repair or replacement is required as a result of any act, omission or neglect of the Lessee or those for whose conduct the Lessee is legally responsible but subject to Section 24 with respect to insured losses. Lessor shall not charge Lessee any sum for any cost expended by Lessor pursuant to this Section 11(b) either directly or in the form of Additional Rent, provided, however, that any and all costs and expenses incurred for roof maintenance, repair or replacement due to or as a result of any roof cuts, punctures or penetrations of any kind by Lessee including, without limitation, arising from or related to the installation or maintenance of HVAC or cooling equipment placed on the roof by the Lessee shall be borne by the Lessee. All available manufacturers’ warranties shall be provided by Lessor to Lessee.

Lessee shall promptly give Lessor notice of any required maintenance, repair or replacement that is required to be performed by Lessor under this Section 11(b) after Lessee first learns thereof, to the extent that such defects are reasonably observable by Lessee. If Lessor fails within ten (10) days after receipt of notice to commence and to proceed thereafter with due diligence to make repairs required to be made by Lessor pursuant to this Section 11(b), such repairs may be performed by Lessee, at the expense of Lessor, and Lessee shall deduct the reasonable costs of such repairs from its payment of Base Rent to Lessor. Lessee’s failure to give such notice to Lessor shall not relieve Lessor of any obligation to make repairs which Lessor shall have pursuant to this Section 11(b), provided that Lessor shall have actual knowledge of the need to make such repairs.

12. ALTERATIONS - ADDITIONS . (a) The Lessee shall not make structural alterations or additions to the Premises, including, without limitation, roof cuts, punctures and penetrations of any kind, except as necessary to install HVAC or cooling equipment and vents and ducts, but may make non-structural alterations, provided that, in each instance, the Lessor consents thereto in writing, which consent shall not be unreasonably withheld or delayed. All such allowed alterations, shall be at Lessee’s expense and shall be in quality at least equal to the present construction. Lessee shall not permit any mechanics’ liens, or similar liens, to remain upon the Premises for labor and material furnished to Lessee or claimed to have been furnished to Lessee in connection with work of any character performed or claimed to have been performed at the direction of Lessee and shall cause any such lien to be released of record forthwith without cost to Lessor nor shall any improvements be subject to any security interest or lien of any kind. Any alterations or improvements made by the Lessee shall become the property of the Lessor at the termination of occupancy as provided herein, excluding moveable and semi-moveable (i) trade fixtures, (ii) equipment (including special HVAC units and other equipment for clean rooms and telecommunications equipment), (iii) furniture and (iv) other personal property, all of which shall remain the property of the Lessee and which it may remove, provided (i) it repairs any damages caused by such removal, (ii) it conducts such repairs in a fashion which does not impair any roof warranty then existing and (iii), with regard to trade fixtures and any other property affixed to the Building, it is not then in default in the payment of Base Rent or Additional Rent. Lessor acknowledges that it has approved of the work and construction of the improvements to the Premises being performed by the Lessee that will facilitate and accommodate Lessee’s long-term use and occupancy of the Premises described in the work plan attached hereto as Exhibit C.

6


(b) All leasehold improvements constructed by Lessee within the Premises shall be done in accordance with plans and specifications first approved by Lessor, which approval shall not be unreasonably withheld, delayed or conditioned. Lessee shall submit to Lessor for Lessor’s reasonable approval all plans and specifications for Lessee’s construction of any leasehold improvements, alterations or additions in or to any part of the Premises. Lessor shall review such plans and specifications as submitted within five (5) business days after the receipt thereof and shall notify Lessee if Lessor approves or disapproves such plans and specifications. If Lessor disapproves such plans, Lessor shall specify the reasons for its disapproval of any aspect of such plans. Lessee shall prepare any revisions to such plans and specifications which may be necessary as a result of Lessor’s disapproval and shall submit them for Lessor’s approval or disapproval which Lessor shall give within three (3) business days. Lessor and Lessee shall initial the plans and specifications after the same have been submitted by Lessee and finally approved by Lessor. Lessee agrees that Lessee’s construction shall be built in substantial accordance with such final plans and specifications and agrees to obtain from its architect, certificates, from time to time, that such final plans and specifications meet all federal, state and local governmental requirements, including, without limitation, all applicable zoning laws, building codes, environmental codes, rules, ordinances or regulations, and any applicable laws and regulations regarding accommodations for handicapped persons. Lessor shall not be deemed unreasonable for withholding approval of any improvements, alterations or additions which, when completed, will (i) materially adversely affect any structural or exterior mechanical, plumbing, HVAC, electrical or other exterior elements of the Building, or (ii) will increase the cost of construction or of insurance or taxes on the Building or the Premises, unless Lessee agrees in writing to pay all such costs. Lessee shall provide Lessor with a full set of as-built plans for the Premises so improved upon completion of such improvements. In the event Lessor has not approved or disapproved plans and specifications in writing within the time periods set forth above, such plans and specifications shall be conclusively deemed approved. There shall be no fee paid by Lessee to Lessor in connection with the construction of such leasehold improvements, alterations or additions.

Notwithstanding the provisions of the above paragraphs, the Lessee shall not be obligated to notify and obtain the consent from the Lessor if (i) the cost of a particular improvement does not exceed $250,000.00 or (ii) a particular improvement is non-structural and does not involve the installation of any fixtures.

(c) All construction work in the Premises shall be done in a good and workmanlike manner and in compliance with the Lease, all applicable laws and ordinances, regulations and orders of governmental authority and insurers of the Building or the Premises. Before Lessee begins any work, it shall secure all licenses and permits necessary therefor and cause each contractor to carry (1) workmen’s compensation insurance in statutory amounts covering all the contractors and subcontractors employees, and (2) comprehensive public liability per occurrence insurance with limits of $1,000,000, with property damage insurance with limits of not less than $1,000,000 per occurrence (all such insurance to be written in companies approved by Lessor and insuring Lessor and Lessee as well as the contractors). Lessee agrees to pay promptly when due the entire cost of any work done in the premises by Lessee, its agents, employees or independent contractors, and not to cause or permit any liens for labor or materials performed or furnished in connection with its work to attach to the Premises and immediately to discharge any such liens which may attach. Lessor may inspect the work at any time in compliance with the provisions of Section 15. Lessee shall indemnify Lessor and hold it harmless from and against any cost, claim, or liability arising from any work done by or at the direction of Lessee.

13. ASSIGNMENT - SUBLEASING .

(a) Lessee shall not assign or sublet or otherwise transfer, voluntarily or involuntarily, the whole or any part of the Premises or this Lease, or allow any other person to occupy the Premises without Lessor’s prior written consent, which consent shall not be unreasonably withheld or delayed, provided Lessee shall give Lessor written notice of the terms of the assignment, transfer or sublet and that the proposed assignee or sublessee is of good reputation and financial condition and its proposed use is permitted by all applicable by-

7


laws and regulations and provided further that Lessee shall pay all reasonable legal and other fees incurred by Lessor in connection with reviewing and approving any such assignment or sublet. Lessee shall give Lessor written notice of the material terms of any proposed assignment or other transfer or sublease and such other information regarding the assignee or sublessee as Lessor shall reasonably require. Notwithstanding such consent, Lessee shall remain fully liable to Lessor for the payment of all Rent and for the full performance of the covenants and conditions of this Lease. It shall also be a condition of the validity of the assignment or sublet that the assignee or sublessee agree directly with Lessor, in form satisfactory to Lessor, to be bound by all Lessee obligations under this Lease (but in the event of a sublease, only to the extent applicable to the subleased premises). The acceptance by Lessor of the payment of Base Rent or Additional Rent following an assignment, sublease or other transfer not approved shall not be deemed to be consent by Lessor to any such assignment, sublease or transfer nor shall the same constitute a waiver of any right or remedy of Lessor.

(b) Notwithstanding Section 13(a), Lessee shall have the right to sublet up to fifty percent (50%) of the Premises without Lessor’s prior written consent, provided that the proposed sublessee is of good reputation and financial condition and its proposed use is permitted by all applicable by-laws and regulations. Lessee shall give Lessor written notice of the name and address of the sublessee, a brief description of such sublessee’s business and the material terms of the sublet (including, without limitation, the portion of the Premises to be sublet, the rent for such sublet and the term for which such portion of the Premises is to be sublet). Lessee shall pay all reasonable legal and other fees incurred by Lessor in connection with reviewing any such sublet. Notwithstanding such sublet, Lessee shall remain fully liable to Lessor for the payment of all Rent and for the full performance of the covenants and conditions of this Lease.

(c) Notwithstanding Section 13(a), in the event the Lessee (i) sells substantially all of its assets, or (ii) is a party to a merger or consolidation in which it is not the surviving party, the Lessor shall be deemed to have consented to assignment of this Lease to the purchaser of the Lessee’s assets or the surviving or new entity arising from such merger or consolidation; provided, however, that such purchaser or surviving or new entity executes an assumption of all of Lessee’s liabilities and responsibilities hereunder.

