e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
000-51567
NxStage Medical, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3454702
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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439 S. Union St.,
5th
Floor, Lawrence, MA
(Address of Principal
Executive Offices)
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01843
(Zip
Code)
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Registrants telephone number, including area code:
(978) 687-4700
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the registrant was approximately
$394.3 million, as of June 30, 2010, based on the last
reported sale price of the registrants common stock on the
NASDAQ Global Select Market on June 30, 2010.
There were 53,751,518 shares of the registrants
common stock outstanding as of the close of business on
February 14, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
its 2011 Annual Meeting of Stockholders to be held on
May 26, 2011 are hereby incorporated by reference in
response to Part III, Items 10, 11, 12, 13 and 14 of
the Annual Report on
Form 10-K.
NXSTAGE
MEDICAL, INC.
2010 ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
2
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report and certain information incorporated by reference
herein contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, concerning
our business, operations and financial condition, including
statements with respect to the market adoption of our products
in the United States and internationally; the growth of the
home, critical care and in-center dialysis markets in general
and the home hemodialysis market in particular; the development
and commercialization of our products; changes in the historical
purchasing patterns and preferences of our key customers,
including DaVita Inc.; the adequacy of our funding; our ability
to achieve and sustain positive cash flows; whether and when we
might achieve improvements to our gross margins and operating
expenses; expectations with respect to our operating expenses
and achieving our business plan; expectations with respect to
achieving profitable operations; expectations with respect to
achieving improvements in product reliability; the timing and
success of the submission, acceptance and approval of regulatory
filings and the impact of any changes in the regulatory
environment with respect to our products or business; the scope
of patent protection with respect to our products; expectations
with respect to the clinical findings of our FREEDOM study, and
the impact of new and future changes to reimbursement for
chronic dialysis treatments. All statements other than
statements of historical facts included in this report regarding
our strategies, prospects, financial condition, costs, plans and
objectives are forward-looking statements. When used in this
report, the words expect, anticipate,
intend, plan, believe,
seek, estimate, potential,
continue, predict, may, and
similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain
these identifying words. Because these forward-looking
statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these
forward-looking statements for a number of important reasons,
including those discussed below in Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this
report.
You should read these forward-looking statements carefully
because they discuss our expectations about our future
performance, contain projections of our future operating results
or our future financial condition or state other
forward-looking information. You should be aware
that the occurrence of any of the events described under
Risk Factors and elsewhere in this report could
substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline.
We cannot guarantee future results, events, levels of activity,
performance or achievements. The forward-looking statements
contained in this report represent our expectations as of the
date of this report and should not be relied upon as
representing our expectations as of any other date. Subsequent
events and developments will cause our expectations to change.
However, while we may elect to update these forward-looking
statements, we specifically disclaim any obligation to do so,
even if our expectations change.
3
PART I
For convenience, in this Annual Report on
Form 10-K,
NxStage, we, us, and
the Company refer to NxStage Medical, Inc. and our
consolidated subsidiaries, taken as a whole.
Overview
We are a medical device company that develops, manufactures and
markets innovative products for the treatment of kidney failure,
fluid overload and related blood treatments and procedures. Our
primary product, the NxStage System One, or the System One, was
designed to satisfy an unmet clinical need for a system that can
deliver the therapeutic flexibility and clinical benefits
associated with traditional dialysis machines in a smaller,
portable, easy-to-use form that can be used by healthcare
professionals and trained lay users alike in a variety of
settings, including patient homes, as well as more traditional
care settings such as hospitals and dialysis clinics. Given its
design, the System One is particularly well-suited for home
hemodialysis and a range of dialysis therapies including more
frequent, or daily, dialysis, which clinical
literature suggests provides patients better clinical outcomes
and improved quality of life. The System One is cleared or
approved for commercial sale in the United States, Europe and
Canada for the treatment of acute and chronic kidney failure and
fluid overload. The System One is cleared specifically by the
United States Food and Drug Administration, or FDA, for home
hemodialysis as well as therapeutic plasma exchange, or TPE, in
a clinical environment. We also sell needles and blood tubing
sets primarily to dialysis clinics for the treatment of
end-stage renal disease, or ESRD, which we refer to as the
in-center market. We believe our largest future product market
opportunity is for our System One used in the home hemodialysis
market, or home market, for the treatment of ESRD using more
frequent, or daily hemodialysis.
ESRD, which affects over 500,000 people in the United
States and 2 million people worldwide, is an irreversible,
life-threatening loss of kidney function that is treated
predominantly with dialysis. Dialysis is a kidney replacement
therapy that removes toxins and excess fluids from the
bloodstream and, unless the patient receives a kidney
transplant, is required for the remainder of the patients
life. Approximately, 70% of ESRD patients in the United States
rely on life-sustaining dialysis treatment. Hemodialysis, the
most widely prescribed type of dialysis, typically consists of
treatments in a dialysis clinic three times per week, with each
session lasting three to five hours. Approximately 8% of
U.S. ESRD dialysis patients receive some form of dialysis
treatment at home, most of whom treat themselves with peritoneal
dialysis, or PD, although surveys of physicians and healthcare
professionals suggest that a larger proportion of patients could
take responsibility for their own care. Clinical data also
suggests that hemodialysis therapy administered five or six
times per week, commonly referred to as daily therapy, better
mimics the natural functioning of the human kidney and can lead
to improved clinical outcomes, including reductions in
antihypertensive medications, reduced fluid overload, reduced
depression and improvements in health-related quality of life.
We believe there is an unmet need for a hemodialysis system that
allows more frequent and easily administered therapy at home and
have designed our system to address this and other kidney
replacement markets. Currently, nearly all of our System One
patients in the home market receive treatment between five or
six times a week in order to take advantage of these reported
clinical benefits.
Measuring 15x15x18 inches, the System One is the smallest
commercially available hemodialysis system. It consists of a
compact, portable and easy-to-use cycler, disposable drop-in
cartridge and high purity premixed fluid. The System One has a
self-contained design and simple user interface making it easy
to operate by a trained patient and his or her trained partner
in any setting prescribed by the patients physician.
Unlike traditional dialysis systems, our System One does not
require any special disinfection and its operation does not
require specialized electrical or plumbing infrastructure or
modifications to the home. Patients can bring the System One
home, plug it in to a conventional electrical outlet and operate
it, thereby eliminating what can be expensive plumbing and
electrical household modifications required by other traditional
dialysis systems. Because of its portability, patients also have
the freedom to travel with the System One. We market the System
One to dialysis clinics for chronic hemodialysis treatment. The
clinics in turn provide the System One to ESRD patients.
4
We also market the System One to hospitals for treatment of
acute kidney failure and fluid overload. It is estimated that
there are over 200,000 cases of acute kidney failure in the
United States each year. The clinical flexibility of our System
One, coupled with its
ease-of-use
and portability, make our system well suited for hospital
critical care environments.
In addition to the System One, we sell a line of extracorporeal
disposable products for use primarily for in-center dialysis
treatments for patients with ESRD. These products, which we
obtained in connection with our October 2007 acquisition of
Medisystems Corporation and certain affiliated entities, which
we refer to collectively as Medisystems, include hemodialysis
blood tubing sets, A.V. fistula needles and apheresis needles.
Medisystems has been selling products to dialysis centers for
the treatment of ESRD since 1981, and has achieved leading
positions in the U.S. market for both hemodialysis blood
tubing sets and AV fistula needles. Our blood tubing set
products include the ReadySet High Performance Blood Tubing set,
or ReadySet, and the Streamline Airless Blood Tubing set, or
Streamline. ReadySet has been on the market since 1993.
Streamline, our next generation product which was introduced in
2007, is designed to provide improved patient outcomes and lower
costs to dialysis clinics. Our needle products line includes AV
fistula needles incorporating safety features, first introduced
in 1995, including PointGuard Anti-Stick Needle Protectors and
MasterGuard technology, and ButtonHole needles, first introduced
in 2002.
For the year ended December 31, 2010, our revenues were
$179.2 million and we incurred a net loss of
$31.7 million. As of December 31, 2010, we had cash
and cash equivalents of $104.3 million, total assets of
$286.1 million, long term liabilities of $97.6 million
and total stockholders equity of $152.1 million.
Since inception, we have incurred negative operating margins and
losses every quarter. At December 31, 2010, we had an
accumulated deficit of approximately $308.4 million. While
we have achieved positive gross margins for our products, in
aggregate, since the fourth quarter of 2007, we cannot provide
assurance that our gross margins will improve or, if they do
improve, the rate at which they will improve. Continued
improvements in gross margins are dependent on many factors,
including growing revenues, reducing costs of revenues by
implementing design and process improvements, obtaining better
purchasing terms and prices and increasing reliability of our
products. Additionally, we expect our operating expenses to
continue to increase as we grow our business. Our ability to
become profitable and, its timing and sustainability, depend
principally upon continued improvements in gross margins,
growing revenues, and leverage of our operating infrastructure
including any investment in selling and marketing or research
and development activities.
For the year ended December 31, 2010, cash flows from
operating activities were positive due to improvements in net
loss versus 2009 and a $4.3 million one-time customer
prepayment on first quarter 2011 orders. While we continue to
make progress in improving our cash flows from operating
activities, we expect cash flows from operating activities in
the near term to fluctuate between negative and positive on a
quarterly basis, primarily due to changes in working capital.
There can be no assurance that we will be able to continue to
improve cash flows from operating activities or whether we will
be able to generate positive cash flows from operating
activities in the future. We believe, based on current
projections and the current nature of our business, that we have
the required resources to fund our ongoing operating
requirements. Our ability to and the rate at which we continue
to improve cash flows from operating activities will depend on
many factors, including growing revenues, continued improvements
in gross margins, leverage of our operating infrastructure and
continued sale versus rental of a significant percentage of our
System One equipment.
We were incorporated in Delaware in 1998 under the name QB
Medical, Inc., and later changed our name to NxStage Medical,
Inc. Our principal executive offices are located at 439 South
Union Street, Fifth Floor, Lawrence, Massachusetts 01843.
Additional financial information regarding our business segments
and geographic data about our assets is contained in
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of Part II, and in
our notes to Consolidated Financial Statements included in
Item 8 of Part II of this Annual Report on
Form 10-K.
5
Our
Products and Services
The
System One
Our primary product, the NxStage System One, is a small,
portable, easy-to-use hemodialysis system. Sales of the System
One and related disposables accounted for approximately 64%, 58%
and 52% of our total sales for the years ended December 31,
2010, 2009 and 2008, respectively.
The System One includes the following components:
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The NxStage Cycler. A compact portable
electromechanical device containing pumps, control mechanisms,
safety sensors and remote data capture functionality.
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The NxStage Cartridge. A single-use,
disposable, integrated treatment cartridge that loads simply and
easily into the cycler. The cartridge incorporates a proprietary
volumetric fluid management system and includes a pre-attached
dialyzer.
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Premixed Dialysate. The System One uses
high-purity premixed dialysate for hemodialysis applications.
The volume of fluids used varies with treatment options,
prescription, and setting. We supply our premixed dialysate in
sterile five liter bags or through the use of our PureFlow SL
accessory. The PureFlow SL module allows for the preparation of
dialysate fluid in the patients home using ordinary tap
water and dialysate concentrate thereby reducing the need for
bagged fluids for in-home treatments.
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ReadySet
The ReadySet High Performance Blood Tubing Set, which was
introduced for use in hemodialysis in 1993, features a pump
segment material designed to deliver reliable, accurate flows
throughout the treatment. The blood tubing is designed to be
easy to handle and to enable relatively fast priming, or removal
of air from the dialysate solution. These technological advances
are intended to optimize dose delivery. Sales of ReadySet
accounted for approximately 15%, 19% and 24% of our total sales
for the years ended December 31, 2010, 2009 and 2008,
respectively.
Streamline
Streamline, which was introduced in 2007, is our next generation
blood tubing set product. Streamline features an efficient and
airless design intended to result in superior clinical and
economic performance and is designed to reduce treatment time,
minimize waste and optimize dose delivery. Streamline also
includes our patented LockSite needleless access sites,
eliminating the need for sharp needles or costlier guarded
needles to be used with the tubing set in connection with
dialysis therapy, thereby intended to facilitate a
clinicians ability to satisfy Occupational Safety and
Health Administration, or OSHA, anti-stick requirements.
AV
Fistula and Apheresis Needles
Our AV fistula and apheresis needles have been designed to
achieve a smooth blood flow throughout the treatment, intended
to result in less clotting, lower pressure drops, and less
stress on the patients blood. A significant amount of our
needles sold are branded MasterGuard, and include our
Fingershield®
anchor designed to protect the operator from inadvertent needle
stick injury. We also offer ButtonHole needles, first introduced
in 2002, for hemodialysis therapies as an alternative to our AV
fistula needles with MasterGuard. This needle is used by
patients that employ the constant-site technique,
whereby a fistula needle is inserted in the same place each
treatment. Published clinical experience suggests that the
incidence of pain, hematoma, and infiltrations at the needle
insertion site can be reduced by utilizing the constant-site
technique. Our ButtonHole AV fistula needle has an anti-stick,
dull bevel design well-suited for the constant-site technique,
while also designed to reduce the risk of accidental needle
sticks. Sales of needles accounted for approximately 12%, 14%
and 18% of our total sales for the years ended December 31,
2010, 2009 and 2008, respectively.
6
Our
Business by Segment
We report the results of our operations in two segments: System
One and In-Center. We distribute our products in three markets:
home, critical care and in-center. In the System One segment we
derive our revenues from the sale and rental of equipment and
the sale of disposable products in the home and critical care
markets. We define the home market as the market devoted to the
treatment of ESRD patients in the home and the critical care
market as the market devoted to the treatment of hospital-based
patients with acute kidney failure or fluid overload. In the
In-Center segment, we derive our revenues from the sale of
needles and blood tubing sets used predominantly in hemodialysis
performed in-center as well as apheresis, which we refer to as
the in-center market.
System
One
We began marketing the System One to perform hemodialysis for
ESRD patients in September 2004, and we began marketing our
System One specifically for home use in July 2005, after the
System One was cleared by the FDA for home hemodialysis. We
market the System One to independent dialysis clinics as well as
dialysis clinics that are part of national or regional chains,
providing clinics with improved access to a developing market,
the home hemodialysis market, and the ability to expand their
patient base by adding home-based patients without adding clinic
infrastructure. Since Medicare regulations require that all
chronic ESRD patients be under the care of a dialysis clinic,
whether they are treated at-home, in-clinic or with a kidney
transplant, we do not sell the System One directly to patients.
For each month that a patient is treated with the System One, we
bill the clinic for the purchase of the related disposable
cartridges and treatment fluids necessary to perform treatment.
A majority of our sales to customers in the home market include
the purchase rather than the rental of System One equipment. Our
two largest customers in the home market, DaVita and Fresenius,
purchase rather than rent all or nearly all of their System One
equipment.
After selling or renting a System One to a clinic, our clinical
educators train the clinics nurses and dialysis
technicians on the proper use of the system using proprietary
training materials. We are not responsible for, and do not
provide patient training. We rely on our customers trained
technicians and nurses to train home patients, their partners
and other technicians and nurses using the System One.
Patient training takes place at the clinic primarily during the
patients prescribed, often daily, two to three hour
treatment sessions. Training typically takes two to three weeks
and includes basic instruction on ESRD, the operation of the
System One and the insertion by the patient or their partner of
needles into the patients vascular access site. Training
sessions are presently reimbursed by Medicare or private
insurance, and there may be a co-payment requirement to the
patient associated with this training.
The System One cycler sold to hospitals in the critical care
market is based on the same technology platform used in the home
market, but includes an additional display module, called
OneView, that is designed to facilitate easier medical record
charting and troubleshooting. Most of our customers in the
critical care market use our System to perform prolonged or
continuous renal replacement therapy, also referred to as CRRT,
for their acute kidney failure or fluid overload patients. We
are specifically focusing our sales efforts in the critical care
market on those large institutions that we believe are most
dedicated to prolonged or continuous renal replacement therapy
for patients with acute kidney failure and believe in
ultrafiltration as an earlier-stage treatment option for fluid
overload.
We primarily sell the System One cycler to customers in the
critical care market; we also sell related disposable cartridges
and treatment fluids necessary to perform dialysis treatment.
After selling or renting a System One to a hospital, our
clinical educators generally train the hospitals intensive
care unit, or ICU, and acute dialysis nurses on the proper use
of the System One using proprietary training materials. We then
rely on the trained nurses to train other nurses. By adopting
this train the trainer approach, our sales nurses do
not need to return to the hospital each time a new nurse needs
to be trained.
Ownership of United States dialysis clinics is highly
consolidated. While there are over 5,500 Medicare-certified
dialysis outpatient facilities in the United States, DaVita and
Fresenius each control approximately
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30% of U.S. dialysis market. Smaller chains and independent
clinics and hospitals represent the approximately 40% of
remaining clinics.
We sell or rent the System One to DaVita and a growing
percentage of our System One sales are to Fresenius. DaVita is
our most significant customer for the System One segment; with
direct sales to DaVita representing approximately 34% of our
System One segment revenues during 2010 and 38% and 35% during
2009 and 2008, respectively. Further, DaVita is our largest
customer in the home market, constituting over 40% of our home
hemodialysis patients. Our sales to Fresenius grew significantly
in 2010, and Fresenius is now our second largest customer in the
System One segment, with nearly all of those sales in the home
market.
In July 2010, we entered into a First Amended and Restated
National Service Provider Agreement, or the Amended Agreement,
with DaVita expiring on June 30, 2013. The Amended
Agreement supersedes our earlier agreement with DaVita entered
into on February 7, 2007. Pursuant to the terms of the
Amended Agreement, we agreed to continue to supply to DaVita the
System One and PureFlow SL and related supplies for home
hemodialysis therapy. Under the Amended Agreement, DaVita
committed to continue to purchase, rather than rent, nearly all
of its future System One equipment needs. After June 30,
2013, the term of the Amended Agreement may be automatically
extended on a monthly basis unless terminated by either party
pursuant to the Amended Agreement.