(d) Notwithstanding anything to the contrary in this Section 13, in the event a sublessee is paying the Lessee more per month than the Rent the Lessee is paying the Lessor per month, and such sublessee rents more than 10,000 square feet of space from the Lessee, the Lessee shall pay the Lessor one-half (1/2) of such excess (after the deduction of any brokerage commission, tenant improvement allowances, free rent or other similar tenant inducements paid by Lessee with respect to such sublease) with its monthly payments of Base and Additional Rent. In the event such sublessee is subleasing a portion of the Premises from the Lessee, for purposes of determining whether the sublessee is paying the Lessee more than the Rent the Lessee is paying the Lessor, the monthly Rent amount shall be multiplied by a fraction, the numerator of which shall be the square footage occupied by the subtenant, and the denominator of which shall be 163,560. The resulting product shall be compared with the rent paid by the sublessee. If the resulting product is less than the rent paid by the sublessee, one-half (1/2) of the excess of the rent paid by the sublessee over the Rent paid by the Lessee (after the deduction of any brokerage commission, tenant improvement allowances, free rent or other similar tenant inducements paid by Lessee with respect to such sublease) shall be paid by the Lessee to the Lessor in accordance with the first sentence of this paragraph. For purposes of this paragraph, rent actually paid each month by the sublessee shall be considered the rent the sublessee is paying the Lessee, whether or not the sublessee is in default on an obligation to pay a higher amount, and whether or not such payment includes an arrearage from a preceding month.

14. SUBORDINATION/ESTOPPEL CERTIFICATE .

(a) This Lease shall be subject and subordinate to the lien of any and all mortgages, deeds of trust and other instruments in the nature of a mortgage, now or at any time hereafter, a lien or liens on the Premises of which the Premises are a part, without the necessity for executing any such instrument of subordination.

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However, the Lessee shall, when requested, promptly execute and deliver such written instruments as shall be necessary to show the subordination of this Lease to said mortgages, deeds of trust, ground leases or other such instruments in the nature of a mortgage or ground lease. The subordination of this Lease shall be specifically conditioned upon Lessor obtaining from the holder of any mortgage, deed of trust, or other instrument in the nature of a mortgage or ground lease, a non-disturbance and attornment agreement to permit the Lessee to continue its quiet enjoyment of the Premises under the terms of this Lease, provided Lessee complies with all of the terms and conditions of this Lease. Lessor shall obtain a commercially reasonable non-disturbance agreement from Lessor’s mortgage lender prior to the Commencement Date.

(b) At the request in writing of any mortgagee or holder of a deed of trust of the Premises, this Lease shall be deemed superior to such mortgage or deed of trust, whether this Lease was executed before or after such mortgage and Lessee shall execute such documents in recordable form as such mortgagee or holder of a deed in trust shall reasonably request.

(c) Lessee agrees, at any time and from time to time, within ten (10) days’ of written request by Lessor, to execute, acknowledge and deliver to Lessor a statement in writing certifying that this Lease is presently in full force and effect and unmodified except as may be indicated; that the Lessee has accepted possession of the Premises except as may be indicated, any improvements required by the terms of this Lease to be made by the Lessor have been completed to the satisfaction of the Lessee except as may be indicated; that no rent under the Lease has been paid more than thirty (30) days in advance of its due date (except for security deposits, if any, in a specified amount); that the addresses for notices to be sent to the Lessee is as set forth in the Lease or as specified in such certificate; and that the Lessee as of the date of executing the certificate has no charge, lien or claim of offset under the Lease, or otherwise, against rents or other charges due or to become due thereunder except as may be indicated. In addition, in the event the Lessee receives written notice from the Lessor or the holder of a mortgage or ground lease on the Premises so requesting, and provided a non-disturbance agreement and attornment agreement has been entered into with the holder of such mortgage or ground lease if this Lease is subordinate to same, the Lessee shall enter into a written agreement with the Lessor and/or the holder of such mortgage or ground lease providing that: (1) the Lessee will not pay any rent under the Lease more than thirty (30) days in advance of its due date (except for security deposits, if any); (2) Lessee will not enter into or consent to the modification of any of the terms of this Lease nor to the termination thereof by the Lessor except as permitted herein; (3) Lessee will not seek to terminate this Lease by reason of any act or omission of the Lessor until the Lessee shall have given written notice of such act or omission to the holder of such mortgage or ground lease (at such holder’s last address furnished the Lessee) and until a reasonable period of time, but not more than thirty (30) days, shall have elapsed following the giving of such notice during which period such holder shall have the right, but shall not be obligated to remedy such act or omission. Such agreement shall be of no effect unless the Lessee is furnished by the mortgagee, or ground lessee, with a copy of an assignment to it of the Lessor’s interest in this Lease.

15. LESSOR’S ACCESS/RIGHT OF ENTRY . Lessor shall have the right to enter the Premises, but only with an escort provided by the Lessee, upon twenty four (24) hours’ prior written notice (or with reasonable notice in the case of emergency) during normal business hours (or at any other time for the purpose of making emergency repairs) to (i) inspect the Premises, (ii) make such repairs and do such work on or about the Premises as Lessor is required to perform pursuant to this Lease, or that Lessor may be required by law to make, (iii) following the expiration of the Lessee’s exclusive right to purchase the Premises as set forth in Section 35, show the Premises to prospective buyers for purchase and (iv) during the last six (6) months of the Term, to show the Premises to prospective tenants for lease, unless an Extension Option (as defined below) has previously been exercised.

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Each entry by Lessor in accordance with this Section 15 shall be made in such a manner as will not unreasonably interfere with Lessee’s use of the Premises. Lessor may remove placards and signs not approved and affixed as herein provided, and at any time within six (6) months before the expiration of the Term, may affix to any suitable part of the Premises a notice for letting or selling the Premises and keep the same so affixed without hindrance or molestation in accordance with the provision of the first paragraph of this Section 15.

Lessor agrees not to disclose any trade secrets or other confidential information it may gain access to as a result of any entry on to the Premises.

16. INDEMNIFICATION AND LIABILITY . (a) Except as provided in Section 24 with regard to insured losses, the Lessee shall save the Lessor and its trustees, beneficiaries, servants, agents and employees and those in privity with the estate of the Lessor (“Lessor Indemnified Parties”) harmless from all loss and damage occasioned by the use or escape of water or by the bursting of pipes on the Premises, or by any nuisance caused by Lessee on the Premises, unless such loss is caused by the act or omission of any Lessor Indemnified Party or any of Lessor’s contractors. In addition, to the maximum extent permitted by law, Lessee hereby indemnifies and covenants to save Lessor Indemnified Parties harmless from and against any and all claims, damages, liabilities or penalties asserted by or on behalf of any person, firm, corporation or public authority:

(i) on account of or based upon any injury to person, or loss of or damage to property, sustained or occurring on the Premises on account of or based upon the act, omission, fault, negligence or misconduct of any person other than Lessor Indemnified Parties;

(ii) on account of or based upon any injury to person, or loss of or damage to property, sustained or occurring on the Premises to the extent arising out of the use or occupancy of the Premises by the Lessee or by any person claiming by, through or under any Lessee Indemnified Party (as defined below) or Lessee’s contractors; and

(iii) on account of or based upon (including monies due on account of) any work or thing whatsoever done (other than by Lessor Indemnified Parties or Lessor’s contractors) on the Premises during the Term of this Lease and during the period of time, if any, prior to the Commencement Date when Lessee may have been given access to the Premises, except as a result of the acts of Lessor Indemnified Parties or Lessor’s contractors;

and, in respect of any of the foregoing, from and against all costs, expenses (including, without limitation, reasonable attorneys’ fees) and liabilities incurred in or in connection with any such claim, or any action or proceeding brought thereon.

Lessee shall not generate, store, release, transport, dispose of or otherwise handle any substance, waste or material deemed hazardous, toxic or a contaminant under any federal, state or local statute, law, ordinance, rule or regulation, order or decision (hereinafter, any “Hazardous Substance”) in violation of any laws. Lessee shall defend, indemnify and hold harmless Lessor and any mortgagee of Lessor from and against any and all liability, loss, cost, or expense, including, without limitation, reasonable attorneys’ fees and consultants’ fees and, to the extent required by environmental laws (but without the requirement of an activity use limitation of any kind), clean-up costs arising from the presence, release, or threat of release of any Hazardous Substance on or deriving from the Premises and to the extent arising out of the generation, storage, release, transportation, disposal or other handling of any Hazardous Substance at or near the Premises by Lessee, its employees, invitees, contractors or agents, regardless of whether said release or threat of release is caused by negligence or not.

(b) Lessor hereby indemnifies and covenants to save Lessee and its officers, shareholders, servants, agents and employees and those in privity with the estate of the Lessee (“Lessee Indemnified Parties”) harmless from and against any and all claims, damages, liabilities or penalties asserted by or on behalf of any person, firm, corporation or public authority:

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(i) on account of or based upon any injury to person, or loss of or damage to property, sustained or occurring on the Premises to the extent arising out of or caused by the negligence or misconduct of Lessor Indemnified Parties or Lessor’s contractors;

(ii) on account of or based upon any injury to person, or loss of or damage to property, sustained or occurring in or about the Premises arising out of the negligence or misconduct of Lessor Indemnified Parties or Lessor’s contractors;

and, in respect of any of the foregoing, from and against all costs, expenses (including, without limitation, reasonable attorneys’ fees) and liabilities incurred in or in connection with any such claim, or any action or proceeding brought thereon.

Lessor shall defend, indemnify and hold harmless Lessee Indemnified Parties from and against any and all liability, loss, cost, or expense, including without limitation, attorneys’ fees, consultants’ fees and clean-up costs arising out of the generation, storage, release, transportation, disposal or other handling of any Hazardous Substance at or near the Premises by Lessor, its employees, invitees, contractors or agents.

In addition to the foregoing indemnification, Lessor shall indemnify, defend and hold Lessee Indemnified Parties harmless from any and all lawsuits, judgments, liabilities, damages, claims, costs and expenses (including, without limitation, technical consultant fees, court costs and reasonable attorney’s fees), arising out of or resulting from (i) any “release” as defined in §101(22) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), of any “hazardous substance,” as defined in §101(14) of CERCLA or petroleum (including crude oil or any fraction thereof) or “hazardous material” or “oil” (as each term is defined in M.G.L. c. 21E (“Chapter 21E”)) at, on, from or near the Premises; (ii) any contamination of the soil, ground water or other environmental media or damage to the environment and natural resources of the Premises, whether arising under CERCLA, Chapter 21E or other existing statutes and regulations, or common law; or (iii) any toxic, explosive or otherwise dangerous materials which have been buried beneath or concealed within the Premises; in each case by Lessor or its predecessors or its trustees, beneficiaries, servants, agents, employees or independent contractors. Without limiting the generality of the foregoing, Lessor also shall indemnify, defend and hold Lessee Indemnified Parties harmless from any claims or losses arising from the presence, release, or threat of release of any pre-existing Hazardous Substance on the Premises, including, without limitation, from any matter or condition for which Lessor is entitled to indemnification pursuant to that certain Agreement by and among Lessor, Thermadyne Holding Company, and Danvers Industrial Packaging Corp. dated November 22, 1996.

17. LESSEE’S LIABILITY AND PROPERTY INSURANCE . The Lessee shall maintain in full force, from the Commencement Date, comprehensive public-liability insurance written on an occurrence basis and including contractual liability coverage to cover any liabilities assumed under this Lease in the amount of $2,000,000, with property-damage insurance in limits of $1,000,000, in responsible companies qualified to do business in Massachusetts and in good standing therein naming the Lessor as an additional insured against injury to persons or damage to property as provided. The Lessee shall deposit with the Lessor certificates for such insurance at or prior to the commencement of the term, and thereafter within thirty (30) days prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be canceled or amended without at least twenty (20) days’ prior written notice to the insured and additional insured named therein.

The Lessee shall also maintain in full force and effect from the Commencement Date throughout the Lease Term and thereafter so long as the Lessee is in occupancy of any part of the Premises, reasonable property insurance covering the Lessee’s furnishings, fixtures, equipment or other personal property of the Lessee written on an “All Risk” basis.

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18. FIRE, CASUALTY - EMINENT DOMAIN . Should all or substantially all of the Premises be damaged by fire or other casualty, or be taken by eminent domain or condemned, the Lessee may elect to terminate this Lease at any time thereafter upon written notice to the Lessee. Such termination shall be effective as of the date of the taking or casualty. Upon termination, the parties hereto shall be relieved of all obligations and liabilities hereunder which had not yet accrued. Lessor shall also return all sums Lessee pre-paid hereunder, including Base Rent for the month in which the casualty or taking occurred on a pro-rata basis. To the extent fire, casualty, or taking renders the Premises or any portion thereof, unsuitable for their intended use, a just and proportionate abatement of Base Rent shall be made for the period in which, by reason of such damage or taking, there is interference with Lessee’s use of the Premises. Subject to the last paragraph of this Section 18, Lessor shall promptly restore the Premises to its condition prior to such casualty or taking (as nearly as practical). Notwithstanding the foregoing or the provisions of the last paragraph of this Section 18, the Lessee may elect to terminate this Lease if:

(a) The Lessor fails to give written notice within forty-five (45) days of such fire, casualty or taking of intention to restore Premises; or

(b) The Lessor fails to restore the Premises to substantially the same condition which existed prior to the fire, casualty or taking within one hundred twenty (120) days of said fire, casualty or taking.

If the Premises becomes untenantable in whole or in part because of fire or other casualty, or as a result of a taking of or damage to the premises or the Building in connection with the exercise of any power of eminent domain or condemnation, Lessee may elect to terminate this Lease at any time after the expiration of the time periods specified in (a) and (b) above by fifteen (15) days prior written notice to the Landlord, unless prior to the effective date of the notice the Premises is restored to substantially the same condition that existed immediately prior to such fire or other casualty. Such termination shall be effective as of the date of the taking or casualty. Termination shall relieve the parties hereto of all further obligations and liabilities which had not yet accrued. Lessor shall also return all sums Lessee paid hereunder, including Base Rent for the month in which the taking of casualty occurred, on a pro-rata basis.

The Lessor reserves, and the Lessee grants to the Lessor, all rights which the Lessee may have for damages or injury to the Premises for any taking by condemnation or eminent domain, except for damage to the Lessee’s fixtures, property or equipment, damage to Lessee’s improvements and Lessee’s relocation expenses. Lessee acknowledges and agrees that Lessee shall be solely responsible to insure its fixtures, property and equipment.

In the event of fire or casualty, the Lessor shall be obligated to make repairs and perform any restoration work as promptly as possible, but the Lessor shall have no obligation to make any repairs or perform any restoration work under this Section 18 if prevented from doing so by reason of any cause beyond its reasonable control, including, without limitation, the requirements of any applicable laws, codes, ordinances, rules or regulations, or in the event of damage to or destruction of any portion of the Building which is not fully covered by the insurance proceeds received by the Lessor (provided that the Lessor has obtained the insurance coverage required by the following paragraph) and in such events Lessee may terminate this Lease by written notice to the Lessor, given within thirty (30) days after the date of notice to Lessor that said damage or destruction is not so covered, or that the proceeds are not available for repair of the damage or destruction. Notwithstanding the foregoing sentence, the time periods set forth in Section 18(a) and (b) above shall not be extended for any reason, and the Lessor agrees to use best efforts to obtain the consent of all holders of mortgages on the Premises to fully use all insurance proceeds to restore the Building. Further, the Lessor shall not be obligated to make any repairs or perform any restoration work to any fixtures in the Premises or the Building which were constructed or installed by or for some party other than the Lessor and which are not the property of the Lessor.

The Lessor shall carry 100% replacement cost insurance insuring against all risks or fire with standard coverage insurance covering the Building of which the Premises are a part.

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19. DEFAULT AND BANKRUPTCY .

(a) In the event (each an “Event of Default”):

(i) The Lessee shall fail to pay any installment of Base Rent, Additional Rent or other sums herein specified and such default shall continue for ten (10) days after written notice thereof, provided, however, Lessor shall not be required to give more than three (3) notices in any calendar year with regard to the late payment of Base Rent;

(ii) The Lessee shall fail to perform or observe any other of the Lessee’s covenants, agreements, or obligations hereunder and such default shall not be corrected within thirty (30) days after written notice thereof or, if thirty (30) days is not a reasonably sufficient time within which to cure such default, provided the Lessee has promptly commenced and is diligently proceeding the cure such longer time as is reasonable necessary;

(iii) The Lessee shall be declared bankrupt or insolvent according to law, or, if any assignment shall be made of Lessee’s property for the benefit of creditors or any receiver or trustee is appointed for all or any portion of the Lessee’s property or any involuntary or voluntary proceedings are begun under any bankruptcy or similar laws for reorganization or arrangements to settle, satisfy or extend payment of debts and such declaration or proceedings are not set aside within ninety (90) days thereafter; or

(iv) The Lessee’s interest in this Lease shall be taken by execution or other process of law;

then the Lessor shall have the right thereafter, while such default continues, to declare the term of this Lease ended, without prejudice to any remedies which might be otherwise used for arrears of rent or other default.

(b) If this Lease shall have been terminated as provided in Section 19(a), then Lessor may, but only after obtaining an order from a court of competent jurisdiction, re-enter the Premises either by summary proceedings, ejectment or otherwise, and to remove and dispossess Lessee and all other persons and any and all property from the same, as if this Lease had not been made.

(c) In the event that this Lease is terminated under any of the provisions contained in Section 19(a) or shall be otherwise terminated by breach of any obligation of Lessee, Lessee covenants and agrees forthwith to pay and be liable for, on the days originally fixed herein for the payment thereof, amounts equal to the several installments of Base Rent and Additional Rent and charges reserved as they would, under the terms of this Lease, become due if this Lease had not been terminated or if Lessor has not entered or re-entered, as aforesaid, and whether the Premises be relet or remain vacant, in whole or in part, or for a period less than the remainder of the Term, and for the whole thereof, but in the event the Premises be relet by Lessor, Lessee shall be entitled to a credit in the net amount of rent and other charges received by Lessor in reletting, after deduction of all reasonable expenses incurred (and not reimbursed by third parties) in reletting the Premises (including, without limitation, fit-out costs, brokerage fees, attorney fees and the like), and in collecting the rent in connection therewith, in the following manner:

Amounts received by Lessor after reletting shall first be applied against such Lessor’s reasonable expenses, until the same are recovered, and until such recovery, Lessee shall pay, as of each day when a payment would fall due under this Lease, the amount which Lessee is obligated to pay under the terms of this Lease (Lessee’s liability prior to any such reletting and such recovery not in any way to be diminished as a result of the fact that such reletting might be for a rent higher than the rent provided for in this Lease); when and if such expenses have been completely recovered, the amounts received from reletting by Lessor as have not previously been applied shall be credited against Lessee’s obligations as of each day when a payment would fall due under this Lease, and only the net amount therefor shall be payable by Lessee. Further, amounts received by Lessor from such reletting for any period shall be credited only against obligations of Lessee allocable to such

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period, and shall not be credited against obligations of Lessee hereunder accruing subsequent or prior to such period; nor shall any credit of any kind be due for any period after the date when the term of this Lease is scheduled to expire according to its terms.