The Amended Agreement includes a modest increase to
DaVitas pricing from the levels under the original 2007
agreement, and continues DaVitas right to receive most
favored nations pricing for the System One and related supplies
for home hemodialysis therapy, subject to certain requirements,
including DaVita achieving certain System One home patient
growth targets. In addition, under the Amended Agreement, DaVita
is eligible for pricing discounts based upon the achievement of
certain System One home patient growth targets (reflecting home
patients who have remained on contiguous home hemodialysis
therapy for at least three full months with the System One) at
June 30, 2011, 2012 and 2013, and which further require
DaVita to continue to grow its home patient census every six
months during the term of the Amended Agreement. In order to
conserve our cash, the pricing discount was structured to be
paid as a warrant, in lieu of cash. The Amended Agreement
provides for a range of warrant levels that may be earned based
on DaVita and NxStage System One home patient targets. Under
this tiered structure, DaVita would be required to grow its net
patients on the NxStage System One at a compounded annual growth
rate of approximately 20 percent from the level at the time
of entering into the agreement in order to obtain any discount,
while achieving the highest discount will require a significant
increase above that. If all tiers of discounts are achieved, the
Amended Agreement provides that DaVita may earn warrants to
purchase up to 5.5 million shares of our common stock. The
warrants have an exercise price of $14.22 per share and are
non-transferable and must be exercised in cash.
In connection with the issuance of the warrants, we entered into
a Registration Rights Agreement with DaVita pursuant to which we
agreed to file, on or prior to April 1, 2011, a
registration statement on
Form S-3
with respect to the resale by DaVita of any shares issued to
DaVita under the warrant. We registered the shares of common
stock issuable upon the exercise of the warrant on
February 16, 2011 on our automatic shelf registration
statement on
Form S-3
filed on November 17, 2010
(No. 333-170654).
In-center
We sell primarily blood tubing sets and needles to customers in
the in-center market. In this market, our customers are
independent dialysis clinics as well as dialysis clinics that
are part of national or regional chains. The majority of our
sales in this market are made through distributors, in order to
leverage national networks, shipping efficiencies and existing
customer relationships. We plan our manufacturing and
distribution activities based on distributor purchase orders.
Finished goods are shipped directly to distributor warehouses.
We support distributor selling and marketing efforts with brand
marketing support and a team of clinical educators who assist
with clinical in-service activities.
Our In-Center segment revenues are highly concentrated in
several significant purchasers. Our two largest distributors are
Henry Schein, Inc., or Henry Schein, and Gambro Renal Products,
Inc., or Gambro. Revenues from Henry Schein represented
approximately 44%, 66% and 80% of our In-Center segment revenues
during
8
2010, 2009 and 2008, respectively. Revenues from Gambro
represented approximately 36% and 14% of our In-Center segment
revenues during 2010 and 2009, respectively. Gambro was not a
distributor of ours in 2008. Our distribution agreement with
Henry Schein will expire in April 2012. Our distribution
agreement with Gambro will expire in July 2014.
Sales of our products through distributors to DaVita accounted
for nearly half of In-Center segment revenues during 2010, 2009
and 2008. DaVita has contractual purchase commitments under two
agreements: one with us for needles and one with Gambro for
blood tubing sets. DaVitas contractual purchase
obligations with respect to needles will expire in January 2013.
Gambros long term product supply agreement with DaVita
entered into in connection with the sale of Gambros United
States dialysis clinic business to DaVita in 2005, obligates
DaVita to purchase a significant majority of its blood tubing
set requirements from Gambro through 2015. In June 2009, we
entered into a five year distribution agreement in the United
States with Gambro, which contractually obligates Gambro to
exclusively supply our blood tubing sets, including our ReadySet
and the Streamline product lines, to DaVita through July 2014.
International
Historically, we have focused nearly all of our sales and
marketing efforts in the United States. In 2009 we began
entering into arrangements with distributors to sell the System
One and certain of our other products internationally.
Currently, we have distribution arrangements with several
international partners for the sale of our System One in Europe
and the Middle East. Finished goods are shipped directly to
distributor warehouses. The distributors sell or rent our
products to dialysis providers or hospitals. Currently,
distributors handle marketing, patient and clinic training and
equipment servicing and repair. To date, our international sales
have been quite limited, and we are still very early in our
international commercialization efforts.
Marketing,
Customer Support
We have a sales force that calls on dialysis clinics,
nephrologists and hospitals. In addition to specialized sales
representatives, we also employ nurses in our sales force as
clinical educators to support our sales efforts. We have a staff
of Customer Support Specialists to assist patients, clinics and
hospitals with product orders and deliveries, and also provide
technical support
24-hours a
day, seven days a week through a dedicated staff of Technical
Support Representatives, to respond to questions raised by
patients, clinics and hospitals concerning the System One. Our
direct sales efforts focus almost exclusively on the home and
critical care markets as we rely heavily on distributors to sell
our products in the in-center market.
In the home market we primarily use a depot service model for
equipment servicing and repair while we generally service
equipment sold to customers in the critical care market in the
field. For our home market customers, if a device requires
repair, we arrange for a replacement device to be shipped to the
site of care, whether it is a patients home, clinic or
hospital, and for pick up and return to us of the system
requiring service. This shipment is done by common carrier, and,
as there are no special installation requirements, the patient,
clinic or hospital can quickly and easily set up the new
machine. The nature of the hospital critical care settings,
coupled with the practices of other ICU dialysis equipment
suppliers, necessitates an option for
on-site
support for our systems installed in this environment.
Competition
The dialysis therapy market is mature, consolidated and
competitive. Our System One in the critical care market competes
against Gambro, Fresenius Medical Care AG, Baxter Healthcare, or
Baxter, B. Braun and others. Our product lines in the in-center
market compete directly against products produced by Fresenius
Medical Care AG, Gambro, Nipro, B. Braun, Baxter Healthcare, JMS
and others. Our competitors each market one or more FDA-cleared
medical devices for the treatment of acute or chronic kidney
failure. Each of these competitors offer products that have been
in use for a longer time than our System One and are more widely
recognized by physicians, patients and providers. These
competitors have significantly more financial and human
resources, more established sales and distribution channels,
service and customer support infrastructures and spend more on
product development and marketing than we do. Many of our
competitors also have
9
established relationships with the providers of dialysis therapy
and, Fresenius owns and operates a chain of dialysis clinics.
The product lines of most of these companies are broader than
ours, enabling them to offer a broader bundle of products that
may afford them a significant competitive advantage.
We believe the competition in the market for kidney dialysis
equipment and supplies is based primarily on:
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product quality;
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ease-of-use;
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cost effectiveness;
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sales force coverage; and
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clinical flexibility and performance.
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We presently have the only portable product specifically cleared
for home hemodialysis therapy in the United States. However, on
February 18, 2011, we learned that Fresenius, our second
largest customer in the System One segment, with nearly all of
these sales in the home market, obtained in February 2011
clearance to use its 2008K At Home hemodialysis system for use
in home chronic therapy. There is also an increasing interest in
the home hemodialysis market from other competitors. Baxter has
a research and development collaboration with DEKA Research and
Development Corporation and HHD, LLC, or DEKA, and has recently
indicated that it received Investigation Device Exemption, or
IDE, approval from the FDA and hopes to commence U.S. and
Canadian clinical studies of DEKAs new home hemodialysis
system in 2011 and launch in international markets as early as
2011 and obtain regulatory approval for Europe in 2012. Other
small companies are also working to develop products for this
market. We are unable to predict when, if ever, any of these
products may attain regulatory clearance and appear in the
market, or how successful they may be should they be introduced,
but if additional viable products are introduced to the market,
it could adversely affect our sales and growth.
For the critical care market, we believe we compete favorably in
terms of product quality and ease of use due to our System One
design, portability, drop-in cartridge and use of premixed
fluids. We believe we also compete favorably on the basis of
clinical flexibility, given the System Ones ability to
perform hemofiltration, hemodialysis and ultrafiltration.
However, the fact that we are not indicated for
hemodiafiltration may be perceived by some clinicians as a
disadvantage of our system over others. We believe we compete
favorably in terms of cost-effectiveness for hospitals that
perform continuous renal replacement therapies, or CRRT. In the
fluid overload market, which is a very small component of our
critical care market, drug therapy is currently the most common
and preferred treatment. To date, ultrafiltration has not been
broadly adopted and, if the medical community does not accept
ultrafiltration as clinically useful, cost-effective and safe,
we will not be able to successfully compete against existing
pharmaceutical therapies in the treatment of fluid overload.
For the in-center market, where we sell needles and blood tubing
sets, we believe that we compete favorably in terms of product
quality,
ease-of-use,
cost effectiveness, clinical flexibility and performance. We
also compete favorably in terms of branding, as Medisystems has
been selling products to dialysis centers for the treatment of
ESRD since 1981. We compete unfavorably in terms of sales force
coverage, as we rely nearly exclusively on distributors, rather
than our own direct sales force.
Our primary competitors are large, well-established businesses
with significantly more financial and personnel resources and
greater commercial infrastructures than us. We believe our
ability to compete successfully will depend largely on our
ability to:
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establish the infrastructures necessary to support a growing
home, critical care and in-center dialysis products business;
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maintain and improve product quality;
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continue to develop sales and marketing capabilities;
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continuously improve our products and develop and obtain
clearance for new products; and
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achieve cost reductions.
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10
Our ability to successfully market our products for the
treatment of kidney failure could also be adversely affected by
pharmacological and technological advances in preventing the
progression of chronic ESRD
and/or in
the treatment of acute kidney failure, technological
developments by others in the area of dialysis, the development
of new medications designed to reduce the incidence of kidney
transplant rejection and progress in using kidneys harvested
from genetically-engineered animals as a source of transplants.
There can be no assurance that competitive pressure or
pharmacological or technological advancements will not have a
material adverse effect on our business.
Clinical
Experience and Results
Over 100 published articles have reported on the benefits of
daily dialysis therapy. Although many of these publications were
based on studies that did not use our product, the literature
strongly supports that daily hemodialysis therapy can lead to
improved clinical outcomes, including reduction in left
ventricular mass, reduction in hypertension and use of
antihypertensive medications, improved nutritional status, and
overall improvement in quality of life, including improvements
related to overall physical and mental health, depressive
symptoms, sleep, restless legs syndrome and post-dialysis
recovery time.
In early 2006, we enrolled the first patient in our post-market
FREEDOM (Following Rehabilitation, Economics, and Everyday
Dialysis Outcome Measurements) study, which is designed to
quantify the clinical and economic benefits of daily home
therapy administered to Medicare patients with the System One
versus conventional thrice-weekly dialysis. The FREEDOM study is
a prospective, multi-center, observational study, which will
enroll up to 500 Medicare patients in up to 70 clinical centers.
Enrollment is ongoing. The study will compare Medicare patients
using the System One with a matched cohort of patients from the
United States Renal Data System, or USRDS, patient database
treated with traditional in-center thrice weekly dialysis, to
help define differences in the cost of care and patient outcomes
between the daily home setting and the dialysis clinic setting.
Comparing the study group of patients using the System One to a
USRDS database group matched in terms of demographics,
co-morbidities, geography, number of years on dialysis and other
key factors, should allow a valuable comparison to be made
without the time and cost challenges of a crossover study, in
which patients would be followed for a given time on each type
of therapy.
Our goal is to provide further insights into more frequent
dialysis and its cost-effectiveness as well as to confirm the
significant reported potential benefits of daily therapy on
patient quality of life and rehabilitation. Published
U.S. government data estimates the total health care cost
burden of a Medicare dialysis patient at over $70,000 annually,
with dialysis services representing approximately 25% of this
cost, while the cost of hospitalizations, drugs and physician
fees make up nearly 60%.
Interim four and twelve month results from our ongoing FREEDOM
study show daily home hemodialysis treatment made possible by
the System One therapy significantly improves select measures of
patient
quality-of-life
as compared to conventional, thrice-weekly in-center treatment.
Specific improvements identified to date include a reduction in
post dialysis recovery time (the average time to resume normal
activity), returning significant quality time to patients each
week. Other benefits include a reduction in depressive symptoms,
improvements in select physical and mental health quality of
life domains, a reduction in antihypertensive medications,
improvements in sleep and restless legs syndrome.
We also completed an approved IDE study intended to support a
home nocturnal indication for the System One. Enrollment started
in the first quarter of 2008 and we submitted the associated
510(k) to the FDA in 2010. We met our primary safety and
efficacy endpoints for the study. Nevertheless, the FDA recently
notified us that their standards for what will be required for a
home nocturnal clearance may change from what was required in
our approved IDE. We continue to discuss with the FDA what the
pathway to clearance for our product should be, and are
evaluating our next steps.
In addition to the FREEDOM and nocturnal studies, we have
completed two significant clinical trials with the System One
for ESRD therapy, a post-market study of chronic daily
hemofiltration and a study under an FDA-approved IDE. We have
also completed a study of ultrafiltration with the System One
for fluid overload associated with Congestive Heart Failure, or
CHF.
11
In the IDE study, we compared center-based and home-based daily
dialysis with the System One. That study was a prospective,
multi-center, two-treatment, two-period, open-label, cross-over
study. The first phase of the study consisted of 48 treatments,
six per week, in an eight-week period performed in-center, while
the second phase consisted of the same number of treatments
performed in an in-home setting. Between the two phases, there
was a two-week transition period conducted primarily in the
patients home. Prior to study initiation, enrolled
patients were to have been on at least two weeks of daily
hemodialysis with the System One in an in-center environment.
The objective of the study was to evaluate equivalence on a
per-treatment basis between the delivery of hemodialysis with
our system in-center and at home. The result of the
investigation showed that the safety and effectiveness of
hemodialysis with our system in each setting was equivalent.
Research
and Development
Our research and development organization has focused on
developing innovative technical approaches that address the
limitations of current dialysis systems and disposable products.
Our development team has skills across the range of technologies
required to develop and maintain dialysis systems and products.
These areas include filters, tubing sets, mechanical systems,
fluids, software and electronics. In response to physician and
patient feedback and our own assessments, we are continually
working on enhancements to our product designs to improve
ease-of-use,
functionality, reliability and safety and to reduce product
cost. We also seek to develop new products that supplement our
existing product offerings and intend to continue to actively
pursue opportunities for the research and development of
complementary products.
For the years ended December 31, 2010, 2009 and 2008, we
incurred research and development expenses of
$12.9 million, $9.8 million and $8.9 million,
respectively.
Intellectual
Property
We seek to protect our investment in the research, development,
manufacturing and marketing of our products through the use of
patent, trademark, copyright and trade secret law. We own or
have licensed rights to a number of patents, trademark,
copyrights, trade secrets and other intellectual property
directly related and important to our business both in the
United States and abroad. We also have domestic and foreign
pending patent applications.
As of December 31, 2010, we had 85 issued U.S. and
international patents, 1 issued European Union, or EU,
industrial design registration and 32 U.S., international and
foreign pending patent applications.
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6/24/2009
|
|
|
|
1/7/2024
|
|
00982268.5
|
|
GB
|
|
SYNCHRONIZED VOLUMETRIC FLUID BALANCING SYSTEMS AND METHODS
|
|
|
1/13/2010
|
|
|
|
11/29/2020
|
|
04757998.2
|
|
GB
|
|
METHOD AND APPARATUS FOR MANUFACTURING FILTERS [2006/10]
|
|
|
3/10/2010
|
|
|
|
3/19/2024
|
|
07760334.8
|
|
GB
|
|
TUBING CLAMP FOR MEDICAL APPLICATIONS
|
|
|
8/11/2010
|
|
|
|
4/9/2027
|
|
04810398.0
|
|
GB
|
|
APPARATUS FOR LEAK DETECTION IN BLOOD PROCESSING SYSTEM
|
|
|
9/8/2010
|
|
|
|
11/5/2024
|
|
02761044.3
|
|
GB
|
|
METHOD AND APPARATUS FOR LEAK DETECTION IN A FLUID LINE
|
|
|
9/8/2010
|
|
|
|
7/8/2022
|
|
06717769.1
|
|
GB
|
|
FILTRATION SYSTEM FOR PREPARATION OF FLUIDS FOR MEDICAL
APPLICATIONS
|
|
|
10/20/2010
|
|
|
|
1/9/2026
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent No.
|
|
Regime
|
|
Title
|
|
Issue Date
|
|
|
Expiration Date
|
|
|
00991516.6
|
|
GB
|
|
FLUID PROCESSING SYSTEMS AND METHODS USING EXTRACORPOREAL FLUID
FLOW PANELS ORIENTED WITHIN A CARTRIDGE
|
|
|
2/9/2011
|
|
|
|
11/29/2020
|
|
04757998.2
|
|
FR
|
|
METHOD AND APPARATUS FOR MANUFACTURING FILTERS [2006/10]
|
|
|
3/10/2010
|
|
|
|
3/19/2024
|
|
07760334.8
|
|
FR
|
|
TUBING CLAMP FOR MEDICAL APPLICATIONS
|
|
|
8/11/2010
|
|
|
|
4/9/2027
|
|
04810398.0
|
|
FR
|
|
APPARATUS FOR LEAK DETECTION IN BLOOD PROCESSING SYSTEM
|
|
|
9/8/2010
|
|
|
|
11/5/2024
|
|
02761044.3
|
|
FR
|
|
METHOD AND APPARATUS FOR LEAK DETECTION IN A FLUID LINE
|
|
|
9/8/2010
|
|
|
|
7/8/2022
|
|
06717769.1
|
|
FR
|
|
FILTRATION SYSTEM FOR PREPARATION OF FLUIDS FOR MEDICAL
APPLICATIONS
|
|
|
10/20/2010
|
|
|
|
1/9/2026
|
|
00991516.6
|
|
FR
|
|
FLUID PROCESSING SYSTEMS AND METHODS USING EXTRACORPOREAL FLUID
FLOW PANELS ORIENTED WITHIN A CARTRIDGE
|
|
|
2/9/2011
|
|
|
|
11/29/2020
|
|
000023148-0001
|
|
EU
|
|
BLOOD TREATMENT MACHINE AND PARTS THEREOF
|
|
|
4/1/2003
|
|
|
|
4/1/2028
|
|
04700648.1
|
|
DE
|
|
PREPARING REPLACEMENT FLUID
|
|
|
6/24/2009
|
|
|
|
1/7/2024
|
|
60043710.8-08
|
|
DE
|
|
SYNCHRONIZED VOLUMETRIC FLUID BALANCING SYSTEMS AND METHODS
|
|
|
1/13/2010
|
|
|
|
11/29/2020
|
|
602004 025 923.3-08
|
|
DE
|
|
METHOD AND APPARATUS FOR MANUFACTURING FILTERS [2006/10]
|
|
|
3/10/2010
|
|
|
|
3/19/2024
|
|
602007008395.8
|
|
DE
|
|
TUBING CLAMP FOR MEDICAL APPLICATIONS
|
|
|
8/11/2010
|
|
|
|
4/9/2027
|
|
602004029077.7
|
|
DE
|
|
APPARATUS FOR LEAK DETECTION IN BLOOD PROCESSING SYSTEM
|
|
|
9/8/2010
|
|
|
|
11/5/2024
|
|
60237621.1
|
|
DE
|
|
METHOD AND APPARATUS FOR LEAK DETECTION IN A FLUID LINE
|
|
|
9/8/2010
|
|
|
|
7/8/2022
|
|
602006017654.6
|
|
DE
|
|
FILTRATION SYSTEM FOR PREPARATION OF FLUIDS FOR MEDICAL
APPLICATIONS
|
|
|
10/20/2010
|
|
|
|
1/9/2026
|
|
N/A
|
|
DE
|
|
FLUID PROCESSING SYSTEMS AND METHODS USING EXTRACORPOREAL FLUID
FLOW PANELS ORIENTED WITHIN A CARTRIDGE
|
|
|
2/9/2011
|
|
|
|
11/29/2020
|
|
2,593,580
|
|
CA
|
|
FILTRATION SYSTEM FOR PREPARATION OF FLUIDS FOR MEDICAL
APPLICATIONS
|
|
|
11/23/2010
|
|
|
|
1/9/2026
|
|
|
|
|
* |
|
EU industrial design registration |
16
Patents for individual products extend for varying periods of
time according to the date a patent application is filed or a
patent is granted and the term of the patent protection
available in the jurisdiction granting the patent. The scope of
protection provided by a patent can vary significantly from
country to country.