(d)  (i) At any time within eighteen (18) months after such termination and whether or not Lessor shall have collected any damages as aforesaid, as liquidated final damages and in lieu of all other damages beyond the date of notice from Lessor to Lessee, at Lessor’s election, Lessee shall pay to Lessor such a sum as at the time of the giving of such notice represents the amount of the total rent and additional rent which would have accrued to Lessor under this Lease from the date of such notice for what would be the then unexpired Lease Term discounted to present value at a six (6%) percent interest rate (but not including unexercised Renewal Options) if the Lease terms had been fully complied with by Lessee. The foregoing amount shall be reduced by, or the Lessee shall receive a credit against any judgment received by Lessor pursuant to this Section 19(d), by the greater of the following amounts: (1) the credit Lessee would have received under Section 19(c) following Lessor’s election pursuant to this Section 19(d) and (ii), if Lessor fails to make commercially reasonable efforts to re-let the Premises, the amount Lessor would have received had Lessor made such efforts. For purposes of this Section 19(d), the listing of the Premises for lease at a market rate with a broker experienced in the leasing of commercial space in the North Shore of Boston shall constitute commercially reasonable efforts to re-let the Premises.

(ii) For the purposes of this Section 19, if Lessor elects to require Lessee to pay damages in accordance with the immediately preceding paragraph, the total rent shall be computed by assuming that Lessee’s Proportionate Share of Operating Expenses would be, for each year (or portion thereof) of the unexpired Term from the date of such notice, the amount thereof for the immediately preceding Lease year payable by Lessee to Lessor.

(e) In case of any Event of Default, re-entry, dispossession by summary proceedings or otherwise, Lessor may (i) re-let the Premises or any part or parts thereof, either in the name of Lessor or otherwise, for a term or terms which may at Lessor’s option be equal to or less than or exceed the period which would otherwise have constituted the balance of the Term of this Lease and may grant concessions or free rent to the extent that Lessor considers advisable or necessary to re-let the same and (ii) may make such alterations and repairs in the Premises as Lessor in its reasonable judgment considers advisable or necessary for the purpose of reletting the Premises; and the making of such alterations, repairs and decorations shall not operate or be construed to release Lessee from liability hereunder as aforesaid. Lessor shall use reasonable efforts to mitigate damages as a result of Lessee’s default.

(f) The specified remedies to which Lessor may resort hereunder are not intended to be exclusive of any remedies or means of redress to which Lessor may at any time be entitled lawfully, and Lessor may invoke any remedy (including the remedy of specific performance) allowed at law or in equity as if specific remedies were not herein provided for. Further, nothing contained in this Lease shall limit or prejudice the right of Lessor to prove for and obtain in proceedings for bankruptcy or insolvency by reason of the termination of this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater, equal to, or less than the amount of the loss or damages referred to above.

(g) Lessor shall in no event be in default in the performance of any of Lessor’s obligations hereunder unless and until Lessor shall have failed to perform such obligations within thirty (30) days, or, if thirty (30) days is not a reasonably sufficient time, such additional time as is reasonably required to correct any such default, after notice by Lessee to Lessor specifying wherein Lessor has failed to perform any such obligation.

(h) Even though Lessee has breached the Lease, the Lease shall continue in effect for so long as Lessor does not terminate Lessee’s right of possession as described above, and Lessor may enforce all of its rights and

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remedies under the Lease, including without limitation, the right to receive rent as it becomes due. If the Lessee shall default, after the notice specified in Section 19(a)(i) and (ii), in the observance or performance of any conditions or covenants on Lessee’s part to be observed or performed under or by virtue of any of the provisions in any Section of this Lease, the Lessor, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of the Lessee. If the Lessor makes any expenditures or incurs any obligations for the payment of money in connection therewith, including but not limited to reasonable attorney’s fees in instituting, prosecuting or defending any action or proceeding, such sums paid or obligation incurred, with interest at the rate of ten (10%) percent per annum and costs, shall be paid to the Lessor by the Lessee as Additional Rent.

20. NOTICE . Any notice from either party to the other party relating to the Premises or to the occupancy thereof shall be made in writing and shall be given by (a) hand delivery, (b) registered or certified mail, return receipt requested, postage prepaid, or (c) a nationally recognized overnight courier. All notices shall be sent to the Lessor at 513 Turtle Hatch Lane, Naples, FL 34103, unless notice is given of an alternative mailing addresses in the manner prescribed above, and to Lessee at 22 Cherry Hill Drive, Danvers, MA 01923, to the attention of the Chief Executive Officer, unless notice is given of an alternative mailing address by either party in the manner prescribed above. Except as otherwise provided herein, all such notices shall be deemed to have been served on the date upon which such notice is received by the party and/or delivery is declined.

21. SURRENDER . Subject to its rights of removal described in Section 12 above, the Lessee shall at the expiration or other termination of this Lease remove all Lessee’s goods and effects from the Premises (including, without hereby limiting the generality of the foregoing, all signs and lettering affixed or painted by the Lessee, either inside or outside the Premises, other than any monument signs) but shall not be required to remove cabling, telecommunication or security systems upon surrendering the Premises to Lessor. Lessee shall deliver to the Lessor the Premises and all keys, locks thereto, and other fixtures connected therewith and all alterations and additions made to or upon the Premises, in the same condition as they were at the commencement of the Term, or in the case of permitted alterations, additions and improvements as they were put in during the term hereof, reasonable wear and tear and damage by fire or other casualty and condemnation and repairs which are Lessor’s responsibility only excepted. In the event of the Lessee’s failure to remove any of Lessee’s property from the Premises, Lessor is hereby authorized, without liability to Lessee for loss or damage thereto, and at the sole risk of Lessee, to remove and store any of the property at Lessee’s expense, or to retain same under Lessor’s control or to sell at public or private sale, without notice, any or all of the property not so removed and to apply the net proceeds of such sale to the payment of any sum due hereunder, or to destroy such property.

Lessee recognizes that the Lessor may be required to guarantee delivery of possession to the new occupant promptly upon the expiration or earlier termination of this Lease. Accordingly, Lessee specifically agrees to remove all of its goods and effects and to deliver full possession of the Premises to Lessor not later than the date of the expiration or earlier termination hereof in order to avoid substantial, and perhaps irreparable harm to Lessor, Lessee agrees that Lessor shall have all remedies available at law or in equity for Lessee’s failure so to do.

In addition to all such remedies, Lessee further agrees that any holding over by it which has not been consented to in writing by Lessor shall be treated as a tenancy at sufferance at the greater of (i) one and one-half times the monthly rent, or (ii) market rent for one (1) year (on a monthly basis), plus other charges then applicable as of the date of the expiration or earlier termination of this Lease, and such tenancy at sufferance shall otherwise be on the terms and conditions set forth in this Lease so far as applicable. Any monies received after the termination date of the Lease will be applied for “use and occupancy only” and will not reestablish the tenancy and shall otherwise be on the terms and conditions set forth in this Lease, as far as applicable.

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22. BROKERAGE . Lessor and Lessee represent and warrant to each other that they have not dealt with any broker in connection with the Premises other than Colliers International and Jones Lang LaSalle (collectively, “Brokers”). Brokers shall be paid by Lessor pursuant to a separate agreement. Lessee hereby indemnifies Lessor for any claims for commission by any other third parties arising from the acts or conduct of Lessee and Lessor hereby indemnifies Lessee from any claims for commission by Brokers or any other third parties arising from any acts or conduct of Lessor.

23. QUIET ENJOYMENT . Lessee shall, upon paying the Rent reserved hereunder and observing and performing all of the terms, covenants and conditions on Lessee’s part to be observed and performed, peaceably and quietly have and hold the Premises without hindrance or molestation by any person or persons lawfully claiming by, through or under, Lessor, subject, however, to the terms of this Lease.

24. WAIVER OF SUBROGATION . Lessor and Lessee and all parties claiming under them (including without limitation any insurers) mutually release and discharge each other, to the extent of insurance proceeds recovered from the policies then in effect from all claims (including without limitation subrogation claims) and liabilities for damage or destruction to their respective property by fire or any other peril or casualty which could have been covered by an “All Risk of Physical Loss” endorsement to a fire and casualty insurance policy whether or not such policy is actually in force and irrespective of any party’s act or omission. Lessor agrees to insure the Building with a policy containing an All Risk of Physical Loss endorsement for one hundred (100%) percent of replacement value and Lessee agrees to insure its fixtures and other personal property containing an All Risk of Physical Loss endorsement and each of the parties hereto agree to have a waiver of subrogation clause attached to and made a part of its insurance policy or policies.

25. ENTIRE AGREEMENT: EXECUTION AND HEADNOTES . This Lease together with all Exhibits referred to herein sets forth the entire agreement between the parties hereto and cannot be modified or amended, except in writing duly executed by the respective parties. This Lease is executed as a sealed instrument and in multiple counterparts, all copies of which are identical, and any one of which is to be deemed to be complete in itself and may be introduced in evidence or used for any purpose without the production of any other copy. The headnotes throughout this Lease are for convenience of reference only, and shall in no way be held or deemed to define, limit, explain, describe, modify or add to the interpretation, construction or meaning of any provision of this Lease.

26. NO WAIVER . No assent, express or implied, by the Lessor or Lessee to any breach of any agreement or condition herein contained on the part of the Lessor or Lessee to be performed or observed, and no waiver, express or implied, of any such agreement or condition shall be deemed to be a waiver of an assent to any succeeding breach of the same or any other agreement or condition; the acceptance by the Lessor of Rent or other payment hereunder, or silence by the Lessor or Lessee as to any breach, shall not be construed as waiving any of the Lessor’s or Lessee’s rights hereunder unless such waiver shall be in writing. No acceptance by Lessor of a lesser sum than the Base Rent, Additional Rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, nor shall any endorsement or statement on any check or any charge be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor’s right to recover the balance of such installment or pursue any other remedy provided in this Lease.