In connection with the acquisition of Medisystems on
October 1, 2007, we also acquired exclusive license rights
to a portfolio of patents from Lifestream Medical Corporation
(formerly known as DSU Medical Corporation). Lifestream Medical
Corporation is wholly-owned by David S. Utterberg, a member of
our board of directors and a significant stockholder of the
Company. On February 17, 2011, Lifestream Medical
Corporation assigned the formerly licensed patents to us, giving
us control over the prosecution and maintenance of such patents
and the ability to operate under such patents in all fields for
any purpose. The assignment agreement does, however, provide
that our rights under the patents are qualified by certain
sublicenses previously granted to third parties. We have agreed
that Mr. Utterberg will retain the right to royalty income
under one of these sublicenses.
The following table lists all of the licensed patents assigned
to us by Lifestream Medical Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent No.
|
|
Regime
|
|
Title
|
|
Issue Date
|
|
|
Expiration Date
|
|
|
5643190
|
|
US
|
|
Flow-Through Treatment Device
|
|
|
7/1/1997
|
|
|
|
1/17/2015
|
|
5328461
|
|
US
|
|
Blow Molded Venous Drip Chamber For Hemodialysis
|
|
|
7/12/1994
|
|
|
|
7/12/2011
|
|
5330425
|
|
US
|
|
Blow Molded Venous Drip Chamber For Hemodialysis
|
|
|
7/19/1994
|
|
|
|
4/30/2012
|
|
5360395
|
|
US
|
|
Pump Conduit Segment Having Connected, Parallel Branch Line
|
|
|
11/1/1994
|
|
|
|
12/20/2013
|
|
5520640
|
|
US
|
|
Blood Air Trap Chamber
|
|
|
5/28/1996
|
|
|
|
5/28/2013
|
|
5772638
|
|
US
|
|
Protector For Needle
|
|
|
6/30/1998
|
|
|
|
9/17/2016
|
|
5772624
|
|
US
|
|
Reusable Blood Lines
|
|
|
6/30/1998
|
|
|
|
7/20/2015
|
|
5817043
|
|
US
|
|
Flow-Through Treatment Device
|
|
|
10/6/1998
|
|
|
|
1/17/2015
|
|
5895368
|
|
US
|
|
Blood Set Priming Method And Apparatus
|
|
|
4/20/1999
|
|
|
|
9/23/2016
|
|
6440095
|
|
US
|
|
Pump Segment Having Connected Parallel Branch Line
|
|
|
8/27/2002
|
|
|
|
12/31/2015
|
|
6165149
|
|
US
|
|
Reusable Blood Lines
|
|
|
12/26/2000
|
|
|
|
7/20/2015
|
|
5951870
|
|
US
|
|
Automatic Priming Of Blood Sets
|
|
|
9/14/1999
|
|
|
|
10/21/2017
|
|
5824213
|
|
US
|
|
Separable Hemodialysis System
|
|
|
10/20/1998
|
|
|
|
9/7/2014
|
|
5895571
|
|
US
|
|
Separable Hemodialysis System Connected By A Movable Arm
|
|
|
4/20/1999
|
|
|
|
9/7/2014
|
|
6299589
|
|
US
|
|
Flow-Through Treatment Method
|
|
|
10/9/2001
|
|
|
|
1/17/2015
|
|
6290665
|
|
US
|
|
Blood Set Priming Method And Apparatus
|
|
|
9/18/2001
|
|
|
|
9/23/2016
|
|
6177049
|
|
US
|
|
Reversing Flow Blood Processing System
|
|
|
1/23/2001
|
|
|
|
6/10/2018
|
|
5980741
|
|
US
|
|
Bubble Trap With Flat Side Having Multipurpose Supplemental Ports
|
|
|
11/9/1999
|
|
|
|
8/1/2017
|
|
6010623
|
|
US
|
|
Bubble Trap With Flat Side
|
|
|
1/4/2000
|
|
|
|
8/1/2017
|
|
6019824
|
|
US
|
|
Bubble Trap Chamber
|
|
|
2/1/2000
|
|
|
|
6/9/2018
|
|
6117342
|
|
US
|
|
Bubble Trap With Directed Horizontal Flow And Method Of Using
|
|
|
9/12/2000
|
|
|
|
11/26/2016
|
|
6755801
|
|
US
|
|
Dialysis Pressure Monitoring With Clot Suppression
|
|
|
6/29/2004
|
|
|
|
11/8/2019
|
|
6319465
|
|
US
|
|
Reversing Flow Blood Processing System Having Reduced Clotting
Potential
|
|
|
11/20/2001
|
|
|
|
6/3/2019
|
|
6387069
|
|
US
|
|
Blood Set Priming Method And Apparatus
|
|
|
5/14/2002
|
|
|
|
9/23/2016
|
|
6051134
|
|
US
|
|
Bubble Trap Having Common Inlet/Outlet Tube
|
|
|
4/18/2000
|
|
|
|
3/28/2017
|
|
6187198
|
|
US
|
|
Automatic Priming Of Connected Blood Sets
|
|
|
2/13/2001
|
|
|
|
10/21/2017
|
|
6517508
|
|
US
|
|
Set For Blood Processing
|
|
|
2/11/2003
|
|
|
|
11/3/2019
|
|
6206954
|
|
US
|
|
Blood Set And Chamber
|
|
|
3/27/2001
|
|
|
|
5/13/2018
|
|
4501729
|
|
JP
|
|
Automatic Priming Of Blood Sets
|
|
|
5/1/2001
|
|
|
|
10/13/2018
|
|
2306829
|
|
CA
|
|
Automatic Priming Of Blood Sets
|
|
|
5/1/2007
|
|
|
|
10/13/2018
|
|
743310
|
|
AU
|
|
Automatic Priming Of Blood Sets
|
|
|
5/9/2002
|
|
|
|
10/13/2018
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent No.
|
|
Regime
|
|
Title
|
|
Issue Date
|
|
|
Expiration Date
|
|
|
6344139
|
|
US
|
|
Arterial And Venous Blood Tubing Set
|
|
|
2/5/2002
|
|
|
|
10/21/2017
|
|
7025750
|
|
US
|
|
Set For Blood Processing
|
|
|
4/11/2006
|
|
|
|
1/7/2020
|
|
6596234
|
|
US
|
|
Reversing Flow Blood Processing System
|
|
|
7/22/2003
|
|
|
|
3/14/2019
|
|
6620119
|
|
US
|
|
Reusable Blood Lines
|
|
|
9/16/2003
|
|
|
|
11/12/2015
|
|
6464878
|
|
US
|
|
Automatic Priming Of Blood Sets
|
|
|
10/15/2002
|
|
|
|
10/21/2017
|
|
6695807
|
|
US
|
|
Blood Flow Reversing System
|
|
|
2/24/2004
|
|
|
|
1/18/2022
|
|
7166084
|
|
US
|
|
Blood Set Priming Method And Apparatus
|
|
|
1/23/2007
|
|
|
|
7/22/2017
|
|
6666839
|
|
US
|
|
Method of Using Reusable Blood Lines
|
|
|
12/23/2003
|
|
|
|
7/20/2015
|
|
5983947
|
|
US
|
|
Docking Ports For Medical Fluid Sets
|
|
|
11/16/1999
|
|
|
|
3/3/2017
|
|
4117505
|
|
JP
|
|
Flow-Trough Treatment Device
|
|
|
5/2/2008
|
|
|
|
7/17/2017
|
|
3103938
|
|
JP
|
|
Universal Connector
|
|
|
9/1/2000
|
|
|
|
6/6/2011
|
|
2064749
|
|
CA
|
|
Universal Connector
|
|
|
10/18/1994
|
|
|
|
6/6/2011
|
|
5385372
|
|
US
|
|
Luer Connector With Integral Closure
|
|
|
1/31/1995
|
|
|
|
1/8/2013
|
|
5772638
|
|
US
|
|
Protector For Needle
|
|
|
6/30/1998
|
|
|
|
9/17/2016
|
|
5433703
|
|
US
|
|
Guarded Winged Needle Assembly
|
|
|
7/18/1995
|
|
|
|
7/18/2012
|
|
5562636
|
|
US
|
|
Needle Protector Sheath
|
|
|
10/8/1996
|
|
|
|
7/15/2014
|
|
5562637
|
|
US
|
|
Needle Protector Sheath
|
|
|
10/8/1996
|
|
|
|
7/15/2014
|
|
2153091
|
|
CA
|
|
Needle Protector Sheath
|
|
|
1/29/2008
|
|
|
|
6/30/2015
|
|
5704924
|
|
US
|
|
Easy Use Needle Protector Sheath
|
|
|
1/6/1998
|
|
|
|
1/11/2016
|
|
5951529
|
|
US
|
|
Needle Protector Sheath
|
|
|
9/14/1999
|
|
|
|
7/15/2014
|
|
3809563
|
|
JP
|
|
Easy Use Needle Protector Sheath
|
|
|
6/2/2006
|
|
|
|
12/20/2016
|
|
717410
|
|
AU
|
|
Easy Use Needle Protector Sheath
|
|
|
7/6/2000
|
|
|
|
12/20/2016
|
|
6089527
|
|
US
|
|
Squeeze Clamp For Flexible Tubing
|
|
|
7/18/2000
|
|
|
|
10/3/2017
|
|
6113062
|
|
US
|
|
Squeeze Clamp
|
|
|
9/5/2000
|
|
|
|
1/28/2019
|
|
6042570
|
|
US
|
|
Needle Point Protection Sheath
|
|
|
3/28/2000
|
|
|
|
2/11/2019
|
|
6595965
|
|
US
|
|
Needle Protector Sheath
|
|
|
7/22/2003
|
|
|
|
7/15/2014
|
|
6196519
|
|
US
|
|
Squeeze Clamp For Flexible Tubing
|
|
|
3/6/2001
|
|
|
|
10/3/2017
|
|
6193694
|
|
US
|
|
Needle Point Protection Sheath
|
|
|
2/27/2001
|
|
|
|
2/11/2019
|
|
6517522
|
|
US
|
|
Tubular Intravenous Set
|
|
|
2/11/2003
|
|
|
|
4/3/2020
|
|
743589
|
|
AU
|
|
Needle Point Protector Sheath
|
|
|
5/16/2002
|
|
|
|
2/9/2020
|
|
6616635
|
|
US
|
|
Tubular Intravenous Set
|
|
|
9/9/2003
|
|
|
|
7/26/2020
|
|
6685680
|
|
US
|
|
Tapered Intravenous Cannula
|
|
|
2/3/2004
|
|
|
|
4/20/2019
|
|
7591804
|
|
US
|
|
Short-Winged Needle And Guard
|
|
|
9/22/2009
|
|
|
|
5/24/2027
|
|
7025744
|
|
US
|
|
Injection Site For Male Luer Or Other Tubular Connector
|
|
|
4/11/2006
|
|
|
|
10/4/2022
|
|
3843414
|
|
JP
|
|
Closure Needle Protector Sheath
|
|
|
8/25/2006
|
|
|
|
7/5/2015
|
|
6517522
|
|
US
|
|
Tubular Intravenous Set
|
|
|
2/11/2003
|
|
|
|
4/3/2020
|
|
6530911
|
|
US
|
|
Set With Angled Needle
|
|
|
3/11/2003
|
|
|
|
6/28/2020
|
|
18
In addition to the issued patents and pending patent
applications owned by us, in the United States and selected
non-U.S. markets,
we possess trade secrets and proprietary know-how relating to
our products. Any of our trade secrets, know-how or other
technology not protected by a patent could be misappropriated,
or independently developed by, a competitor and could, if
independently invented and patented by a competitor, under some
circumstances, be used to prevent us from further use of such
information, know-how or technology.
Our strategy is to develop patent portfolios for our research
and development projects. We monitor the activities of our
competitors and other third parties with respect to their use of
intellectual property. We intend to aggressively defend the
patents we hold, and we intend to vigorously contest claims
other patent holders may bring against us.
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. While we attempt to ensure
that our products and methods do not infringe other
parties patents and proprietary rights, our competitors
may assert that our products, or the methods that we employ, are
covered by patents held by them. In addition, our competitors
may assert that future products and methods we may market
infringe their patents.
We require our employees, consultants and advisors to execute
confidentiality agreements with us. We also require our
employees to agree to disclose and assign to us all inventions
conceived by them during their employment with us. Similar
obligations are imposed upon consultants and advisors performing
work for us relating to the design or manufacture of our
product. Despite efforts taken to protect our intellectual
property, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as
proprietary.
Manufacturing
The manufacture of our products is accomplished through a
complementary combination of outsourcing and internal
production. We have manufacturing facilities in Mexico, Germany
and Italy. We outsource the manufacture of premixed dialysate,
needles, some blood tubing sets, and some components.
We have single-source suppliers for a number of components as
well as finished goods. In most instances, there are alternative
sources of supply available. Where obtaining a second source is
more difficult, we have tried to establish supply agreements
that better protect our continuity of supply, although we do not
have supply agreements with all of our single-source suppliers.
Where we have no agreements in place, we generally work to
maintain enough inventory of the single-sourced component to
allow us to satisfy our requirements for the component while we
secure an alternative source of supply. Our most critical
single-source supply relationships are with Membrana GmbH, or
Membrana, and Kawasumi Laboratories, or Kawasumi.
Membrana supplies the fibers used in the filters pre-attached to
our System One cartridges. In 2007, we granted Membrana
exclusive supply rights under a ten year contract scheduled to
expire in 2017. We also have the right to obtain fiber from
Asahi Kuraray Medical, Inc., or Asahi, pursuant to an agreement
we signed with Asahi in March 2010. In the event Membrana is
unable for any reason to supply fiber to us, we would try to
shift to fiber supplied by Asahi, however, this would take time
to accomplish and we do not presently have the regulatory
approvals necessary to use Asahi fiber in our System One
cartridge in the United States. There can be no assurance that
any interruption in supply of fiber from Membrana would not hurt
our business, at least in the near term.
We purchase the majority of our finished goods of ReadySet blood
tubing sets and all of our needles from Kawasumi, headquartered
in Tokyo, Japan, with manufacturing facilities in Thailand. The
remainder of our blood tubing sets are manufactured at our
manufacturing facility in Tijuana, Mexico. Kawasumis
contractual obligation to manufacture blood tubing sets expires
in January 2012, with opportunities to extend
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the term beyond that date. Under the terms of this agreement, we
supply Kawasumi with molded component parts and Kawasumi in turn
uses these components to manufacture finished goods blood tubing
sets, which are then purchased by us. We have committed to
purchase from Kawasumi a minimum quantity of blood tubing sets
over the term of the agreement. We believe that this minimum
purchase commitment is less than our anticipated requirements
for blood tubing sets. Kawasumis contractual obligation to
supply blood tubing sets to us can be, at times, less than our
forecasted demand. In the event Kawasumi supplies no more than
the amount of their required maximum monthly supply, or upon any
interruption in supply of blood tubing sets, we anticipate that
we would be able to cover at least a significant portion of any
shortfall by manufacturing additional blood tubing sets at our
Mexican facility. However, there can be no assurance that any
shortfall or interruption in supply of blood tubing sets from
Kawasumi would not hurt our business, at least in the near term.