27. PARTIAL INVALIDITY . The invalidity of one or more phrases, sentences, clauses or sections shall not affect the remaining portions of this Lease, and if any part of this Lease should be declared invalid by the final order, decree or judgment of a court of competent jurisdiction, this Lease shall be construed as if such invalid phrases, sentences, clauses or sections had not been inserted.

28. NOTICE OF LEASE . The parties shall execute and record a notice of lease upon execution of this Lease.

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29. RIGHT TO PERFORM LESSEE’S COVENANTS . Lessee covenants and agrees that, if it shall, at any time, fail to make any payment or perform any other act on its part to be made or performed as in this Lease provided, and Lessee fails to cure within the time periods set forth in Section 19 or in the event no time period is specified therein, within thirty (30) days, or in the event the performance of such act(s) (excluding therefrom any payment obligation) cannot be completed within thirty (30) days, despite due diligence, within a reasonable time, Lessor, in its sole discretion, may make any payment or perform any other act on the part of the Lessee to be made and performed as in this Lease provided, in such manner and to such extent as Lessor may reasonably deem necessary, and in exercising any such rights, Lessor may pay reasonable necessary and incidental costs and expenses, employ counsel, and incur and pay reasonable attorneys’ fees. The making of any such payment or the performing of any other act by the Lessor pursuant to this Section 29 shall not waive, or release the Lessee from, any obligations of the Lessee in this Lease contained. All reasonable sums so paid by Lessor and all reasonably necessary and incidental costs and expenses in connection with the performance of any such act by Lessor shall, except as otherwise in this Lease expressly provided, be payable to Lessor within thirty (30) days after Lessor presents an invoice (with backup materials) to Lessee, and Lessor shall have (in addition to any other right or remedy of Lessor) the same rights and remedies in the event of the non-payment thereof by Lessee as in the case of default by Lessee in the payment of the Base Rent.

30. LIMITATION OF LIABILITY . The obligations of the Lessor hereunder shall be binding upon Lessor and each succeeding owner of the Lessor’s interest hereunder only during the period of such ownership and Lessor and each succeeding owner shall have no liability whatsoever except for its obligations during each such respective period. Lessee hereby agrees for itself and each succeeding holder of the Lessee’s interest, or any portion thereof, hereunder, that any judgment, decree or award obtained against the Lessor or any succeeding owner of the Lessor’s interest, which is in any manner related to this Lease, the Premises or the Lessee’s use and occupancy of the Premises, whether at law or in equity, shall be satisfied out of the Lessor’s interest in the Premises and the rents and income from the Premises subject to the rights of mortgagees, and further agrees to look only to such assets and to no other assets of the Lessor, or any succeeding owner, for satisfaction. Neither the Trustees, partners nor beneficiaries of Lessor shall have any personal liability hereunder. The foregoing limitation shall not operate to bar the Lessee from seeking injunctive or other equitable relief from a court of competent jurisdiction. In no event shall Lessor ever be liable to Lessee for any indirect or consequential damages suffered by Lessee from whatever cause except in the event of actual damage caused by Lessor’s willful misconduct or bad faith.

In no event shall either party ever be liable to the other party for any indirect or consequential damages suffered by the other party from whatever cause except in the event of actual damage caused by the first party’s willful misconduct or bad faith.

31. NOTICE TO MORTGAGEE: OPPORTUNITY TO CURE . After receiving notice from any person, firm or other entity that it holds a mortgage which includes the Premises as a part of the mortgaged premises, no notice from the Lessee to the Lessor shall be effective unless and until a copy of the same is given to such Mortgagee, and the curing of any of the Lessor’s defaults by such Mortgagee shall be treated as performance by the Lessor. Accordingly, no act or failure to act on the part of the Lessor which would entitle the Lessee under the terms of this Lease, or by law, to be relieved of the Lessee’s obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or a termination of this Lease unless (i) the Lessee shall have first given written notice of the Lessor’s act or failure to act to such Mortgagee, if any, specifying the act or failure to act on the part of the Lessor which could or would give basis to the Lessee’s rights; and (ii) such Mortgagee, after receipt of such notice, has failed or refused to correct or cure the condition complained of within thirty (30) days or such longer time as is reasonably required by the Mortgagee (but in no event exceeding 120 days) provided the Mortgagee is diligently proceeding to cure, but nothing contained in this Section 31 shall be deemed to impose any obligation on any such Mortgagee to correct or cure any such condition.

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32. MISCELLANEOUS . If any payment of Base Rent or other payment or charge payable to Lessor hereunder or with respect hereto shall not be paid when due (after the receipt of an invoice except in the case of Base Rent), in which case no invoice shall be required, the same shall bear interest from date when same was due and payable until the date paid with interest at the rate of ten (10%) percent per annum.

Without limiting any of Lessor’s rights and remedies hereunder, and in addition to all other amounts Lessee is otherwise obligated to pay, it is expressly agreed that Lessor shall be entitled to recover from Lessee all reasonable costs and expenses, including reasonable legal fees, and attorneys’ fees, incurred by Lessor in enforcing this Lease from and after Lessee’s Event of Default, not cured within the applicable cure periods. Lessee shall be similarly entitled to recover its reasonable legal fees incurred in enforcing its rights hereunder in the event of a default by Lessor hereunder, not cured within the applicable cure periods.

33. LANDLORD’S WARRANTIES AND REPRESENTATIONS . As a material inducement to the Lessee to enter into this Lease, the Lessor warrants and represents as follows:

a. Lessor is the owner of a fee simple estate in the Premises and has the right and power to enter into this Lease and to perform the same and by this instrument conveys a good leasehold interest in Lessee in accordance with the terms, conditions and provisions hereof.

b. This Lease does not violate the provisions of any instrument affecting the Premises, and the execution of this Lease has been duly and validly authorized on behalf of Lessor.

34. LESSEE’S OPTION TO EXTEND . The Lessee shall have the option (collectively, the “Extension Options”) to extend the Term of this Lease specified in Section 3 hereof (herein referred to as the “Original Term”) for three separate periods of five (5) years each (each such extension period hereafter referred to as the “Extended Term”). Such option to extend may be exercised as hereinafter provided. The Lessee may exercise each of the aforesaid Extension Options by giving written notice to the Lessor of Lessee’s election to extend the Original Term or the applicable Extended Term, provided that such written notice shall be given not less than six (6) months prior to the expiration of the Original Term or the applicable Extended Term. Upon exercise of said Extension Option as aforesaid, the Term of this Lease shall be automatically extended by the applicable aforesaid five (5) year period without the requirement of any further instrument, upon the same terms and conditions set forth in this Lease, except that Base Rent for the Extended Term shall be determined as provided in the balance of this Section 34. In the event that any Extension Option is duly exercised, all references contained in this Lease to the Term hereof, whether by number of years or number of months, shall be construed to refer to the Original Term hereof extended as aforesaid, whether or not specific reference thereto is made in this Lease. The second Extended Term is available to the Lessee only if it exercised its option for the first Extended Term, and the third Extended Term is available to the Lessee only if it exercised its option for the second Extended Term.

(a) Rent During Extended Term. In the event Lessee exercises an Extension Option as herein provided, commencing on the first day of the applicable Extended Term, Lessee shall pay to Lessor for the Premises then leased by Lessee annual Base Rent equal to the “Fair Rental Value”, as hereinafter determined, and, in any event, shall continue to pay Additional Rent as set forth in Section 5(b).

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For purposes of this Lease, “Fair Rental Value” shall mean the annual fair rental for the Premises to be leased by Lessee pursuant to its exercise of an Extension Option that would be agreed upon between a landlord and a tenant executing a lease in a comparable building of comparable age for comparable square footage located in North Shore area for a comparable term in light of all of the other business terms of the Lease, taking the following assumptions into account while determining “Fair Rental Value”:

(i) the Lessor and Lessee are well informed and well advised and each is acting in what it considers its own best interests;

(ii) the rental shall reflect the condition of the Premises and all residual value of any improvements to the Premises, except improvements which Lessee installed itself or for which it directly contracted and paid;

(iii) the transaction involves customary and usual lease concessions, including, without limitation, construction allowances, rent abatement, base year(s), or moving allowance or any other concessions or financial terms prevalent at that time;

(iv) the method by which square footage is measured is similar to the measure used in the Lease; and

(v) the credit worthiness of the tenant is similar to the credit worthiness of Lessee at the time such Extension Option is exercised.

(b) Determination of Fair Rental Value. Upon written request given by Lessee to Lessor not earlier than three hundred sixty (360) days nor later than one hundred eighty (180) days prior to the expiration of the Original Term or the applicable Extended Term, Lessor shall, within twenty (20) days of such request, give written notice to Lessee of Lessor’s determination of the aforesaid Fair Rental Value of the Premises for the next succeeding Extended Term. The amount so designated by Lessor shall be the annual Base Rent for the Premises for the next succeeding Extended Term, unless, within thirty (30) days after Lessee shall have received such notice, Lessee shall give notice to Lessor exercising Lessee’s right of appraisal as set forth in subsection (d) below to determine such Fair Rental Value, in which event such Fair Rental Value shall be determined by the appraisal thereunder.