We also have an agreement with Kawasumi for the manufacture of
needles. Virtually all of these needles rely on our patented
guarded needle technology. Kawasumis obligation to supply
needles to us expires in February 2014, with opportunities to
extend the term beyond that date. We have committed to purchase
from Kawasumi a minimum quantity of needles over the term of the
contract. We believe that this minimum purchase commitment is
less than our anticipated requirements for needles. Kawasumi
presently supplies all of our needle requirements, but
Kawasumis contractual obligation to supply needles to us
can be, at times, less than our forecasted demand. In the event
Kawasumi supplies no more than the amount of their required
maximum monthly supply, we may not have enough needle supply to
meet the demands of our customers. We maintain a limited extra
supply of needles to mitigate against the risk of any
intermittent shortfalls in supply. However, there can be no
assurance that any interruption in needle supply would not
impair our needle sales, at least in the near term.
We purchase bicarbonate-based premixed dialysate from B. Braun
Medizintechnologie GmbH, or B. Braun, and bicarbonate-based and
lactate-based premixed dialysate from Laboratorios PISA, or
PISA. We have a supply agreement with B. Braun that obligates B.
Braun to supply the dialysate to us for an indefinite period
until either party provides twelve months notice of termination
in exchange for a minimum purchase commitment, which we believe
is less than our anticipated requirements. Our supply agreement
with PISA extends through December 2011, with opportunities to
extend the term beyond that date. We have committed to purchase
from PISA a minimum quantity of premixed dialysate over the term
of the agreement, which we believe is less than our anticipated
requirements. With these two suppliers, we believe we have a
stable supply of premixed dialysate for our customers.
Government
Regulation
Food
and Drug Administration
In the United States, our products are subject to regulation by
the FDA, which regulates our products as medical devices. The
FDA regulates the design, development, clinical testing,
manufacture, labeling, distribution, import and export, sale and
promotion of medical devices. Noncompliance with applicable FDA
requirements can result in, among other things, fines,
injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval
for devices, withdrawal of marketing clearances or approvals and
criminal prosecution.
Unless an exemption applies, all medical devices must receive
either prior 510(k) clearance or pre-market approval, or
PMA approval, from the FDA before they may be
commercially distributed in the United States.
The FDA classifies medical devices into one of three classes:
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Class I devices, which are subject to only general controls
(e.g., labeling, medical devices reporting, and prohibitions
against adulteration and misbranding) and, in some cases, to the
510(k) premarket clearance requirements;
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Class II devices, generally requiring 510(k) premarket
clearance before they may be commercially marketed in the United
States; and
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Class III devices, consisting of devices deemed by the FDA
to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not
substantially equivalent to a predicate device, generally
requiring submission of a PMA supported by clinical trial data.
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Submissions to obtain 510(k) clearance and pre-market approval
must be accompanied by a user fee, unless exempt. In addition,
the FDA can also impose restrictions on the sale, distribution
or use of devices at the time of their clearance or approval, or
subsequent to marketing.
FDA
Regulatory Clearance Status
We currently have all of the regulatory clearances required to
market the System One in the United States in both the home and
critical care markets. The FDA has cleared the System One for
the treatment, under a physicians prescription, of renal
failure or fluid overload using hemofiltration, hemodialysis
and/or
ultrafiltration. The FDA has also specifically cleared the
System One for home hemodialysis use under a physicians
prescription.
We received our first clearance from the FDA for a predecessor
model to the System One in January 2001 for hemofiltration and
ultrafiltration. In July 2003, we received expanded clearance
from the FDA for the System One for hemodialysis, hemofiltration
and ultrafiltration. Then in June 2005, we received FDA
clearance specifically allowing us to promote home hemodialysis
using the System One. To date we have received a total of 26
product clearances from the FDA since our inception in December
1998 for our System One and related products. We continue to
seek opportunities for product improvements and feature
enhancements, which will, from time to time, require FDA
clearance before market launch.
We have received a total of 24 product clearances to market
Medisystems products that support the in-center market. These
clearances, the first of which was received in 1981, cover blood
tubing sets used for hemodialysis, needle sets used in
hemodialysis and apherisis, and other components such as
intravenous administration sites, Medics and transducer
protectors, used primarily for hemodialysis.
FDA
Clearance Procedures
510(k) Clearance Pathway. When we are required
to obtain a 510(k) clearance for a device that we wish to
market, we must submit a pre-market notification to the FDA
demonstrating that the device is substantially equivalent to
(1) a device that was legally marketed prior to
May 28, 1976 and for which the FDA has not yet required
premarket approval; (2) a device which has been
reclassified from Class III to Class II or I; or
(3) a novel device classified into Class I or II
through de novo classification. If the FDA agrees that the
device is substantially equivalent to the predicate, it will
subject the device to the same classification and degree of
regulation as the predicate device, thus effectively granting
clearance to market it. The FDA attempts to respond to a 510(k)
pre-market notification within 90 days of submission of the
notification (or in some instances 30 days under what is
referred to as special 510(k) submission), but the
response may be a request for additional information or data,
sometimes including clinical data. As a practical matter,
pre-market clearance can take significantly longer, including up
to one year or more.
After a device receives 510(k) clearance for a specific intended
use, any modification that could significantly affect its safety
or effectiveness, or that constitutes a major change in its
intended use, would require a new 510(k) clearance or could
require pre-market approval. In the first instance, the
manufacturer may determine that a change does not require a new
510(k) clearance. The FDA can review any such decision and can
disagree with a manufacturers determination. If the FDA
disagrees with a manufacturers determination that a new
clearance or approval is not required for a particular
modification, the FDA can require the manufacturer to cease
marketing
and/or
recall the modified device until 510(k) clearance or pre-market
approval is obtained.
Pre-market Approval Pathway. A pre-market
approval application must be submitted if the device cannot be
cleared through the 510(k) process. The pre-market approval
process is much more demanding than the 510(k) pre-market
notification process. A pre-market approval application must be
supported by extensive data and information including, but not
limited to, technical, preclinical and clinical trials,
manufacturing and
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labeling to demonstrate to the FDAs satisfaction the
safety and effectiveness of the device. After the FDA determines
that a pre-market approval application is complete, the FDA
accepts the application and begins an in-depth review of the
submitted information. The FDA, by statute and regulation, has
180 days to review an accepted pre-market approval
application, although the review generally occurs over a
significantly longer period of time, and can take up to several
years. During this review period, the FDA may request additional
information or clarification of information already provided.
Also during the review period, an advisory panel of experts from
outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the
approvability of the device. In addition, the FDA will conduct a
pre-approval inspection of the manufacturing facility to ensure
compliance with the Quality System Regulations. New pre-market
approval applications or supplemental pre-market approval
applications are required for modifications that affect the
safety or effectiveness of the device. These types of changes
include changes to the manufacturing process, labeling, use and
design of the approved device. PMA supplements often require
submission of the same type of information as a pre-market
approval application, except that the supplement is limited to
information needed to support any changes from the device
covered by the original pre-market approval application, and may
not require as extensive clinical data or the convening of an
advisory panel.
Clinical Trials. A clinical trial is almost
always required to support a pre-market approval application and
is sometimes required for a 510(k) pre-market notification.
Clinical trials for devices that involve significant risk,
referred to as significant risk devices, require submission of
an application for an IDE to the FDA. The IDE application must
be supported by appropriate data, such as animal and laboratory
testing results, showing that it is safe to test the device in
humans and that the testing protocol is scientifically sound.
Clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the institutional
review board, or IRB, overseeing the clinical trial. If FDA
fails to respond to an IDE application within 30 days of
receipt, the application is deemed approved, but IRB approval
would still be required before a study could begin. Products
that are not significant risk devices are deemed to be
non-significant risk devices under FDA regulations,
and are subject to abbreviated IDE requirements, including
informed consent, IRB approval of the proposed clinical trial
and submission of certain reports to the IRB. Clinical trials
are subject to extensive recordkeeping and reporting
requirements. Our clinical trials must be conducted under the
oversight of an IRB at each clinical study site and in
accordance with applicable regulations and policies including,
but not limited to, the FDAs good clinical practice, or
GCP, requirements.
Continuing
FDA Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include, among others:
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product listing and establishment registration, which helps
facilitate FDA inspections and other regulatory action;
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Quality System Regulations, which require manufacturers to have
a quality system for the design, manufacture, packaging,
labeling, storage, installation, and servicing of finished
medical devices;
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labeling regulations, which govern product labels and labeling,
prohibit the promotion of products for unapproved, or off-label,
uses and impose other restrictions on labeling and promotional
activities;
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clearance of product modifications that could significantly
affect safety or efficacy or that would constitute a major
change in intended use of one of our cleared devices;
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medical device reporting, or MDR, regulations, which require
that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur; and
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the FDAs recall authority, whereby it can ask, or under
certain conditions order, device manufacturers to recall from
the market a product that is in violation of governing laws and
regulations;
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regulations pertaining to voluntary recalls; and
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notices of corrections or removals.
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MDR Regulations. The MDR regulations require
that we report to the FDA any incident in which our product may
have caused or contributed to a death or serious injury, or in
which our product malfunctioned and, if the malfunction were to
recur, would likely cause or contribute to a death or serious
injury. To date, a majority of our MDRs had been submitted to
comply with the FDAs blood loss policy for routine
dialysis treatments. This policy, which is no longer in effect,
required manufacturers to file MDR reports related to routine
dialysis treatments if the patient experiences blood loss
greater than 20cc.
FDA Inspections. We have registered with the
FDA as a medical device manufacturer. The FDA seeks to ensure
compliance with regulatory requirements through periodic,
unannounced facility inspections and these inspections may
include the manufacturing facilities of our subcontractors.
Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include any
of the following:
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warning letters or untitled letters;
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fines, injunctions, and civil penalties;
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administrative detention, which is the detention by the FDA of
medical devices believed to be adultered or misbranded;
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voluntary or mandatory recall or seizure of our products;
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customer notification, or orders for repair, replacement or
refund;
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operating restrictions, partial suspension or total shutdown of
production;
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refusal to review pre-market notification or pre-market approval
submissions;
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rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
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criminal prosecution.
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The FDA has inspected our Lawrence, Massachusetts facility and
quality system multiple times. In our first inspection, one
observation was made, but was rectified during the inspection,
requiring no further response from us. Our subsequent
inspections, including our most recent inspection in 2010,
resulted in no inspectional observations. Medisystems has been
inspected by the FDA on multiple occasions, and all inspections
resulted in no action indicated. We cannot provide assurance
that we can maintain a comparable level of regulatory compliance
in the future at our facilities.
Foreign
Regulation of Medical Devices
Clearance or approval of our products by regulatory authorities
comparable to the FDA may be necessary in foreign countries
prior to marketing the product in those countries, whether or
not FDA clearance has been obtained. The regulatory requirements
for medical devices vary significantly from country to country.
They can involve requirements for additional testing and may be
time consuming and expensive. We cannot provide assurance that
we will be able to obtain regulatory approvals in any other
markets.
The System One cycler and related cartridges are regulated as
medical devices in Canada under the Canadian Medical Device
Regulations and in the EU under the Medical Device Directive. We
have received four product licenses from Canada. We have
obtained CE marking approval in the EU for our System One and
associated ancillaries.
Our blood tubing sets, AV fistula needles, apheresis needles,
dialysis priming sets, transducer protectors, Reverso, and Medic
are regulated as medical devices in Canada under the Canadian
Medical Device Regulations and in the EU, under the Medical
Device Directive. We maintain six Medical Device Licenses in
Canada under the Medisystems brandname for these products. We
have received CE marking in the EU for blood tubing sets, AV
fistula needles, transducer protectors, apheresis needles, Medic
and its Reverso product.
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Fraud and
Abuse Laws
Anti-Kickback
Statutes
The federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual
for, or the furnishing, arranging for or recommending a good or
service for which payment may be made in whole or part under a
federal healthcare program such as Medicare or Medicaid. The
definition of remuneration has been broadly interpreted to
include anything of value, including for example gifts,
discounts, the furnishing of supplies or equipment, credit
arrangements, payments of cash and waivers of payments. Several
courts have interpreted the statutes intent requirement to
mean that if any one purpose of an arrangement involving
remuneration is to induce referrals or otherwise generate
business involving goods or services reimbursed in whole or in
part under federal healthcare programs, the statute has been
violated. The law contains a few statutory exceptions, including
payments to bona fide employees, certain discounts and certain
payments to group purchasing organizations. Violations can
result in significant penalties, imprisonment and exclusion from
Medicare, Medicaid and other federal healthcare programs.
Exclusion of a manufacturer would preclude any federal
healthcare program from paying for its products. In addition,
kickback arrangements can provide the basis for an action under
the Federal False Claims Act, which is discussed in more detail
below.
The Anti-Kickback Statute is broad and potentially prohibits
many arrangements and practices that are lawful in businesses
outside of the healthcare industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, the Office of Inspector
General of Health and Human Services, or OIG, issued a series of
regulations, known as the safe harbors, beginning in July 1991.
These safe harbors set forth provisions that, if all the
applicable requirements are met, will assure healthcare
providers and other parties that they will not be prosecuted
under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors
does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that
do not fully satisfy each applicable safe harbor may result in
increased scrutiny by government enforcement authorities such as
the OIG. Arrangements that implicate the Anti-Kickback Law, and
that do not fall within a safe harbor, are analyzed by the OIG
on a
case-by-case
basis.
Government officials have focused recent enforcement efforts on,
among other things, the sales and marketing activities of
healthcare companies, and recently have brought cases against
individuals or entities with personnel who allegedly offered
unlawful inducements to potential or existing customers in an
attempt to procure their business. Settlements of these cases by
healthcare companies have involved significant fines
and/or
penalties and in some instances criminal pleas.
In addition to the Federal Anti-Kickback Statute, many states
have their own anti-kickback laws. Often, these laws closely
follow the language of the federal law, although they do not
always have the same exceptions or safe harbors. In some states,
these anti-kickback laws apply with respect to all payors,
including commercial health insurance companies.
False
Claims Laws
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Manufacturers can be held liable under false claims laws, even
if they do not submit claims to the government, if they are
found to have caused submission of false claims. The Federal
Civil False Claims Act also includes whistle blower provisions
that allow private citizens to bring suit against an entity or
individual on behalf of the United States and to recover a
portion of any monetary recovery. Many of the recent highly
publicized settlements in the healthcare industry related to
sales and marketing practices have been cases brought under the
False Claims Act. The majority of states also have statutes or
regulations similar to the federal false claims laws, which
apply to items and services reimbursed under Medicaid and other
state programs. Several states have false claims laws that apply
regardless of the payor. Sanctions under
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these federal and state laws may include civil monetary
penalties, exclusion of a manufacturers products from
reimbursement under government programs, criminal fines and
imprisonment.
Compliance
Program
The healthcare laws and fraud and abuse laws applicable to our
business are complex and subject to variable interpretations. We
maintain certain compliance review, education and training and
other programs to further our commitment to high standards of
ethical and legal conduct and to minimize the likelihood that we
would engage in conduct or enter into arrangements in violation
of applicable authorities. For example, we have
(i) established a compliance team consisting of
representatives from our Legal, Finance, Human Resources,
Regulatory Affairs/Quality Assurance and Commercial departments
that meets regularly; (ii) established a compliance hotline
that permits our employees to report anonymously any compliance
issues that may arise; and (iii) instituted other
safeguards intended to help prevent any violations of the
applicable fraud and abuse laws and healthcare laws, and to
remediate any situations that could give rise to violations. We
also review our transactions and agreements, both past and
present, to help assure they are compliant.
Through our compliance efforts, we constantly strive to
structure our business operations and relationships with our
customers to comply with all applicable legal requirements.
However, many of the laws and regulations applicable to us are
broad in scope and may be interpreted or applied by
prosecutorial, regulatory or judicial authorities in ways that
we cannot predict. Thus, it is possible that governmental
entities or other third parties could interpret these laws
differently or assert non-compliance with respect to one or more
of our business operations and relationships. Moreover, the
standards of business conduct expected of healthcare companies
under these laws and regulations have become more stringent in
recent years, even in instances where there has been no change
in statutory or regulatory language. While there have been no
claims asserted against us for alleged non-compliance with fraud
and abuse laws or other healthcare laws, if a claim were
asserted and we were not to prevail, possible penalties and
sanctions could have a material effect on our financial
statements or our ability to conduct our operations.
Privacy
and Security
The Health Insurance Portability and Accountability Act of 1996,
or HIPAA, and the rules promulgated there under require certain
entities, referred to as covered entities, to comply with
established standards, including standards regarding the privacy
and security of protected health information (PHI) known as the
HIPAA Privacy and Security Rules. Most healthcare facilities
that purchase and use our products are covered entities. We are
not a covered entity but due to activities that we could perform
for or on behalf of covered entities, we could potentially
become a business associate, as such term is defined by HIPAA.
HIPAA requires that covered entities enter into agreements
meeting certain regulatory requirements with their business
associates which, among other things, obligate the business
associates to safeguard the covered entitys PHI against
improper use and disclosure. In the past, we entered into a few
business associate agreements with certain of our customers that
are also covered entities. Pursuant to the terms of these
business associate agreements, we agreed, among other things,
not to use or further disclose the covered entitys PHI
except as permitted or required by the agreements or as required
by law, to use reasonable safeguards to prevent prohibited
disclosure of such PHI and to report to the covered entity any
unauthorized uses or disclosures of such PHI. The Health
Information Technology for Economic and Clinical Health Act, or
HITECH made significant amendments to the HIPAA Privacy and
Security Rules. Under HITECH, business associates
obligations with respect to PHI are no longer solely contractual
in nature. HITECH strengthened and expanded HIPAA and made a
number of HIPAA Privacy Rule requirements and a majority of
HIPAA Security Rule requirements directly applicable to business
associates. Accordingly, now we may be subject to HIPAA civil
and criminal penalties for violation of the Privacy and Security
Rule requirements. HITECH increased civil penalty amounts for
violations of HIPAA and significantly strengthened enforcement
by requiring the U.S. Department of Health and Human
Services (HHS) to conduct periodic audits to confirm compliance
and authorizing state attorneys general to bring civil actions
seeking either injunctions or damages in response to violations
of HIPAA that threaten the privacy of state residents. These new
provisions may require us to incur
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compliance related costs and may restrict our business
operations. Moreover, if we fail to meet our contractual
obligations under any business associate agreements, we may
incur significant civil or criminal liability.
In addition, many other state and federal laws regulate the use
and disclosure of health information, including state medical
privacy laws and federal and state consumer protection laws. In
many cases, these laws are not necessarily preempted by HIPAA,
particularly if they afford greater protection to the individual
than does HIPAA. These various laws may be subject to varying
interpretations by courts and government agencies creating
potentially complex compliance issues for our business. Other
countries also have, or are developing, laws governing the
collection, use and transmission of personal information and
these laws could create liability for us or increase our cost of
doing business.
Reimbursement
Home
and In-Center Markets
Medicare regulations require that all chronic ESRD patients be
under the care of a dialysis clinic, whether they are treated at
home or in-clinic. We sell or rent our System One to dialysis
clinics and sell our needles and blood tubing sets to dialysis
clinics. These clinics are, in turn, reimbursed by Medicare,
Medicaid and private insurers. According to the 2009 USRDS
Annual Data Report, Medicare is the primary payor for
approximately 75% of prevalent dialysis patients using
hemodialysis and peritoneal dialysis. The report also indicates
that approximately 15% of patients are covered by commercial
insurance, with the remaining 10% of patients classified by the
USRDS as other or unknown. Certain
centers have reported that the NxStage daily home dialysis
therapy attracts a higher percentage of commercial insurance
patients than other forms of dialysis.
Medicare. Medicare generally provides health
insurance coverage for persons who are age 65 or older and
for persons who are completely disabled. For ESRD patients,
however, Medicare coverage is not dependent on age or
disability. Patients are eligible for Medicare based solely on
ESRD. Coverage for patients eligible for Medicare based solely
on ESRD begins three months after the month in which the patient
begins dialysis treatments. During this three-month waiting
period either Medicaid, private insurance or the patient is
responsible for payment for dialysis services. Medicare waives
this waiting period for individuals who participate in a
self-care dialysis training program, or are hospitalized for a
kidney transplant and the surgery occurs within a specified time
period.
For ESRD patients under age 65 who have any employer group
health insurance coverage, regardless of the size of the
employer or the individuals employment status, Medicare
coverage is generally secondary to the employer coverage during
the 30-month
period that follows the establishment of Medicare eligibility or
entitlement based on ESRD. During the period, the patients
existing insurer is responsible for paying primary benefits at
the rate specified in the plan, which may be a negotiated rate
or the healthcare providers usual and customary rate. As
the secondary payor during this period, Medicare will make
payments up to the applicable Medicare payment rate for dialysis
services to supplement any primary payments by the employer
group health plan if the plan covers the services but pays only
a portion of the charge for the services.
Medicare generally is the primary payor for ESRD patients after
the 30-month
period. Under current rules, Medicare is also the primary payor
for ESRD patients during the
30-month
period under certain circumstances. Medicare remains the primary
payor when an individual becomes eligible for Medicare on the
basis of ESRD if, (1) the individual was already
age 65 or over or was eligible for Medicare based on
disability and (2) the individuals private insurance
coverage is not by reason of current employment or, if it is,
the employer has fewer than 20 employees in the case of
eligibility by reason of age, or fewer than 100 employees
in the case of eligibility by reason of disability. The rules
regarding entitlement to primary Medicare coverage when the
patient is eligible for Medicare on the basis of both ESRD and
age, or disability, have been the subject of frequent
legislative and regulatory changes in recent years and there can
be no assurance that these rules will not be unfavorably changed
in the future.
When Medicare is the primary payor for services furnished by
dialysis clinics, it reimburses dialysis clinics for 80% of the
allowable rate, leaving the secondary insurance or the patient
responsible for the
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remaining 20%. Through 2010, providers were paid under the ESRD
composite rate payment system. The Medicare composite rate was
set by Congress and was intended to cover virtually all costs
associated with each dialysis treatment, excluding physician
services and certain separately billable drugs and laboratory
services. While there was some regional variation in the
Medicare composite rate, the national average for 2010 was $155
per treatment for both independent and hospital-based dialysis
facilities. This composite rate was then adjusted for patient
case mix variables, potentially improving the reimbursement. For
example, under the case-mix adjustment, Medicare paid more for
patients with a higher body weight, and payment varies by
patient age. This case-mix adjusted composite rate payment may
have been beneficial to our customers, as to date, our patient
population has tended to be larger and younger than the ESRD
national average.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. One of these
initiatives was the Medicare Improvements for Patients and
Providers Act of 2008, or MIPPA, which was signed into law in
2008. As a result of this legislation, effective January 1,
2011 the Centers for Medicare and Medicaid Services, or CMS, has
implemented a new prospective payment system for dialysis
services that includes more items and services within the
prospective payment. In November 2010, dialysis facilities were
given a one-time opportunity to choose whether they wanted to
transition into the prospective payment system over a four year
period, or to opt out of the transition and be paid fully under
the new prospective payment system beginning in January 2011.
According to the Kidney Care Council, an organization
representing dialysis providers, over 90% of clinics opted out
of the transition and chose to be reimbursed immediately under
the new system. The new prospective payment system includes a
per treatment payment that incorporates the reimbursement for
dialysis-related medications and laboratory tests that were
previously reimbursed separately. Similar to the previous
composite rate, there are also case mix, co-morbidity and other
adjustors to the prospective payment. While there is some
regional variation, the new rate before adjustments for patient
case mix variables is $230 per treatment for both independent
and hospital-based dialysis facilities. One of the stated goals
of this new prospective payment system is to encourage home
dialysis, and certain elements (e.g., bundling of certain drugs
into the payment, a uniform treatment payment whether dialysis
is administered in the center or at home and a separate payment
adjustor for home dialysis training) are intended to support
this objective. However, it is not possible at this time to
determine what impact this new prospective payment system will
have on the adoption of home
and/or daily
hemodialysis or the price for which we can sell our products.
CMS rules, under the earlier composite system and the new
prospective payment system, limit the number of hemodialysis
treatments paid for by Medicare to three per week, unless there
is medical justification provided by the dialysis facilities on
information from the patients physician. The determination
of medical justification is currently made at the local Medicare
contractor level on a
case-by-case
basis. Based upon the clinical benefits of more frequent therapy
most of our patients perform treatments more than three times a
week. The adoption of our System One for more frequent therapy
for ESRD would likely be slowed if Medicare or their contractors
are reluctant or refuse to pay for these additional treatments.
A clinics decision as to how much it is willing to spend
on home daily dialysis equipment and services will be at least
partly dependent on whether Medicare will reimburse additional
treatments per week based on submitted claims for medical
justification.
Medicaid. Medicaid programs are
state-administered programs partially funded by the federal
government. These programs are intended to provide coverage for
certain categories of patients whose income and assets fall
below state defined levels and who are otherwise uninsured. For
those who are eligible, the programs serve as supplemental
insurance programs for the Medicare co-insurance portion and
provide certain coverage, for example, self-administered
outpatient prescription medications, that is not covered by
Medicare. For ESRD treatment, state regulations generally follow
Medicare reimbursement levels and coverage without any
co-insurance amounts, which is pertinent mostly for the
three-month waiting period. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon
levels of income or assets.
Private Insurers. Some ESRD patients have
private insurance that covers dialysis services. Healthcare
providers receive reimbursement for ESRD treatments from the
patient or private insurance during a waiting period of up to
three months before the patient becomes eligible for Medicare.
In addition, if the private payor
27
is an employer group health plan, it is generally required to
continue to make primary payments for dialysis services during
the 30-month
period following eligibility or entitlement to Medicare. In
general, employers may not reduce coverage or otherwise
discriminate against ESRD patients by taking into account the
patients eligibility or entitlement to Medicare benefits.
It is generally believed that private insurance pays
significantly more for dialysis services than Medicare and these
patients with private insurance are generally viewed as more
profitable to dialysis service providers.
Critical
Care
For Medicare patients, both acute kidney failure and fluid
overload therapies provided in an in-patient hospital setting
are reimbursed under a traditional Medicare severity diagnosis
related group, or MS-DRG, system. Under this system,
reimbursement is determined based on a patients primary
diagnosis and is intended to cover all costs of treating the
patient. The presence of acute kidney failure or fluid overload
increases the severity of the primary diagnosis and,
accordingly, could increase the amount reimbursed. The longer
hospitalization stays and higher labor needs, which are typical
for patients with acute kidney failure and fluid overload, must
be managed for care of these patients to be cost-effective. We
believe that there is a significant incentive for hospitals to
find a more cost-efficient way to treat these patients in order
to improve hospital economics for these therapies.
Our
Employees
As of December 31, 2010, we had approximately
1,600 employees, including full-time, part-time and
seasonal or temporary employees. From time to time we also
employ independent contractors to support our engineering,
marketing, sales, clinical and administrative organizations.
Most of our employees are involved in the manufacture of our
products and are employed outside of the United States, with the
significant majority employed in Mexico.
Executive
Officers
The following is a list of names, ages and background of our
executive officers as of December 31, 2010:
|
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Name
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Age
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|
Position
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Jeffrey H. Burbank
|
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48
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Chief Executive Officer
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Robert S. Brown
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52
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Senior Vice President, Chief Financial Officer and Treasurer
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Tom Shea
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48
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Senior Vice President, Manufacturing Operations
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Winifred L. Swan
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46
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Senior Vice President, General Counsel and Secretary
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Joseph E. Turk, Jr.
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43
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President, North America
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Michael J. Webb
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44
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Senior Vice President of Quality, Regulatory and Clinical
Affairs
|
Jeffrey H. Burbank has been our Chief Executive Officer
and a director of the Company since December 1998. Prior to
joining NxStage, Mr. Burbank was a founder and the CEO of
Vasca, Inc., a medical device company that developed and
marketed a new blood access device for dialysis patients.
Mr. Burbank also served in roles of increasing
responsibility in areas of manufacturing, and sales and
marketing at Gambro, a leading dialysis products company. He
holds a B.S. from Lehigh University.
Robert S. Brown has been our Senior Vice President, Chief
Financial Officer and Treasurer since November 2006. Prior to
joining NxStage, Mr. Brown held several leadership
positions in Boston Scientifics financial group including
Vice President, Corporate Analysis & Control from 2005
until he joined us in 2006, where he and his team were
responsible for Boston Scientifics financial, compliance
and operational audits and reported directly to the Audit
Committee of the Board of Directors. Mr. Brown also served
as Vice President, International from 1999 through 2004, where
he was responsible for the financial functions of Boston
Scientifics international division in over forty
countries. Previous experience also includes financial
28
reporting and special projects at United Technologies and public
accounting and consulting at Deloitte & Touche. He
holds a B.B.A. degree in Accounting from the University of
Toledo and an M.B.A. from the University of Michigan, and is a
certified public accountant.
Tom Shea has been our Senior Vice President of
Manufacturing Operations since March 2008. Prior to joining
NxStage, he held several leadership positions at Jabil
Incorporated, a $12 billion Tier I contract
manufacturer. Most recently, Tom served as Jabils Global
Business Unit Manager, supporting clients in the aerospace,
defense and telecommunications industries. In this capacity, he
developed and implemented global operations, logistics and
pricing strategies for his sector. He previously served as
Operations Manager at Jabil where he had full plant profit and
loss responsibility for their Massachusetts facility.
Mr. Shea earned his M.B.A. at the University of
Massachusetts and his B.S. in Production and Operations
Management at Bryant University.
Winifred L. Swan has been our Senior Vice President since
January 2005 and our Vice President and General Counsel since
November 2000. From July 1995 to November 2000, Ms. Swan
was Senior Corporate Counsel at Boston Scientific Corporation.
She holds a B.A., cum laude , in Economics and Public Policy
from Duke University and a J.D., cum laude and Order of the Coif
, from the University of Pennsylvania Law School.
Joseph E. Turk, Jr. has been our President of North
American operations since December 2010, Senior Vice President,
Commercial Operations since January 2005 and our Vice President,
Sales and Marketing since May 2000. From August 1998 to May
2000, Mr. Turk was employed at Boston Scientific
Corporation as Director of New Business Development.
Mr. Turk holds an A.B. degree in Economics from Wabash
College and an M.B.A. in Marketing and Finance from Northwestern
Universitys Kellogg School of Management.
Michael J. Webb has been our Senior Vice President of
Quality, Regulatory and Clinical Affairs since August 2007, Vice
President of Disposables Operations from January 2007 through
August 2007, Vice President of Quality Assurance and Regulatory
Affairs from July 2002 through January 2007, and our Vice
President of Operations from July 2001 through July 2002. Prior
to joining NxStage, Mr. Webb was Vice President of
Operations for Mosaic Technologies, a developer of gene-based
diagnostic products. Other previous positions include Director
of Operations for TFX Medical and Director of Disposables
Manufacturing and Logistics for Haemonetics Corporation.
Mr. Webb received a B.S. degree in Industrial and
Management Engineering and his M.B.A. in Manufacturing
Management from Rensselaer Polytechnic Institute.
Where To
Find More Information
Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through our website
(www.nxstage.com) under the Investor Information
caption as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission, or SEC. In addition, we
intend to disclose on our website any amendments to, or waivers
from, our code of business conduct and ethics that are required
to be disclosed pursuant to the rules of the SEC. We are not
including the information contained on our website as part of,
or incorporating it by reference into, this report. You may read
and copy materials that we have filed with the SEC at the
SECs public reference room located at
100 F Street, N.E., Washington, D.C. 20549. In
addition, our SEC filings are available to the public on the
SECs website (www.sec.gov).
In addition to the factors discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report, the following are
some of the important risk factors that could cause our actual
results to differ materially from those projected in any
forward-looking statements.
Risks
Related to our Business
29
We
expect to derive a significant percentage of our future revenues
from the rental or sale of our System One and the related
products used with the System One and a limited number of other
products.
Since our inception, we have devoted a substantial amount of our
efforts to the development of the System One and the related
products used with the System One. We commenced marketing the
System One and the related disposable products to the critical
care market in February 2003. We commenced marketing the System
One for chronic hemodialysis treatment in September 2004. Prior
to the acquisition of the Medisystems Corporation and certain
affiliated entities, or the Medisystems Acquisition, on
October 1, 2007, nearly 100% of our revenues were derived
from the rental or sale of our System One and the sale of
related disposables. Although the Medisystems Acquisition
broadened our product offerings, we expect that in 2011 and in
the foreseeable future, we will continue to derive a significant
percentage of our revenues from the System One, and that we will
derive the remainder of our revenues from the sale of a few key
disposable products acquired in the Medisystems Acquisition,
including blood tubing sets and needles. To the extent that any
of our primary products are not commercially successful or are
withdrawn from the market for any reason, our revenues will be
adversely impacted, and we do not have other significant
products in development that could readily replace these
revenues.
We
cannot accurately predict the size of the home hemodialysis
market, and it may be smaller, and may develop more slowly than
we expect.
We believe our largest future product market opportunity is the
home hemodialysis market. However this market is presently very
small and adoption of the home hemodialysis treatment options
has been limited. The most widely adopted form of dialysis
therapy used in a setting other than a dialysis clinic is
peritoneal dialysis. Based on the most recently available data
from the United States Renal Data System, or USRDS, less than
10% of all United States patients receiving dialysis treatment
for ESRD receive either peritoneal dialysis or home
hemodialysis. Because the adoption of home hemodialysis has been
limited to date, the number of patients and their partners who
desire to, and are capable of, administering hemodialysis
treatment with a system such as the System One is unknown and
there is limited data upon which to make estimates. In addition,
many dialysis clinics do not presently have the infrastructure
in place to support home hemodialysis and most do not have the
infrastructure in place to support a significant home
hemodialysis patient population. Our long-term growth will
depend on the number of patients who adopt home-based
hemodialysis and how quickly they adopt it, which in turn is
driven by the number of physicians willing to prescribe home
hemodialysis and the number of dialysis clinics able or willing
to establish and support home hemodialysis therapies.
Because nearly all our home hemodialysis patients are also
receiving more frequent dialysis, meaning dialysis delivered
five or more times a week, the market adoption of our System One
for home hemodialysis is also dependent upon the penetration and
market acceptance of more frequent hemodialysis. Given the
increased provider supply costs associated with providing more
frequent dialysis versus conventional three-times per week
dialysis, market acceptance will be impacted, especially for
Medicare patients, by whether dialysis clinics are able to
obtain reimbursement for additional dialysis treatments provided
in excess of three times a week. Presently, we understand that
some of our customers are unable to obtain such additional
reimbursement in all cases, and that there are increased
administrative burdens associated with articulating the medical
justification for treatments beyond three times per week. Both
of these factors will likely negatively impact the rate and
extent of any further market expansion of our System One for
home hemodialysis. Expanding Medicare reimbursement over time to
predictably cover more frequent therapy, with less
administrative burden for our customers, may be critical to our
ability to significantly expand the market penetration of the
System One in the home market and to grow our revenue in the
future.
New regulations particularly impacting home hemodialysis
technologies can also negatively impact the rate and extent of
any further market expansion of our System One for home
hemodialysis. In 2008, the Centers for Medicare and Medicaid
Services, or CMS released new Conditions for Coverage applicable
to our customers. These Conditions for Coverage impose water
testing requirements on our patients using our PureFlow SL
product. These water testing requirements increase the burden of
our therapy for our patients and
30
may impair market adoption, especially for our PureFlow SL
product. To the extent additional regulations are introduced
unique to the home environment, market adoption could be even
further impaired.
We are in a developing market and we will need to continue to
devote significant resources to developing the home market. We
cannot be certain that this market will develop, how quickly it
will develop or how large it will be.
Current
Medicare reimbursement rates, at three times per week, limit the
price at which we can market our home products, and adverse
changes to reimbursement would likely negatively affect the
adoption or continued sale of our home products.