Should Lessee elect to exercise its rights of appraisal and should the appraisal not have been concluded prior to the date on which Lessee’s obligation to pay Rent for the applicable Extended Term shall have occurred, Lessee shall pay annual Base Rent as so designated by Lessor. If the Fair Rental Value as determined by appraisal is greater than or less than Lessor’s designation, then any adjustment required to correct the amount previously paid shall be made by payment by the appropriate party within ten (10) days after such determination of Fair Rental Value.

(c) Conditions Precedent to Exercise. Notwithstanding any contrary provision of this Section 34 or any other provisions of this Lease, the Extension Options and any exercise by Lessee of the Extension Options shall be void and of no effect unless on each date Lessee notifies Lessor that it is exercising an Extension Option and on the date of commencement of the applicable Extended Term (i) this Lease is in full force and effect, (ii) no Event of Default on the part of Lessee then exists under this Lease, and (iii) Lessee has neither assigned this Lease nor sublet any portion of Premises except in accordance with the provisions of Section 13.

(d) Appraisal of Fair Rental Value. In the event that Lessee disputes the amount claimed by Lessor as Fair Rental Value, and such dispute cannot be resolved by mutual agreement, the dispute shall be submitted to the appraisal process hereinafter set forth. The amount of Fair Rental Value determined pursuant to such appraisal process shall be final and binding between the parties. The appraisal process shall be conducted as follows:

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(1) Lessee shall make demand for an appraisal in writing within thirty (30) days after receipt of Lessor’s written determination of Fair Rental Value given under Section 34(b) specifying therein the name and address of the person to act as the appraiser on its behalf. The appraiser shall be a licensed commercial real estate broker with at least ten (10) years’ experience in the field familiar with the fair market rent of first-class commercial, office, manufacturing and industrial space in the North Shore area. Failure on the part of Lessee to make a timely and proper demand for such appraisal shall constitute a waiver of the right thereto. Within fifteen (15) business days after the service of the demand for appraisal, Lessor shall give notice to Lessee, specifying the name and address of the person designated by Lessor to act as appraiser on its behalf who shall be similarly qualified. If Lessor fails to notify Lessee of the appointment of this appraiser, within or by the time above specified, then the appraiser appointed by Lessee shall be the sole appraiser to determine the issue.

(2) In the event that two (2) appraisers are chosen pursuant to Section 34(d)(1) above, the appraisers so chosen shall meet within ten (10) business days after the second appraiser is appointed and, if within ten (10) business days after such first meeting the two appraisers shall be unable to agree upon a determination of Fair Rental Value, such appraisers shall appoint a third appraiser, who shall be a competent and impartial person with qualifications similar to those required of the first two appraisers. In the event the two initially appointed appraisers are unable to agree upon such appointment within five (5) business days after expiration of said ten (10) day period, the third appraiser shall be selected by the Lessor and Lessee, if they can agree thereon, within a further period of ten (10) business days. If the parties do not so agree, then either party, on behalf of both, may request appointment of such a qualified person by an officer of the American Arbitration Association in Boston, Massachusetts. The third appraiser shall be someone who has not acted in any capacity for Lessor or Lessee within ten (10) years of his or her selection. The three (3) appraisers shall decide the dispute, if it has not previously been resolved, by following the procedure set forth in Section 34(d)(3) below.

(3) Where the issue cannot be resolved by agreement between the two appraisers selected by Lessor and Lessee or settlement between the parties during the course of the appraisal process, the issue shall be resolved by the three appraisers in accordance with the following procedure. Within thirty (30) days after the third appraiser has been selected, each appraiser shall state in writing its determination of the Fair Rental Value, supported by the reasons therefor, with counterpart copies to Lessor and Lessee. The appraisers shall arrange for a simultaneous exchange of such proposed determinations. If the third appraiser’s appraisal shall exceed the higher of the first two appraisals, the Fair Rental Value shall be the average of the third appraiser’s appraisal and said higher appraiser’s appraisal. If the third appraiser’s appraisal shall be less than the lower of the first two appraisals, the Fair Rental Value shall be the average of the third appraisal and said lower appraisal. In all other cases, the Fair Rental Value shall be the third appraisal. All such determinations of Fair Rental Value shall be final and binding upon the parties. This provision for determination by appraisal shall be specifically enforceable to the extent such remedies are available under applicable law, and any determination hereunder shall be final and binding upon the parties hereto, and either party shall have the right to enter judgment thereon, unless otherwise provided by applicable law. If a determination of Fair Rental Value is to be made pursuant to this Section 34, Lessor and Lessee shall each pay for the fees and disbursements of any appraiser appointed by it and shall share equally in the fees and expenses of any third appraiser.

(4) In the event of a failure, refusal or inability of any appraiser to act, his successor shall be appointed by the person appointing him or her, but in the case of the third appraiser, his successor shall be appointed in the same manner as provided for appointment of the third appraiser.

(5) Notwithstanding any of the provisions of Section 34 to the contrary, in the case of the first Extended Term following the Original Term (the “First Extended Term”), in no event shall the Fair Rental Value be no less than $9.00 per square foot nor higher than $10.25 per square foot. In the event the Fair Rental Value as determined by the appraisal process is lower than $9.00 per square foot or higher than $10.25 per square foot, then the parties agree that the Base Rent for the First Extended Term shall be calculated using $9.00 per square

20


foot or $10.25 per square foot, as applicable. There shall be no per square foot floor or cap in relation to the second and third Extended Terms.

35. LESSEE’S OPTION TO BUY. The Lessor hereby grants the Lessee the exclusive option to buy the Premises strictly according to the terms and conditions contained herein (such option hereafter referred to as the “Option to Buy.” The Lessee may exercise its Option to Buy by written notice to the Lessor delivered at any time on or before August 31, 2022. Such notice shall specify a closing date, which shall not be earlier than forty-five days (45) after delivery of the notice nor later than the date that is ninety (90) days after delivery of such notice. If a closing and passing of title does not occur on or before the date specified in such notice due to circumstances beyond the Lessee’s reasonable control, the Lessee shall be entitled to one ninety-day (90) extension counted from the closing date specified in the notice. If a closing and passing of title does not occur on or before the date specified in such notice due to the refusal or inability of the Lessor to close, the Lessee shall be entitled to such extension of time as is necessary to compel performance by the Lessor by appropriate court action or to remove the inability of the Lessor to perform. If a closing and passing of title does not occur on or before the date specified in such notice for any other reason, such notice shall be null and void and of no further legal effect, although the Lessee may give an additional notice of exercise that meets the criteria specified in the second and third sentences of this paragraph, including the requirement that it be delivered on or before August 31, 2022.

(a) Purchase Price. If the Lessee exercises its Option to Buy and the applicable notice of exercise states a closing date during the first three (3) years of the Original Term and the closing actually occurs and title passes from the Lessor to the Lessee on or before August 31, 2019, or within the applicable extended period of time established pursuant the first paragraph of this Section 35, the purchase price shall be Sixteen Million Five Hundred Thousand Dollars ($16,500,000.00).

If the Lessee exercises its Option to Buy and the applicable notice of exercise states a closing date during year four of the Original Term and the closing actually occurs and title passes from the Lessor to the Lessee on or before August 31, 2020, or within the applicable extended period of time established pursuant the first paragraph of this Section 35, the purchase price shall be Seventeen Million Dollars ($17,000,000.00).

If the Lessee exercises its Option to Buy and the applicable notice of exercise states a closing date during year five of the Original Term and the closing actually occurs and title passes from the Lessor to the Lessee on or before August 31, 2021, or within the applicable extended period of time established pursuant the first paragraph of this Section 35, the purchase price shall be Seventeen Million Five Hundred and Ten Thousand Dollars ($17,510,000.00).

If the Lessee exercises its Option to Buy and the applicable notice of exercise states a closing date during year six of the Original Term and the closing actually occurs and title passes from the Lessor to the Lessee on or before August 31, 2022, or within the applicable extended period of time established pursuant the first paragraph of this Section 35, the purchase price shall be Eighteen Million and Twenty Thousand Dollars ($18,020,000.00).

(b) Conditions Precedent to Exercise. Notwithstanding any contrary provision of this Section 35 or any other provisions of this Lease, the Option to Buy and any exercise by Lessee of the Option to Buy shall be void and of no effect unless on the date Lessee notifies Lessor that it is exercising the Option to Buy (i) this Lease is in full force and effect and (ii) no Event of Default on the part of Lessee then exists under this Lease.

36. RIGHT OF FIRST OFFER . Provided that the Lessee has not exercised its Option to Buy and its Option to Buy has expired due to the passage of time and further provided that there is no existing Event of Default at the time of its exercise of the right of first offer described in this Paragraph 36, the Lessee shall have a one-time right of first offer to buy the Premises (the “Right of First Offer”) if Lessor determines that it would like to sell

21


the Premises or receives an offer to buy the Premises from a third party buyer. The Lessor shall provide the Lessee with written notice of intention to sell (the “ROFO Notice”), including the purchase price (the “ROFO Purchase Price”) and the other terms and conditions under which the Lessor is willing to sell. Lessee shall have ninety (90) days from receipt of written notice to exercise this right and to actually close. If Lessee rejects Lessor’s offer to buy the Premises, Landlord shall be free to sell the Premises, provided that the purchase price payable for the Premises by any third party purchaser shall be at least equal to 95% of the ROFO Purchase Price set forth by Lessor in the ROFO Notice, net of any monetary concessions granted to the third party purchaser not given to Lessee in the ROFO Notice, unless Lessor first provides Lessee with a new ROFO Notice that reinstates Lessee’s Right of First Offer and designates a new ROFO Purchase Price. This Right of First Offer shall in all events expire on the expiration of the Original Term and shall not apply during any Extended Term.