Our ability to attain profitability will be driven in part by
our ability to set or maintain adequate pricing for our
products. As a result of legislation passed by the United States
Congress more than 30 years ago, Medicare provides broad
and well-established reimbursement in the United States for
ESRD. With approximately 75% of United States ESRD patients
covered by Medicare, the reimbursement rate is an important
factor in a potential customers decision to use the System
One or our other products and limits the fee for which we can
sell or rent our products. Additionally, current CMS rules limit
the number of hemodialysis treatments paid for by Medicare to
three times a week, unless there is medical justification
provided by the dialysis facility based on information from the
patients physician for additional treatments. Most
patients using the System One in the home treat themselves, with
the help of a partner, up to six times per week. To the extent
that Medicare contractors elect not to pay for the additional
treatments, adoption of the System One would likely be impaired.
The determination of medical justification must be made at the
local Medicare contractor level on a
case-by-case
basis, based on documentation provided by our customers. If
daily therapy is prescribed, a clinics decision as to how
much it is willing to spend on dialysis equipment and services
will be at least partly dependent on whether Medicare will
reimburse more than three treatments per week for the
clinics patients. Medicare is switching from
intermediaries to Medicare administrative contractors. This
change in the reviewing entity for Medicare claims could lead to
a change in whether a customer receives Medicare reimbursement
for additional treatments. If an adverse change to historical
payment practices occurs, market adoption of our System One in
the home market may be impaired. We understand that some of our
customers may not be able to obtain additional reimbursement for
more frequent therapy in all cases, and that there are increased
administrative burdens associated with articulating the medical
justification for treatments beyond three times a week. Both of
these factors will likely negatively impact the rate and extent
of any further market expansion of our System One for home
hemodialysis. Expanding Medicare reimbursement over time to more
predictably cover more frequent therapy, with less
administrative burden for our customers, may be critical to our
ability to significantly expand the market penetration of the
System One in the home market. Additionally, any adverse changes
in the rate paid by Medicare for ESRD treatments in general
would likely negatively affect demand for our products in the
home market and the prices we charge for them.
CMS published, on August 12, 2010, the final rule for
implementation of a new prospective payment system for dialysis
treatment effective January 1, 2011. Under this new ESRD
prospective payment system, CMS will make a single bundled
payment to the dialysis facility for each dialysis treatment
that will cover all renal dialysis services and home dialysis,
and will include certain drugs (including erythropoiesis
stimulating agents, or ESAs, iron, and Vitamin D). It will
replace the current system which pays facilities a composite
rate for a defined set of items and services, while paying
separately for drugs, laboratory tests, or other services that
are not included in the composite rate. The prospective payment
system still limits the number of hemodialysis treatments paid
by Medicare to three times a week, unless there is medical
justification provided by the patients physician for
additional treatments. Although a stated goal of the prospective
payment system is to encourage home dialysis, and the inclusion
of drugs into the prospective rate and the retention of a home
patient training payment adjustment with a modest update from
current levels are intended to support this goal, it is not
possible at this time to determine what impact the new payment
system or healthcare legislation will have on the adoption of
home and/or
daily hemodialysis or the price for which we can sell our
products.
31
We
have limited operating experience, a history of net losses and
an accumulated deficit of $308.4 million at December 31,
2010. We cannot guarantee if, when and the extent to which we
will become profitable, or that we will be able to maintain
profitability if it is achieved.
Since inception, we have incurred negative operating margins and
losses every quarter. At December 31, 2010, we had an
accumulated deficit of approximately $308.4 million. We
expect our operating expenses to continue to increase as we grow
our business. While we have achieved positive gross margins for
our products, in aggregate, since the fourth quarter of 2007, we
cannot provide assurance that our gross margins will improve or,
if they do improve, the rate at which they will improve. We
cannot provide assurance that we will achieve profitability,
when we will become profitable, the sustainability of
profitability, should it occur, or the extent to which we will
be profitable.
Our
customers in the System One and In-Center segments are highly
consolidated, with concentrated buying power.
Fresenius and DaVita own and operate the two largest chains of
dialysis clinics in the United States. Collectively, these
entities provide treatment to approximately 60% of United States
dialysis patients; and this percentage may continue to grow with
further market consolidation. DaVita, for example, recently
announced its plans to acquire DSI Renal, Inc. With less than
40% of United States dialysis patients cared for by independent
dialysis clinics, our market adoption, at least within the
United States, would be more constrained without the presence of
both DaVita and Fresenius as customers for our System One and
In-Center products.
Additionally, Fresenius is not only a dialysis service provider,
it is also the leading manufacturer of dialysis equipment
worldwide. On February 18, 2011 we learned that Fresenius
obtained clearance for its 2008K At Home hemodialysis system for
use in home chronic therapy in February 2011. DaVita does not
manufacture dialysis equipment, but has certain dialysis supply
purchase obligations to Gambro, a dialysis equipment
manufacturer, under a long-term preferred supplier agreement.
Fresenius may choose to offer its dialysis patients only the
dialysis equipment Fresenius manufactures, including its
recently cleared home hemodialysis system. DaVita may choose to
offer their dialysis patients the equipment it contractually
agreed to offer in its agreement with Gambro. Fresenius and
DaVita may also choose to otherwise limit access to the
equipment manufactured by competitors. DaVita is our most
significant customer, and we expect it to continue to be, at
least for the foreseeable future. Our earlier agreement with
DaVita contained certain limited exclusivity rights which
restricted our ability to sell the System One in certain
markets, and to Fresenius. These restrictions do not exist under
our July 2010 Amended and Restated National Service Provider
Agreement with DaVita, and we have a growing percentage of our
home market sales to Fresenius, which is now our second largest
customer in the System One segment. However, we have no
assurance that our sales to DaVita or Fresenius will continue to
grow, and we cannot predict what impact Fresenius recently
cleared home hemodialysis system will have on our sales to
Fresenius in the home market, or our overall performance in the
home market going forward. Given the significance of DaVita and
Fresenius as customers in the home market, any adverse change in
eithers ordering or clinical practices would have a
significant adverse impact on our home market revenues,
especially in the near term.
DaVita
is a key customer for our System One and In-Center product
lines. The partial or complete loss of DaVita as a customer
would materially impair our financial results, at least in the
near term.
DaVita is our most significant customer. Sales through
distributors to DaVita of products accounted for nearly half of
In-Center segment revenues for the twelve months ended
December 31, 2010, and direct sales to DaVita accounted for
approximately 34% of our System One segment revenues during
2010. Further, DaVita is our largest customer in the home
market, constituting over 40% of our home hemodialysis patients.
Although we expect that DaVita will continue to be a significant
customer in the home market, we cannot be certain that DaVita
will continue to purchase
and/or rent
the System One or add additional System One patients in the
future. Our contract for needles with DaVita, expiring in
December 2013, includes certain minimum order requirements;
however, these can be reduced significantly under certain
circumstances. Our contract for blood tubing sets with DaVita
expired in September 2009. However, in June 2009, we entered
into a five year distribution agreement in the United States
with Gambro, pursuant to which Gambro will
32
exclusively supply our blood tubing sets, including our ReadySet
and the Streamline product lines to DaVita. The partial or
complete loss of DaVita as a customer for any of these product
lines would adversely affect our business, at least in the near
term.
We
entered into a $40.0 million term loan and security
agreement with Asahi in May 2009. We are obligated to pay 50% of
the interest on the first day of November and May, beginning on
November 1, 2009, and repay the remaining interest and
principal upon maturity in May 2013. If we fail to comply with
all terms under this agreement, we may go into default, which
could trigger, among other things, the acceleration of all of
our indebtedness there under or the sale of our
assets.
In May 2009, we entered into a $40.0 million term loan,
with Asahi. The four year term loan, maturing in May 2013, bears
interest at 8% annually, payable on the first day of November
and May beginning on November 1, 2009, with 50% of the
interest deferred to maturity. The term loan is secured by
substantially all of our assets.
The term loan and security agreement includes certain
affirmative covenants including timely filings and limitations
on contingent debt obligations and sales of assets. The term
loan and security agreement also contains customary events of
default, including nonpayment, misrepresentation, breach of
covenants, material adverse effects, and bankruptcy. In the
event we fail to satisfy our covenants, or otherwise go into
default, Asahi has a number of remedies, including sale of our
assets and acceleration of all outstanding indebtedness, subject
to the rights of holders of senior security interests. Certain
of these remedies would likely have a material adverse effect on
our business.
We
entered into a two year Loan and Security Agreement, dated as of
March 10, 2010, with Silicon Valley Bank, or SVB. The terms
of this Agreement may restrict our current and future
operations, which could affect our ability to respond to changes
in our business and to manage our operations.
On March 10, 2010, we entered into an Agreement with SVB
for a $15.0 million revolving line of credit with a
maturity date of April 1, 2012. The Agreement is secured by
all or substantially all of our assets. In connection with this
Agreement, we amended our term loan and security agreement with
Asahi to provide for certain amendments, including granting to
Asahi junior liens on certain of our assets for so long as the
agreement with SVB remains outstanding. Upon termination of all
obligations under that facility, Asahis security will
revert to a security in all assets other than cash, bank
accounts, accounts receivable, field equipment and inventory.
Borrowings under the Agreement bear interest at a floating rate
per annum equal to two percentage points (2.00%) above the prime
rate (initial prime rate of 4.00%). Pursuant to the Agreement,
we have agreed to certain financial covenants relating to
liquidity requirements and adjusted EBITDA, as defined in our
agreement with SVB. The Agreement contains events of default
customary for transactions of this type, including nonpayment,
misrepresentation, breach of covenants, material adverse effect
and bankruptcy.
As of the date hereof, we do not have an outstanding balance
under the revolving line of credit. However, were we to draw on
the line of credit, in the event we fail to satisfy our
covenants, or otherwise go into default, SVB has a number of
remedies, including sale of our assets and acceleration of all
outstanding indebtedness. Certain of these remedies would likely
have a material adverse effect on our business.
We
compete against other dialysis equipment manufacturers with much
greater financial resources and established products and
customer relationships, which may make it difficult for us to
penetrate the market and achieve significant sales of our
products. Our competitors may also introduce new products or
features that could impair the competitiveness of our own
product portfolio.
Our System One in the critical care market competes against
Gambro AB, Fresenius Medical Care AG, Baxter Healthcare, B.
Braun and others. Our System One in the home market is currently
the only portable system specifically indicated for use in the
home market in the United States. However, on February 18,
2011 we learned that Fresenius, our second largest customer in
the System One segment, with nearly all of those sales in the
home market, obtained clearance for its 2008K At Home
hemodialysis system for use in home chronic therapy in February
2011. Our product lines in the in-center market compete directly
against products
33
produced by Fresenius Medical Care AG, Gambro AB, Nipro, B.
Braun, Baxter Healthcare, JMS CO., LTD and others. Our
competitors each market one or more FDA-cleared medical devices
for the treatment of acute or chronic kidney failure. Each of
these competitors offers products that have been in use for a
longer time than our System One and are more widely recognized
by physicians, patients and providers. These competitors have
significantly more financial and human resources, more
established sales, service and customer support infrastructures
and spend more on product development and marketing than we do.
Many of our competitors also have established relationships with
the providers of dialysis therapy and, Fresenius owns and
operates a chain of dialysis clinics. The product lines of most
of these companies are broader than ours, enabling them to offer
a broader bundle of products and have established sales forces
and distribution channels that may afford them a significant
competitive advantage.
The market for our products is competitive, subject to change
and affected by new product introductions and other market
activities of industry participants, including increased
consolidation of ownership of clinics by large dialysis chains.
If we are successful, our competitors are likely to develop
products that offer features and functionality similar to our
products, including our System One. Improvements in existing
competitive products or the introduction of new competitive
products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better
reliability, convenience or effectiveness or are offered at
lower prices. In addition to the recent clearance of the
Fresenius 2008K At Home for use in home chronic therapy, Baxter
has a research and development collaboration with DEKA Research
and Development Corporation and HHD, LLC, or DEKA, and has
recently indicated that it received IDE approval from the FDA
and hopes to commence U.S. and Canadian clinical studies of
DEKAs new home hemodialysis system in 2011 and launch in
international markets as early as 2011 and obtain regulatory
approval for Europe in 2012. Other small companies are also
working to develop products for this market. We are unable to
predict when, if ever, any of these products may attain
regulatory clearance and appear in the market, or how successful
they may be should they be introduced, but if additional viable
products are introduced to the market, it could adversely affect
our sales and growth. We also are unable to predict what impact
the recent clearance of a Fresenius home hemodialysis systems
will have on our sales to Fresenius or our overall home market
performance. Our ability to successfully market our products
could also be adversely affected by pharmacological and
technological advances in preventing the progression of ESRD
and/or in the treatment of acute kidney failure or fluid
overload. If we are unable to compete effectively against
existing and future competitors and existing and future
alternative treatments and pharmacological and technological
advances, it will be difficult for us to penetrate the market
and achieve significant sales of our products.
Our
continued growth is dependent on our development and successful
commercialization of new and improved products.
Our future success will depend in part on our timely development
and introduction of new and improved products that address
changing market requirements. To the extent that we fail to
introduce new and innovative products or incremental product
improvements, we may lose revenues or market share to our
competitors, which may be difficult to regain. Our inability,
for technological, regulatory or other reasons, to successfully
develop and introduce new or improved products could reduce our
growth rate or otherwise damage our business. We cannot assure
you that our developments will keep pace with the marketplace or
that our new or improved products will adequately meet the
requirements of the marketplace.
The
success and growth of our business will depend upon our ability
to achieve expanded market acceptance of our System
One.
In the home market, we have to convince four distinct
constituencies involved in the choice of dialysis therapy,
namely operators of dialysis clinics, nephrologists, dialysis
nurses and patients, that the System One provides an effective
alternative to other existing dialysis equipment. In the
in-center market, we have to convince all of these
constituencies, but to a lesser degree, patients, that our blood
tubing sets and needles provide an effective alternative to
other dialysis disposables. In the critical care market, we have
to convince hospital purchasing groups, hospitals,
nephrologists, dialysis nurses and critical care nurses that our
system provides an effective alternative to other existing
dialysis equipment. Each of these constituencies use different
considerations in reaching their decision. Lack of acceptance by
any of these constituencies will make it
34
difficult for us to grow our business. We may have difficulty
gaining widespread or rapid acceptance of any of our products,
including the System One, for a number of reasons including:
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the failure by us to demonstrate to operators of dialysis
clinics, hospitals, nephrologists, dialysis nurses, patients and
others that our products are equivalent or superior to existing
therapy options;
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competition from products sold by companies with longer
operating histories and greater financial resources, more
recognizable brand names and better established distribution
networks and relationships with hospitals or dialysis clinics;
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the failure by us to continue to improve product reliability and
the ease of use of our products;
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limitations on the existing infrastructure in place to support
home hemodialysis, including without limitation, home
hemodialysis training nurses, and the willingness, cost
associated with, and ability of dialysis clinics to build that
infrastructure;
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the ownership and operation of some dialysis providers by
companies that also manufacture and sell competitive dialysis
products;
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the introduction of competing products or treatments that may be
more effective, easier to use or less expensive than ours;
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regulations that impose additional burden on patients and their
caregivers, such as the recently adopted Medicare conditions for
coverage which impose additional water testing requirements in
connection with the use of our PureFlow SL;
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the number of patients willing and able to perform therapy
independently, outside of a traditional dialysis clinic, may be
smaller than we estimate; and
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the availability of satisfactory reimbursement from healthcare
payors, including Medicare.
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If we
are unable to convince additional hospitals and healthcare
providers of the benefits of our products for the treatment of
acute kidney failure and fluid overload, we will not be
successful in increasing our market share in the critical care
market.
We sell the System One in the critical care market for use in
the treatment of acute kidney failure and fluid overload.
Physicians currently treat most acute kidney failure patients
using conventional hemodialysis systems or dialysis systems
designed specifically for use in the intensive care unit, or
ICU. We will need to convince hospitals and healthcare providers
that using the System One is as effective as using conventional
hemodialysis systems or ICU-specific dialysis systems for
treating acute kidney failure and that it provides advantages
over conventional systems or other ICU-specific systems because
of its significantly smaller size, ease of operation and
clinical flexibility. In addition, the impact of tightened
credit markets on hospitals could impair the manner in which we
sell products in the critical care market. Hospitals facing
pressure to reduce capital spending may choose to delay capital
equipment purchases or seek alternative financing options.
Our
business and results of operations may be negatively impacted by
general economic and financial market conditions and such
conditions may increase other risks that affect our
business.
Global macro economic conditions and the worlds financial
markets continue to experience some degree of turmoil, resulting
in reductions in available credit, foreign currency fluctuations
and volatility in the valuations of securities generally. In
general, we believe demand for our products in the home and
in-center market will not be substantially affected by the
changing market conditions as regular dialysis is a
life-sustaining, non-elective therapy. However, there is no
assurance that future economic changes or global uncertainties
would not negatively impact our business, especially the manner
and pace in which we sell equipment in the System One segment or
delay equipment placements. Hospitals or clinics facing pressure
to reduce capital spending may choose to rent equipment rather
than purchase it outright, or to enter into other less-capital
intensive purchase structures with us, which may, in turn, have
a negative impact on our cash flows.
35
The
non-cash discounts we have offered to DaVita may lead to
reductions in our future net revenues that will fluctuate
because the amount of the discount is based upon the number of
warrants earned and our stock price.
Under our July 22, 2010 agreement with DaVita, we offered
DaVita the opportunity to earn pricing discounts based upon the
achievement of System One home patient growth targets at
June 30, 2011, 2012 and 2013. In order to preserve cash,
the discount takes the form of warrants to purchase up to
5.5 million shares of our common stock that become
exercisable based on the achievement of certain System One home
patient growth targets (reflecting home patients who have
remained on contiguous home hemodialysis therapy for at least
three full months with the System One) at June 30, 2011,
2012 and 2013, and which further require DaVita to continue to
grow its home patient census every six months during the term of
the agreement. The discount associated with these warrants will
be measured at fair value through the date of vesting using a
Black-Scholes option pricing model, and is being recognized as a
reduction of revenues over the same period as the related
product revenues (between seven to ten years) based on the
number of warrants expected to vest. The warrants are
non-transferable, must be exercised in cash and have an exercise
price of $14.22 per share, which is equal to the trailing
fifteen day volume weighted average price of a share of NxStage
Common Stock on the NASDAQ Global Market as of the close of
business on July 21, 2010, the day prior to entering into
our agreement.
The reduction of revenues recorded in connection with these
warrants was not significant during 2010, based on our
assumptions regarding what tiered level of warrant discounts
DaVita is expected to earn. However, there can be no assurance
that the value of the discount, and, therefore, the amount of
reduction of revenues recorded, will not be higher in the future
based upon the level of warrants DaVita actually earns under the
agreement, as well as the price of our stock on the date the
warrants vest. Should our stock price increase above its current
price, the amount of the discount would be increased.
Healthcare
reform legislation could adversely affect our revenue and
financial condition.
In recent years, there have been numerous initiatives on the
federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives
have ranged from proposals to fundamentally change federal and
state healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under
governmental funded programs, to minor modifications to existing
programs.
In March 2010, the U.S. Congress adopted and President
Obama signed into law comprehensive health care reform
legislation through the passage of the Patient Protection and
Affordable Care Act (Pub. L.
No. 111-148)
and the Health Care and Education Reconciliation Act of 2010
(Pub. L.
No. 111-152).
Among other initiatives, these bills impose a 2.3% excise tax on
domestic sales of certain medical devices after
December 31, 2012. This legislation also applies a
productivity adjustment to the Medicare payment rates for
dialysis facilities that could cause variable annual decreases
in payment rates as of 2012. Outside of the excise tax, which
will impact our results of operations following
December 31, 2012, and the productivity adjustments, which
may impact our operations when the amount of the adjustments are
announced, we cannot predict the effect such legislation will
have on us. If significant reforms are made to the healthcare
system in the United States, or in other jurisdictions, those
reforms may have a material adverse effect on our financial
condition and results of operations.
As our
business continues to grow, we may have difficulty managing our
growth and expanding our operations successfully.
As our business continues to grow, we will need to expand our
manufacturing, sales and marketing and on-going development
capabilities or contract with other organizations to provide
these capabilities for us. As our operations expand, we expect
that we will need to manage additional relationships with
various partners, suppliers, manufacturers and other
organizations. Our ability to manage our operations and growth
requires us to continue to improve our information technology
infrastructure, operational, financial and management controls
and reporting systems and procedures. Such growth could place a
strain on our administrative and
36
operational infrastructure. We may not be able to make
improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies
in existing systems and controls.
If we
are unable to improve or maintain strong product reliability for
our products, our ability to maintain or grow our business and
achieve profitability could be impaired.
We have not yet achieved our long term reliability objectives
for certain of our products, and as a result we continue to
incur increased service and distribution costs. This, in turn,
negatively impacts our gross margins and increases our working
capital requirements. Additionally, product reliability issues
associated with any of our product lines could lead to decreases
in customer satisfaction and our ability to grow or maintain our
revenues and could negatively impact our reputation. We continue
to work to improve product reliability for all products, and
have achieved some improvements to date. If we are unable to
continue to improve product reliability, our ability to achieve
our growth objectives as well as profitability could be
significantly impaired.
We
have a significant amount of System One field equipment, and our
inability to effectively manage this asset could negatively
impact our working capital requirements and future
profitability.
Because our home market relies upon an equipment service swap
model and, for some of our customers, an equipment rental model,
our ability to manage System One equipment is important to
minimizing our working capital requirements. Both factors
require that we maintain a significant level of field equipment
of our System One and PureFlow SL hardware. In addition, our
gross margins may be negatively impacted if we have excess
equipment deployed, and unused, in the field. If we are unable
to successfully track, service and redeploy equipment, we could
(1) incur increased costs, (2) realize increased cash
requirements
and/or
(3) have material write-offs of equipment. This would
negatively impact our working capital requirements and future
profitability.
If
kidney transplantation becomes a viable treatment option for
more patients with ESRD, or if medical or other solutions for
renal replacement become viable, the market for our products may
be limited.
While kidney transplantation is the treatment of choice for most
ESRD patients, it is not currently a viable treatment for most-
patients due to the limited number of donor kidneys, the high
incidence of kidney transplant rejection and the higher surgical
risk associated with older ESRD patients. According to USRDS
data, in 2008, approximately 17,400 patients received
kidney transplants in the United States. The development of new
medications designed to reduce the incidence of kidney
transplant rejection, progress in using kidneys harvested from
genetically engineered animals as a source of transplants or any
other advances in kidney transplantation could limit the market
for our products. The development of viable medical or other
solutions for renal replacement may also limit the market for
our products.
We
could be subject to costly and damaging product and professional
liability claims and may not be able to maintain sufficient
liability insurance to cover claims against us.
If any of our employees or products is found to have caused or
contributed to injuries or deaths, we could be held liable for
substantial damages. Claims of this nature may also adversely
affect our reputation, which could damage our position in the
market. While we maintain insurance, including professional
liability, product and excess liability, claims may be brought
against us that could result in court judgments or settlements
in amounts that are in excess of the limits of our insurance
coverage. In addition, due to the recent tightening of global
credit and the disruption in the financial markets, there may be
a disruption in our insurance coverage or delay or disruption in
the payment of claims by our insurance providers. Our insurance
policies also have various exclusions, and we may be subject to
a product or professional liability claim for which we have no
coverage. We will have to pay any amounts awarded by a court or
negotiated in a settlement that exceed our coverage limitations
or that are not covered by our insurance.
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Any product liability or professional liability claim brought
against us, with or without merit, could result in the increase
of our product liability or professional liability insurance
rates, respectively, or the inability to secure additional
insurance coverage in the future. A product liability claim,
whether meritorious or not, could be time consuming, distracting
and expensive to defend and could result in a diversion of
management and financial resources away from our primary
business, in which case our business may suffer.
We
maintain insurance at levels deemed adequate by management;
however, future claims could exceed our applicable insurance
coverage.
We maintain insurance for property and general liability,
directors and officers liability, product liability,
workers compensation, and other coverage in amounts and on terms
deemed adequate by management based on our expectations for
future claims. Future claims could, however, exceed our
applicable insurance coverage, or our coverage could not cover
the applicable claims.
We
face risks associated with having international manufacturing
operations, and if we are unable to manage these risks
effectively, our business could suffer.
We operate manufacturing facilities in Germany, Italy and
Mexico. We also purchase components, products and supplies from
foreign vendors. We are subject to a number of risks and
challenges that specifically relate to these international
operations, and we may not be successful if we are unable to
meet and overcome these challenges. Significant among these
risks are risks relating to foreign currency, in particular the
Euro, Peso and Thai Baht. We do not currently hedge our foreign
currency transactions. To the extent we fail to control our
exchange rate risk, our gross margins and profitability could
suffer and our ability to maintain mutually beneficial and
profitable relationships with foreign vendors could be impaired.
In addition to these risks, through our international
operations, we are exposed to costs and challenges associated
with sourcing and shipping goods internationally and importing
and exporting goods, difficulty managing operations in multiple
locations, local regulations that may restrict or impair our
ability to conduct our operations, and health issues, such as
pandemic disease risk, which could disrupt our manufacturing and
logistical and import activities.
We
obtain some of our raw materials, components and finished goods
from a single source or a limited group of suppliers. We also
obtain sterilization services from a single supplier. The
partial or complete loss of one of these suppliers could cause
significant production delays, an inability to meet customer
demand, and a substantial loss in revenues.
We depend upon a number of single-source suppliers for some of
the raw materials and components we use in our products. We also
depend upon one single-source supplier for certain of our
finished goods and a single-vendor for sterilization services.
Our most critical single-source supply relationships are with
Membrana and Kawasumi. Membrana is our sole supplier of the
fiber used in our filters for System One products. Kawasumi is
our only supplier of needles and certain blood tubing sets that
we sell to our customers. Our dependence upon these and other
single-source suppliers of raw materials, components, finished
goods and sterilization services exposes us to several risks,
including disruptions in supply, price increases, late
deliveries, and an inability to meet customer demand. This could
lead to customer dissatisfaction, damage to our reputation, or
customers switching to competitive products. Any interruption in
supply could be particularly damaging to our customers using the
System One to treat chronic ESRD and who need access to the
System One and related disposables to continue their therapy.
Finding alternative sources for these raw materials, components,
finished goods and sterilization services would be difficult and
in many cases entail a significant amount of time and
disruption. In the case of Membrana, for fiber, we are
contractually prevented from obtaining an alternative source of
fiber for our System One products. Our relationship with Asahi
could afford us
back-up
supply in the event of an inability to supply by Membrana,
however, switching to Asahi fiber at this time would likely
entail significant delays and difficulties. We do not have the
regulatory approvals necessary to use Asahi fiber in our System
One cartridge in the United States. Additionally, the
performance of Asahi fiber in our System One has not yet been
validated. We purchase the majority of our finished goods of
ReadySet blood tubing sets and all of our
38
needles from Kawasumi. Kawasumis contractual obligation to
manufacture blood tubing sets expires in January 2012, with
opportunities to extend the term beyond that date.
Kawasumis contractual obligation to supply needles to us
expires in February 2014, with opportunities to extend the term
beyond that date. Kawasumis contractual obligation to
supply needles and blood tubing sets to us can be, at times,
less than our forecasted demand. In the event Kawasumi supplies
no more than the amount of their required maximum monthly
supply, we may not have enough needle or blood tubing set supply
to meet the demands of our customers. We maintain a limited
extra supply of needles to mitigate against the risk of any
intermittent shortfalls in needle supply, and we have the
ability to manufacture additional blood tubing sets at our
manufacturing facility in Tijuana, Mexico. However, there can be
no assurance that any interruption in needle or blood tubing set
supply would not impair our business, at least in the near term.
Our
In-Center segment relies heavily upon third-party
distributors.
We sell the majority of our In-Center segment products through
several distributors, which collectively accounted for
substantially all of In-Center revenues during 2010, 2009 and
2008, with Henry Schein and Gambro being our most significant
distributors. Our distribution agreement with Henry Schein
expires in April 2012. Our distribution agreement with
Gambro expires in June 2014. The loss of Gambro or Henry Schein
as our distributors for any reason could materially adversely
affect our business, at least in the near term.
Unless
we can demonstrate sufficient product differentiation in our
blood tubing set business through Streamline or products that we
introduce in the future, we will continue to be susceptible to
further pressures to reduce product pricing and more vulnerable
to the loss of our blood tubing set business to competitors in
the dialysis industry.
Our blood tubing set business has historically been a
commodities business. Prior to the Medisystems Acquisition,
Medisystems competed favorably and gained share through the
development of a high quality, low-cost, standardized blood
tubing set, which could be used on several different dialysis
machines. Our products continue to compete favorably in the
dialysis blood tubing set business, but are increasingly subject
to pricing pressures, especially given recent market
consolidation in the United States dialysis services industry,
with Fresenius and DaVita collectively controlling approximately
60% of the United States dialysis services business. Unless we
can successfully demonstrate to customers the differentiating
features of the Streamline product or products that we introduce
in the future, we may be susceptible to further pressures to
reduce our product pricing and more vulnerable to the loss of
our blood tubing set business to competitors in the dialysis
industry.
The
activities of our business involve the import of finished goods
into the United States from foreign countries, subject to
customs inspections and duties, and the export of components and
certain other products from other countries into Germany,
Mexico, Thailand and Italy. To a lesser, but increasing degree,
our business also involves the export of finished goods from the
United States to foreign countries. If we misinterpret or
violate these laws, or if laws governing our exemption from
certain duties change, we could be subject to significant fines,
liabilities or other adverse consequences.
We import into the United States disposable medical supplies
from Germany, Thailand and Mexico. We also import into the
United States disposable medical components from Germany and
Italy and export components and assemblies into Mexico, Thailand
and Italy. We also import into Mexico components and assemblies
from Germany, Italy and Thailand. To a lesser, but increasing
degree, our business also involves the export of finished goods
from the United States to foreign countries. The import and
export of these items are subject to extensive laws and
regulations with which we will need to comply. To the extent we
fail to comply with these laws or regulations, or fail to
interpret our obligations accurately, we may be subject to
significant fines, liabilities and a disruption to our ability
to deliver product, which could cause our combined businesses
and operating results to suffer. To the extent there are
modifications to the Generalised System of Preferences or
cancellation of the Nairobi Protocol Classification such that
our products would be subject to duties, our profitability would
also be negatively impacted.
39
The
success of our business depends on the services of each of our
senior executives as well as certain key engineering,
scientific, manufacturing, clinical and marketing personnel, the
loss of whom could negatively affect the combined
businesses.
Our success has always depended upon the skills, experience and
efforts of our senior executives and other key personnel,
including our research and development and manufacturing
executives and managers. Much of our expertise is concentrated
in relatively few employees, the loss of whom for any reason
could negatively affect our business. Competition for our highly
skilled employees is intense and we cannot prevent the future
resignation of any employee. We maintain key person insurance
for only one of our executives, Jeffrey Burbank, our Chief
Executive Officer.
Risks
Related to the Regulatory Environment
We are
subject to significant regulation, primarily by the FDA. We
cannot market or commercially distribute our products without
obtaining and maintaining necessary regulatory clearances or
approvals.
Our products are medical devices subject to extensive regulation
in the United States, and in foreign markets we may wish to
enter. To market a medical devices in the United States,
approval or clearance by the FDA is required, either through the
pre-market approval process or the 510(k) clearance process. We
have obtained the FDA clearance necessary to sell our current
products under the 510(k) clearance process. Medical devices may
only be promoted and sold for the indications for which they are
approved or cleared. In addition, even if the FDA has approved
or cleared a product, it can take action affecting such product
approvals or clearances if serious safety or other problems
develop in the marketplace. We may be required to obtain 510(k)
clearances or pre-market approvals for additional products,
product modifications, or for new indications of our products.
Regulatory pathways for such clearances may be difficult to
define and could change. For example, we recently completed an
approval IDE study intended to support a home nocturnal
indication for the System One. Enrollment started in the first
quarter of 2008 and we submitted the associated 510(k) to the
FDA in 2010. We met our primary safety and efficacy endpoints
for the study. Nevertheless, the FDA recently notified us that
their standards for what will be required for a home nocturnal
clearance may change from what was required in our approval IDE.
We continue to discuss with the FDA what the pathway to
clearance for our product should be, and are evaluating our next
steps. Although we do not see the delay in timing for our home
nocturnal clearance as material to our opportunities, we cannot
be certain when this clearance will be obtained. We also cannot
provide assurance that this or other clearances or approvals
might be. Delays in obtaining clearances or approvals could
adversely affect our ability to introduce new products or
modifications to our existing products in a timely manner, which
would delay or prevent commercial sales of our products.
Although the 510(k) regulation has not been formally changed,
the FDA has announced that it is intending to implement
modifications to the 510(k) process. Any changes in regulatory
policies could have an adverse affect on our ability to sell and
promote our products and our business as a whole.
Modifications
to our marketed devices may require new regulatory clearances or
pre-market approvals, or may require us to cease marketing or
recall the modified devices until clearances or approvals are
obtained.
Any modifications to a 510(k) cleared device that could
significantly affect its safety or effectiveness, or would
constitute a major change in its intended use, requires the
submission of another 510(k) pre-market notification to address
the change. Although in the first instance we may determine that
a change does not rise to a level of significance that would
require us to make a pre-market notification submission, the FDA
may disagree with us and can require us to submit a 510(k) for a
significant change in the labeling, technology, performance
specifications or materials or major change or modification in
intended use, despite a documented rationale for not submitting
a pre-market notification. We have modified various aspects of
our products and have filed and received clearance from the FDA
with respect to some of the changes in the design of our
products. If the FDA requires us to submit a 510(k) for any
modification to a previously cleared device, or in the future a
device that has received 510(k) clearance, we may be required to
cease marketing the device, recall it, and not resume marketing
until we obtain clearance from the FDA for the modified version
of the device. Also, we may be subject to regulatory fines,
penalties
and/or other
sanctions authorized by the Federal Food, Drug, and Cosmetic
Act. In the future, we intend to introduce new products and
enhancements and improvements to existing products. We cannot
provide assurance
40
that the FDA will clear any new product or product changes for
marketing or what the timing of such clearances might be. In
addition, new products or significantly modified marketed
products could be found to be not substantially equivalent and
classified as products requiring the FDAs approval of a
pre-market approval application, or PMA, before commercial
distribution would be permissible. PMAs usually require
substantially more data than 510(k) submissions and their review
and approval or denial typically takes significantly longer than
a 510(k) decision of substantial equivalence. Also, PMA products
require approval supplements for any change that affects safety
and effectiveness before the modified device may be marketed.
Delays in our receipt of regulatory clearance or approval will
cause delays in our ability to sell our products, which will
have a negative effect on our revenues growth.
Even
if we obtain the necessary FDA clearances or approvals, if we or
our suppliers fail to comply with ongoing regulatory
requirements our products could be subject to restrictions or
withdrawal from the market.
We are subject to the Medical Device Reporting, or MDR,
regulations that require us to report to the FDA if our products
may have caused or contributed to patient death or serious
injury, or if our device malfunctions and a recurrence of the
malfunction would likely result in a death or serious injury. We
must also file reports of device corrections and removals and
adhere to the FDAs rules on labeling and promotion. Our
failure to comply with these or other applicable regulatory
requirements could result in enforcement action by the FDA,
which may include any of the following:
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untitled letters, warning letters, fines, injunctions and civil
penalties;
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administrative detention, which is the detention by the FDA of
medical devices believed to be adulterated or misbranded;
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customer notification, or orders for repair, replacement or
refund;
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voluntary or mandatory recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusal to review pre-market notification or pre-market approval
submissions;
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rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
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criminal prosecution.