37. ACCESS AND LICENSE AGREEMENT . Pursuant to Section 2(f) of the Access Agreement, the Access Agreement is terminated from and after the date hereof and shall be of no further legal force or effect.

 

 

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Signed as a sealed instrument as of the day and year first written above.

Thibeault Nominee Trust, Lessor

 

By:

 

/s/ Leo C. Thibeault, Jr.

Name:

 

 

Title:

 

 

 

Commonwealth/State of V ermont

 

County of Windsor, ss.

August 11, 2016.

On this 11 day of August, 2016, before me, the undersigned notary public, personally appeared Leo C. Thibeault, Jr., Trustee, proved to me through satisfactory evidence of identification, which was known, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he signed it voluntarily for its stated purpose.

 

 

/s/ Hillary Sundell

 

Notary Public

 

 

 

HILLARY SUNDELL

Notary Public - State of Vermont

My Commission Expires Feb. 10, 2019

 

 


 

ABIOMED, Inc., Lessee

 

By:

 

/s/ Michael Tomsicek

Name:

 

Michael Tomsicek

Title:

 

CFO–VP

Commonwealth of Massachusetts

 

County of Essex, ss.

August 12, 2016.

On this 12 th day of August, 2016, before me, the undersigned notary public, personally appeared Michael Tomsicek, Chief Financial Officer of Abiomed, Inc., proved to me through satisfactory evidence of identification, which was personally known to me, to be the person whose name is signed on the preceding or attached document, and acknowledged to me that he signed it voluntarily for its stated purpose.

 

 

/s/ Theresa J. Mailloux

 

 

Notary Public

 

 

 

 


 

EXHIBIT A

[TO BE ATTACHED]

 

 

 

25


 

 

 

 

 

 


 

EXHIBIT B

[TO BE ATTACHED]

 

 

 

27


 

EXHIBIT B

HVAC Units to be replaced by Lessor

 

RTU-2

RTU-4

RTU-5

RTU-6

RTU-7

RTU-8

RTU-9

RTU-10

RTU-11

RTU-12

RTU-13

RTU-14

RTU-15

RTU-16

RTU-17

RTU-19

RTU-20

RTU-21

RTU-22

RTU-23

 

 

 

 


 

EXHIBIT C

[TO BE ATTACHED]

 

 

33


 

EXHIBIT B

Work Plan

Abiomed, Inc. has undertaken the project of expanding our footprint by 61,000 square feet in the building adjacent to our current location. Construction began in June 2015 and is being rolled out in 5 phases, with an expected completion date of January 2017.

Phase 1A opened in September 2015, consisting of 12 offices and 50 cubicles in 7,000 square feet of space. This area also includes additional IT networking and electrical / mechanical equipment.

Phase IB houses additional Manufacturing and Shipping areas, totaling 17,920 square feet. An employee locker room and restrooms have been included in this area. Although construction is completed, procurement of manufacturing equipment and certification requirements are required prior to fully occupying this area. Expected occupation is estimated at the end of 2016.

Phase 2A is nearing the end of construction and will be open mid-July 2016, ready for occupancy. The space covers approximately 10,940 square feet and will seat 96 employees in 13 offices and 83 cubicles, and will include 3 conference rooms, restrooms and IT networking space.

Phase 2B is currently under construction with a completion target of late August 2016. At just under 4,400 square feet, employees will be occupying the space as soon as it is available, with 7 offices, 10 cubicles and 2 conference rooms.

Phase 2C is in the very early stages of demolition and will continue to be built on the heels of Phase 2B, with the expected completion date of January 2017. As the largest phase of the expansion, it will cover 20,827 and include the following:

 

A new Main Reception Area and Customer Visitor Center

 

3 Conference Rooms

 

Visitor Restrooms

 

Educational Training Center, including the Training Auditorium, Call Support Center, Simulation Labs, Breakout Classrooms and Conference Room

 

Full-service Cafeteria with seating for 200 employees and a back of house food storage area

 

Outside Patio

 

Employee Lounge

 

Locker Room with showers

 

TV Recording Studio

 

Document and Equipment Storage Area

 

Mechanical / Electrical room

In addition, the exterior of the building will be updated with metal paneling, and the surrounding grounds will include a new drive way / drop off area at the front entrance, signage, walkways and extensive landscape plantings and lighting.

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Exhibit 10.2

ABIOMED, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT

This Change of Control Severance Agreement (this “ Agreement ”) is entered into and made effective as of the 27 th day of September, 2016 (the “ Effective Date ”) by and between ABIOMED, Inc., a Delaware corporation (the “ Company ”), and Michael Tomsicek (the “ Executive ).

WHEREAS the Executive currently serves as a key employee of the Company; and

WHEREAS the Company desires to ensure that it will have the continued dedication of the Executive, not withstanding the possibility, threat, or occurrence of a Change of Control, by providing for certain compensation and benefits in the event the Executive’s employment with the Company terminates in connection with a Change of Control.

NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the Company and the Executive agree as follows:

1. Term of Agreement .  The term of this Agreement shall be for two (2) years, commencing on the Effective Date, and automatically renewing thereafter on each two (2)-year anniversary of the Effective Date (each, a “ Renewal Date ”) for successive terms of two (2) years each, unless notice of nonrenewal is provided by the Company not less than sixty (60) days prior to a Renewal Date (the “ Final Renewal Date ”), in which case the term of this Agreement shall expire two (2) years from the Final Renewal Date.  

2. Severance Benefits .  

(a) If the Executive’s employment terminates by reason of a Triggering Event, (i) the Company will continue to pay the Executive base salary, at the rate in effect immediately prior to the Triggering Event, for twenty-four (24) months (the “ Salary Continuation ”) following the date of the termination of the Executive’s employment (the “ Termination Date ”), (ii) the Company will pay the Executive, (x) the Executive’s annual target bonus for the calendar year in which the termination occurred, pro-rated based upon the number of days during such calendar year that the Executive had been employed prior to the Termination Date and (y) an amount equal to two (2) times his target bonus as in effect immediately prior to the Triggering Event, payable in equal installments over the twenty-four (24) months following the Termination Date in accordance with the normal payroll practices of the Company (together the “ Severance Bonus ”), (iii) provided that the Executive timely elects continued medical coverage pursuant to Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended, (“ COBRA Coverage ”), the Company will pay the cost of the Executive’s medical benefits for twenty-four (24) months following the Termination Date or, if earlier, until the Executive receives medical coverage through another employer (the “ Medical Continuation Payments ”), (iv) the Company shall provide reasonable outplacement assistance to the Executive with an aggregate cost not to exceed $10,000 (the “ Outplacement Assistance ”), and (v) all outstanding stock options, stock appreciation rights, and restricted stock held by the Executive as of the Termination Date will accelerate and vest in

 


 

full (the “ Equity Acceleration , collectively with the Salary Continuation, the Severance Bonus, the Medical Continuation Payments, and the Outplacement Assistance, the “ Severance Benefits ”).  

(b) The Medical Continuation Benefits shall be paid as follows: during the first eighteen (18) months following the Termination Date, the Company will pay the Executive a monthly amount equal to the amount that, after all applicable taxes are paid, is equal to the amount of his monthly COBRA premiums; following this period, the Company will pay the Executive a monthly amount equal to the amount that, after all applicable taxes are paid, is equal to the amount of the monthly medical insurance premiums paid by the Executive as an active employee immediately preceding the date of termination of employment.  In the event that the Company’s payment of the Medical Continuation Benefits would subject the Company to any tax or penalty under the Patient Protection and Affordable Care Act (as amended from time to time, the “ ACA ”) or Section 105(h) of the Internal Revenue Code of 1986, as amended (the “ Code ”), or applicable regulations or guidance issued under the ACA or Section 105(h) of the Code, the Company and the Executive will work together in good faith, consistent with the requirements for compliance with, or exemption from, Section 409A of the Code (“ Section 409A ”), to restructure such benefit.

(c) Notwithstanding the foregoing, any obligation of the Company to provide the Severance Benefits is conditioned on the Executive’s (i) continuing through the Termination Date to perform his or her job duties satisfactorily and otherwise complying with the Company’s rules and policies, (ii) signing a separation agreement on terms and conditions satisfactory to the Company, which separation agreement will contain among other items a general release of claims (the “ Release of Claims ”) and will incorporate and affirm the Executive’s compliance with his or her obligations set forth in the Restrictive Covenant Agreement and must become effective not later than the sixtieth (60 th ) day following the Termination Date, and (iii) continuing to comply with his or her obligations to the Company and its affiliates that survive termination of the Executive’s employment, including without limitation pursuant to the Restrictive Covenant Agreement.  The Executive’s timely execution and non-revocation of the Release of Claims and compliance with the Restrictive Covenant Agreement are conditions precedent to the Executive’s right to receive and retain the Severance Benefits.  The Release of Claims will create legally binding obligations on the part of the Executive, and the Company therefore advises the Executive to seek the advice of an attorney before signing the Release of Claims.

(d) Subject to Section 8 below, any Severance Benefits to which the Executive is entitled hereunder that would otherwise be paid to the Executive in the sixty (60) days following the Termination Date will be paid in a lump sum on the first regular payroll date of the Company following the sixtieth (60th) calendar day following the Termination Date.

3. Equity Treatment on a Change of Control .  If in connection with a Change of Control, the Board or the Compensation Committee of the Board exercises its authority under any equity incentive plan of the Company to cancel outstanding stock options, stock appreciation rights, or restricted stock as of or immediately prior to such Change of Control, any stock options and stock appreciation rights held by the Executive that are to be cancelled shall automatically be accelerated and become exercisable ten (10) days prior to the Change of Control and all such to-be-cancelled shares of restricted stock held by the Executive shall automatically be accelerated and fully vested as of immediately prior to the Change of Control.

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4. Withholding .  All payments made by the Company hereunder shall be reduced by any tax or other amounts required to be withheld by the Company under applicable law.

5. Effect on Employment .  Nothing contained herein limits the Company’s right to terminate the Executive’s employment at any time.  

6. Governing Law .  This is a Massachusetts contract and shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to any conflict of laws principles that would result in the application of the laws of any other jurisdiction.  Any action brought by any party to this Agreement shall be brought and maintained only in a court of competent jurisdiction in the Commonwealth of Massachusetts, and each party hereby consents to the exclusive jurisdiction of such courts.  

7. Assignment .  Neither the Company nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other; provided, however, that (a) the Executive’s economic rights hereunder may be assigned by the Executive to his or her estate or beneficiaries upon the death of the Executive and (b) the Company may assign its rights and obligations under this Agreement without the consent of the Executive in the event that the Company is a party to a reorganization, consolidation, merger, or sale of all or substantially all of its properties, stock, or assets.  This Agreement shall inure to the benefit of and be binding upon the Company and the Executive, and their respective successors, executors, administrators, heirs and permitted assigns.

8. Section 409A .

(a) Notwithstanding anything to the contrary in this Agreement, if at the time of the termination of the Executive’s employment, the Executive is a “specified employee,” as defined below, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, any and all amounts payable under this Agreement on account of such termination of employment that constitute deferred compensation and would (but for this provision) be payable within six (6) months following the date of termination, shall instead be paid on the first business day following the expiration of such six (6) month period or, if earlier, upon the Executive’s death.  

(b) For purposes of this Agreement, all references to “termination of employment” and correlative phrases shall be construed to require a “separation from service” (as defined in Section 1.409A-1(h) of the Treasury regulations after giving effect to the presumptions contained therein), and the term “specified employee” means an individual determined by the Company to be a specified employee under Treasury regulation Section 1.409A-1(i).  

(c) Each payment made under this Agreement shall be treated as a separate payment and the right to a series of installment payments under this Agreement is to be treated as a right to a series of separate payments.

(d) Any reimbursement for expenses or provision of in-kind benefits that would constitute nonqualified deferred compensation subject to Section 409A shall be subject to the following additional rules: (i) the amount  of expenses eligible for reimbursement, or the in-kind benefits to be provided, during any taxable year shall not affect the amount of expenses eligible

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for reimbursement, or in-kind benefits to be provided, in any other taxable year, (ii) reimbursement of the expense shall be made, if at all, promptly, but not later than the end of the calendar year following the calendar year in which the expense was incurred, and (iii) the right to reimbursement or to in-kind benefits shall not be subject to liquidation or exchange for any other benefit.  

(e) The parties agree that their intent is that payments and benefits under this Agreement comply with or be exempt from Section 409A to the extent applicable.  This Agreement shall be interpreted to comply with or be exempt from Section 409A, and all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A.  Notwithstanding the foregoing, neither the Executive nor any other Person shall have any claim or right against the Company or any of its directors, officers, employees, advisers or agents by reason of any failure or asserted failure of this Agreement, in form or as administered, to comply with or qualify for exemption from Section 409A.

9. Amendment .  This Agreement may be amended, modified or supplemented, and any obligation hereunder may be waived, only by a written instrument executed by the parties hereto.  The waiver by any party hereto of a breach of any provision of this Agreement shall not operate as a waiver of any subsequent breach.  No failure on the part of any party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy by such party preclude any other or further exercise thereof or the exercise of any other right or remedy.  All rights and remedies hereunder are cumulative, and are in addition to all other rights and remedies provided by law, agreement or otherwise.

10. Definitions .  

(a) “ Affiliates ” means all persons and entities directly or indirectly controlling, controlled by or under common control with the Company, where control may be by management authority, equity interest or otherwise.

(b) “ Board ” means the Board of Directors of the Company.

(c) “ Cause ” means a determination by the Board that the Executive’s employment with the Company or any Affiliate should be terminated as a result of (i) a material breach by the Executive of this Agreement, the Restrictive Covenant Agreement or any other agreement to which the Executive and the Company (or any such Affiliate) are parties, (ii) any act or omission to act by the Executive that may have a material and adverse effect on the business of the Company, such Affiliate or any other Affiliate or on the Executive’s ability to perform services for the Company or any such Affiliate, including, without limitation, the commission of any crime (other than an ordinary traffic violation), or (iii) any material misconduct or material neglect of duties by the Executive in connection with the business or affairs of the Company or any such Affiliate.  If, subsequent to the Executive’s termination of employment for other than Cause, it is determined in good faith by the Board that the Executive’s employment could have been terminated for Cause, the Executive’s employment shall be deemed to have been terminated for Cause retroactively to the date the events giving rise to such Cause occurred.

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(d) Change of Control ” means the occurrence of any one of the following events:

(i) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) becomes, after the Effective Date, a “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act) (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities;

(ii) the consummation of a merger or consolidation of the Company with any other corporation or other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

(iii) the consummation of a sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iv) the stockholders of the Company approve a plan of complete liquidation of the Company.

Notwithstanding the foregoing, to the extent required by Section 409A, a “Change of Control” will not be deemed to have occurred unless the event or circumstances constituting the Change of Control would also constitute a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the Company’s assets, within the meaning of subsection (a)(2)(A)(v) of Section 409A and the Treasury Regulations thereunder.

(e) “ Constructive Termination ” means a termination of employment by the Executive for Good Reason.

(f) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(g) “ Good Reason ” means the occurrence of any of the following conditions without the Executive’s express consent: (i) a material diminution in the scope of the Executive’s duties and authority relative to the Executive’s duties and authority as of immediately prior to the Change of Control (or at any time thereafter); (ii) the material breach by the Company or its Affiliates of any provision of this Agreement; (iii) the Company or any Affiliate requiring the Executive to relocate outside of a 35-mile radius of the location of the Executive’s employment with the Company or its Affiliates as of immediately prior to the Change in Control; or (iv) any decrease in the base salary or cash bonus opportunity provided to the Executive as of immediately prior to the Change of Control (or, if greater, at any time thereafter).  The Executive may terminate his or

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her employment for Good Reason by (A) providing notice to the Company, specifying in reasonable detail the condition giving rise to the Good Reason, no later than the sixtieth (60th) day following the date that the Executive knew or should have known (after reasonable inquiry) of the occurrence of that condition; (B) providing the Company a period of sixty (60) days to remedy the condition so specified in the notice; and (C) terminating his or her employment for Good Reason within thirty (30) days following the expiration of the period to remedy if the Company fails to remedy the condition.

(h) “ Involuntary Termination ” means a termination of the Executive’s employment by the Company without Cause other than in connection with the sale of some or all of the assets of the Company, including the sale of a facility, division, or subsidiary of the Company, pursuant to which the purchaser offers the Executive substantially equivalent employment, the terms of which would not give rise to Good Reason.  

(i) “ Person ” means an individual, a corporation, a limited liability company, an association, a partnership, an estate, a trust or any other entity or organization, other than the Company or its Affiliates.

(j) “ Restrictive Covenant Agreement ” means the Nondisclosure and Noncompetition Agreement by and between the Company and the Executive dated July 15, 2016.

(k) “ Triggering Event ” means an Involuntary Termination or a Constructive Termination that occurs in the two-year period that begins on the date of the consummation of a Change of Control.

11. Exclusive Right to Severance .  During the term hereof, the Executive shall not be eligible for severance under any other plan or policy of the Company or its Affiliates.

12. Entire Agreement .  This Agreement constitutes the entire agreement between the parties, and terminates and supersedes any and all prior agreements and understandings (whether written or oral) between the parties with respect to the subject matter of this Agreement.  The Executive acknowledges and agrees that neither the Company nor anyone acting on its behalf has made, and in executing this Agreement the Executive has not relied upon, any representations, promises or inducements except to the extent the same is expressly set forth herein.

 

 

 

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ABIOMED, INC.

 

 

 

By:

 

/s/ Michael Minogue

 

 

 

Name:

 

Michael Minogue

 

 

 

Title:

 

Chairman, CEO, President

 

ACKNOWLEDGED AND ACCEPTED:

 

 

 

Signature:

 

/s/ Michael Tomsicek

 

 

 

Name:

 

Michael Tomsicek

 

 

 

Exhibit 31.1

CERTIFICATIONS

I, Michael R. Minogue certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ABIOMED, Inc.

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2016

 

/s/ Michael R. Minogue

 

 

Michael R. Minogue

 

 

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

Exhibit 31.2

I, Michael J. Tomsicek certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ABIOMED, Inc.

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 4, 2016

 

/s/ MICHAEL J. TOMSICEK

 

 

Michael J. Tomsicek

 

 

Vice President and Chief Financial Officer

(Principal Accounting and Financial Officer)

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of ABIOMED, Inc., (the “Company”) for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned President and Chief Executive Officer, and Chief Financial Officer, of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ MICHAEL R. MINOGUE

 

/s/ MICHAEL J. TOMSICEK

Michael R. Minogue

Chairman, President and Chief Executive Officer

 

Michael J. Tomsicek

Vice President and Chief Financial Officer

Date: November 4, 2016

 

Date: November 4, 2016