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Our
products are subject to market withdrawals or product recalls
after receiving FDA clearance or approval, and market
withdrawals and product recalls could cause the price of our
stock to decline and expose us to product liability or other
claims or could otherwise harm our reputation and financial
results.
Medical devices can experience performance problems in the field
that require review and possible corrective action by us or the
product manufacturer. We cannot provide assurance that component
failures, manufacturing errors, design defects
and/or
labeling inadequacies, which could result in an unsafe condition
or injury to the operator or the patient will not occur. These
could lead to a government mandated or voluntary recall by us.
The FDA has the authority to require the recall of our products
in the event a product presents a reasonable probability that it
would cause serious adverse health consequences or death.
Similar regulatory agencies in other countries have similar
authority to recall devices because of material deficiencies or
defects in design or manufacture that could endanger health. We
believe that the FDA would request that we initiate a voluntary
recall if a product was defective or presented a risk of injury
or gross deception. Any recall would divert management attention
and financial resources, could cause the price of our stock to
decline and expose us to product liability or other claims and
harm our reputation with customers.
If we
or our contract manufacturers fail to comply with FDAs
Quality System Regulations, our manufacturing operations could
be interrupted, and our product sales and operating results
could suffer.
Our finished goods manufacturing processes, and those of some of
our contract manufacturers, are required to comply with the
FDAs Quality System Regulations, or QSRs, which cover the
procedures and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, sterilization,
41
storage and shipping of our devices. The FDA enforces its QSRs
through periodic unannounced inspections of manufacturing
facilities. We and our contract manufacturers have been, and
anticipate in the future being, subject to such inspections. We
were inspected by the FDA in the second quarter of 2010, and
received no inspectional observations. While all of our previous
inspections have resulted in no significant observations, we
cannot provide assurance that we can maintain a comparable level
of regulatory compliance in the future at our facilities, or
that future inspections would have the same result.
If one of our manufacturing facilities or those of any of our
contract manufacturers fails to take satisfactory corrective
action in response to an adverse QSR inspection, the FDA could
take enforcement action, including issuing a public warning
letter, shutting down our manufacturing operations, embargoing
the import of components from outside of the United States,
recalling our products, refusing to approve new marketing
applications, instituting legal proceedings to detain or seize
products or imposing civil or criminal penalties or other
sanctions, any of which could cause our business and operating
results to suffer.
We may
be subject to fines, penalties or injunctions if we are
determined to be promoting the use of our products in a manner
not consistent with our products cleared indications for
use or with other state or federal laws governing the promotion
of our products.
Our promotional materials and other product labeling must comply
with FDA and other applicable laws and regulations. If the FDA
determines that our promotional materials or other product
labeling constitute promotion of an unapproved, or uncleared
use, it could request that we modify our materials or subject us
to regulatory or enforcement actions, including the issuance of
an untitled letter, a warning letter, injunction, seizure, civil
fine and criminal penalties. Other regulatory agencies, federal,
state and foreign, including the U.S. Federal Trade
Commission, have issued guidelines and regulations that govern
how we promote our product, including how we use endorsements
and testimonials. If our promotional materials are inconsistent
with these guidelines or regulations, we could be subject to
enforcement actions, which could result in significant fines,
costs and penalties. Our reputation could also be damaged and
the adoption of our products could be impaired.
Failure
to obtain regulatory approval in foreign jurisdictions would
prevent us from marketing our products outside the United
States.
Historically, we have not sold or marketed the System One
outside the United States and Canada. In 2009, we began entering
into arrangements with distributors to sell the System One and
certain of our other products outside of the United States. We
are currently selling the System One in Europe and the Middle
East, and are assessing other international markets for the
System One as well. Our In-Center products are presently sold in
the United States as well as in several other countries, through
distributors. We presently have CE marking as well as Canadian
regulatory authority to sell our System One as well as certain
other products in Canada and Europe. However, in order to market
directly our products in other foreign jurisdictions, we must
obtain separate regulatory approvals and comply with numerous
and varying regulatory requirements. The approval procedure
varies from country to country and can involve additional
testing. The time required to obtain approval abroad may be
longer than the time required to obtain FDA clearance. The
foreign regulatory approval process includes many of the risks
associated with obtaining FDA clearance and we may not obtain
foreign regulatory approvals on a timely basis, if at all. FDA
clearance does not ensure approval by regulatory authorities in
other countries, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries. We may not be able to file for
regulatory approvals and may not receive necessary approvals to
commercialize our products in any market outside the United
States, which could negatively affect our overall market
penetration. Additionally, any loss of foreign regulatory
approvals, for any reason, could negatively affect our business.
We
have obligations under our contracts with dialysis clinics and
hospitals to protect the privacy of patient health
information.
In the course of performing our business we obtain, from time to
time, confidential patient health information. For example, we
learn patient names and addresses when we ship our System One
supplies to
42
home hemodialysis patients. We may learn patient names and be
exposed to confidential patient health information when we
provide training on our products to our customers staff.
Our home hemodialysis patients may also call our customer
service representatives directly and, during the call, disclose
confidential patient health information. United States federal
and state laws protect the confidentiality of certain patient
health information, in particular individually identifiable
information, and restrict the use and disclosure of that
information. At the federal level, the Department of Health and
Human Services promulgated health information and privacy and
security rules under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. At this time, we are not a
HIPAA covered entity. However, we have entered into business
associate agreements with covered entities that contain
commitments to protect the privacy and security of
patients health information and, in some instances,
require that we indemnify the covered entity for any claim,
liability, damage, cost or expense arising out of or in
connection with a breach of the agreement by us. If we were to
violate one of these agreements, we could lose customers and be
exposed to liability
and/or our
reputation and business could be harmed. In addition, the Health
Information Technology for Economic and Clinical Health Act
(HITECH), enacted in February 2009, expands the HIPAA privacy
and security rules, including imposing many of the requirements
of those rules directly on business associates and making
business associates directly subject to HIPAA civil and criminal
enforcement provisions and associated penalties. Many of these
requirements went into effect on February 17, 2010. We may
be required to make costly system modifications to comply with
the HIPAA privacy and security requirements. Our failure to
comply may result in criminal and civil liability.
Many other federal and state laws apply to the use and
disclosure of health information, as well as certain financial
information, which could affect the manner in which we conduct
our business. Such laws are not necessarily preempted by HIPAA,
in particular those laws that afford greater protection to the
individual than does HIPAA or cover different subject matter.
Such state laws typically have their own penalty provisions,
which could be applied in the event of an unlawful action
affecting health information.
We are
subject to federal and state laws prohibiting
kickbacks and false and fraudulent claims which, if
violated, could subject us to substantial penalties.
Additionally, any challenges to or investigation into our
practices under these laws could cause adverse publicity and be
costly to respond to, and thus could harm our
business.
The Medicare/Medicaid anti-kickback laws, and similar state
laws, prohibit payments that are intended to induce health care
professionals or others either to refer patients or to acquire
or arrange for or recommend the acquisition of healthcare
products or services. A number of states have enacted laws that
require pharmaceutical and medical device companies to monitor
and report payments, gifts and other remuneration made to
physicians and other health care professionals and health care
organizations. In addition, some state statutes, most notably
laws in Massachusetts, Minnesota, and Vermont, impose outright
bans on certain gifts to physicians. Some of these laws referred
to as aggregate spend laws or gift laws,
carry substantial fines if they are violated. Recently, the
federal Physician Payments Sunshine Act was enacted by Congress
in 2010 as part of the comprehensive health care reform
legislation, and it will require us to begin publicly disclosing
certain payments and other transfers of value to physicians and
teaching hospitals beginning in 2013. These laws affect our
sales, marketing and other promotional activities by limiting
the kinds of financial arrangements, including sales programs,
we may have with hospitals, physicians or other potential
purchasers or users of medical devices. They also impose
additional administrative and compliance burdens on us. In
particular, these laws influence, among other things, how we
structure our sales and rental offerings, including discount
practices, customer support, education and training programs and
physician consulting and other service arrangements. Although we
seek to structure such arrangements in compliance with all
applicable requirements, these laws are broadly written, and it
is often difficult to determine precisely how these laws will be
applied in specific circumstances. If we were to offer or pay
inappropriate inducements to purchase our products, we could be
subject to a claim under the Medicare/Medicaid anti-kickback
laws or similar state laws. If we fail to comply with particular
reporting requirements, we could be subject to penalties under
applicable federal or state laws.
43
Other federal and state laws generally prohibit individuals or
entities from knowingly presenting, or causing to be presented,
claims for payments to Medicare, Medicaid or other third-party
payors that are false or fraudulent, or for items or services
that were not provided as claimed. Although we do not submit
claims directly to payors, manufacturers can be held liable
under these laws if they are deemed to cause the
submission of false or fraudulent claims by providing inaccurate
billing or coding information to customers, by providing
improper financial inducements, or through certain other
activities. In providing billing and coding information to
customers, we make every effort to ensure that the billing and
coding information furnished is accurate and that treating
physicians understand that they are responsible for all billing
and prescribing decisions, including the decision as to whether
to order dialysis services more frequently than three times per
week. Nevertheless, we cannot provide assurance that the
government will regard any billing errors that may be made as
inadvertent or that the government will not examine our role in
providing information to our customers concerning the benefits
of daily therapy. Likewise, our financial relationships with
customers, physicians, or others in a position to influence the
purchase or use of our products may be subject to government
scrutiny or be alleged or found to violate applicable fraud and
abuse laws. False claims laws prescribe civil, criminal and
administrative penalties for noncompliance, which can be
substantial. Moreover, an unsuccessful challenge or
investigation into our practices could cause adverse publicity,
and be costly to respond to, and thus could harm our business
and results of operations.
Foreign
governments tend to impose strict price controls, which may
adversely affect our future profitability.
Presently, our marketing efforts have been confined nearly
exclusively to the United States. We have had limited activities
in Canada with our System One, and in certain other
jurisdictions with our In-Center products sold through
distributors. In 2009, we began entering into arrangements with
distributors to sell the System One and certain of our other
products in Europe and the Middle East. We may, in the future,
seek to market our products in other markets. In some foreign
countries, particularly in the European Union, the pricing of
medical devices is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take considerable time after the receipt of marketing
approval for a product. To obtain reimbursement or pricing
approval in some countries, we may be required to supply data
that compares the cost-effectiveness of our products to other
available therapies. If reimbursement of our products is
unavailable or limited in scope or amount, or if pricing is set
at unsatisfactory levels, it may not be profitable to sell our
products outside of the United States, which would negatively
affect the long-term growth of our business. Further,
reimbursement provided to our products in other jurisdictions
could change, positively or negatively. In the event
reimbursements were to be negatively changed, such as, for
example, in the United Kingdom, our ability to sell our
products could be impaired.
Failure
to comply with the United States Foreign Corrupt Practices Act
could subject us to penalties and other adverse
consequences.
We are subject to the United States Foreign Corrupt Practices
Act which generally prohibits United States companies from
engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business and
requires companies to maintain accurate books and records and
internal controls, including at foreign controlled subsidiaries.
While we have policies and procedures in place designed to
prevent noncompliance, we can make no assurance that our
employees or other agents will not engage in prohibited conduct
under the Foreign Corrupt Practices Act for which we might be
held responsible. If our employees or other agents are found to
have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect
on our business, financial condition and results of operations.
44
Our
business activities involve the use of hazardous materials,
which require compliance with environmental and occupational
safety laws regulating the use of such materials. If we violate
these laws, we could be subject to significant fines,
liabilities or other adverse consequences.
Our research and development programs as well as our
manufacturing operations involve the controlled use of hazardous
materials. Accordingly, we are subject to federal, state and
local laws governing the use, handling and disposal of these
materials. Although we believe that our safety procedures for
handling and disposing of these materials comply in all material
respects with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the
event of an accident or failure to comply with environmental
laws, we could be held liable for resulting damages, and any
such liability could exceed our insurance coverage.
Risks
Related to Operations
Resin
is a key input material to the manufacture of our products and
System One cartridge. Oil prices affect both the pricing and
availability of this material. Escalation of oil prices could
affect our ability to obtain sufficient supply of resin at the
prices we need to manufacture our products at current rates of
profitability.
We currently source resin from a small number of suppliers.
Rising oil prices over the last several years have resulted in
significant price increases for this material. We cannot
guarantee that prices will not continue to increase. Our
contracts with customers restrict our ability to immediately
pass on these price increases, and we cannot guarantee that
future pricing to customers will be sufficient to accommodate
increasing input costs.
Distribution
costs represent a significant percentage of our overall costs,
and these costs are dependent upon fuel prices. Increases in
fuel prices could lead to increases in our distribution costs,
which, in turn, could impair our ability to achieve
profitability.
We currently incur significant inbound and outbound distribution
costs. Our distribution costs are dependent upon fuel prices.
Increases in fuel prices could lead to increases in our
distribution costs, which could impair our ability to achieve
profitability.
We
have labor agreements with our production employees in Italy and
in Mexico. We cannot guarantee that we will not in the future
face strikes, work stoppages, work slowdowns, grievances,
complaints, claims of unfair labor practices, other collective
bargaining disputes or in Italy, anti-union behavior, that may
cause production delays and negatively impact our ability to
deliver our products on a timely basis.
Our wholly-owned subsidiary in Italy has a national labor
contract with Contratto collettivo nazionale di lavoro per gli
addetti allindustria della gomma cavi elettrici ed affini
e allindustria delle materie plastiche, and our
wholly-owned subsidiary in Mexico has entered into a collective
bargaining agreement with a Union named Mexico Moderno de
Trabajadores de la Baja California C.R.O.C. We have not to date
experienced strikes, work stoppages, work slowdowns, grievances,
complaints, claims of unfair labor practices, other collective
bargaining disputes, or in Italy, anti-union behavior, however
we cannot guarantee that we will not be subject to such activity
in the future. Any such activity would likely cause production
delays, and negatively affect our ability to deliver our
production commitments to customers, which could adversely
affect our reputation and cause our combined businesses and
operating results to suffer. Additionally, some of our key
single source suppliers have labor agreements. We cannot
guarantee that we will not have future disruptions, which could
adversely affect our reputation and cause our business and
operating results to suffer.
We do
not have long-term supply contracts with many of our third-party
suppliers.
We purchase raw materials and components from third-party
suppliers, including some single source suppliers, through
purchase orders and do not have long-term supply contracts with
many of these third-party suppliers. Many of our third-party
suppliers are not obligated to perform services or supply
products for any specific period, in any specific quantity or at
any specific price, except as may be provided in a particular
purchase order. We do not maintain large volumes of inventory
from most of our suppliers. If we inaccurately
45
forecast demand for finished goods, our ability to meet customer
demand could be delayed and our competitive position and
reputation could be harmed. In addition, if we fail to
effectively manage our relationships with these suppliers, we
may be required to change suppliers, which would be time
consuming and disruptive and could lead to disruptions in
product supply, which could permanently impair our customer base
and reputation.
Certain
of our products are recently developed and we have recently
transitioned the manufacturing of certain of these products to
new locations. We, and certain of our third-party manufacturers,
have limited manufacturing experience with these
products.
We continue to develop new products and make improvements to
existing products. As such, we and certain of our third-party
manufacturers have limited manufacturing experience with certain
of our products. We are more exposed to risks relating to
product quality and reliability until the manufacturing
processes for these new products mature.
Risks
Related to Intellectual Property
If we
are unable to protect our intellectual property and prevent its
use by third parties, we will lose a significant competitive
advantage.
We rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws to protect our
proprietary technology and prevent others from duplicating our
products. However, these means may afford only limited
protection and may not:
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prevent our competitors from duplicating our products;
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prevent our competitors from gaining access to our proprietary
information and technology; or
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permit us to gain or maintain a competitive advantage.
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Any of our patents, including those we may license, may be
challenged, invalidated, circumvented or rendered unenforceable.
We cannot provide assurance that we will be successful should
one or more of our patents be challenged for any reason. If our
patent claims are rendered invalid or unenforceable, or narrowed
in scope, the patent coverage afforded our products could be
impaired, which could make our products less competitive.
We cannot specify which, if any, of our patents individually or
as a group will permit us to gain or maintain a competitive
advantage. We cannot provide assurance that any pending or
future patent applications we hold will result in an issued
patent or that if patents are issued to us, that such patents
will provide meaningful protection against competitors or
against competitive technologies. The issuance of a patent is
not conclusive as to its validity or enforceability. The United
States federal courts or equivalent national courts or patent
offices elsewhere may invalidate our patents or find them
unenforceable. Competitors may also be able to design around our
patents. Our patents and patent applications cover particular
aspects of our products. Other parties may develop and obtain
patent protection for more effective technologies, designs or
methods for treating kidney failure. If these developments were
to occur, it would likely have an adverse effect on our sales.
The laws of foreign countries may not protect our intellectual
property rights effectively or to the same extent as the laws of
the United States. If our intellectual property rights are not
adequately protected, we may not be able to commercialize our
technologies, products or services and our competitors could
commercialize similar technologies, which could result in a
decrease in our revenues and market share.
Our
products could infringe the intellectual property rights of
others, which may lead to litigation that could itself be
costly, could result in the payment of substantial damages or
royalties, and/or prevent us from using technology that is
essential to our products.
The medical device industry in general has been characterized by
extensive litigation and administrative proceedings regarding
patent infringement and intellectual property rights. Products
to provide kidney replacement therapy have been available in the
market for more than 30 years and our competitors hold a
46
significant number of patents relating to kidney replacement
devices, therapies, products and supplies. Although no third
party has threatened or alleged that our products or methods
infringe their patents or other intellectual property rights, we
cannot provide assurance that our products or methods do not
infringe the patents or other intellectual property rights of
third parties. If our business is successful, the possibility
may increase that others will assert infringement claims against
us.
Infringement and other intellectual property claims and
proceedings brought against us, whether successful or not, could
result in substantial costs and harm to our reputation. Such
claims and proceedings can also distract and divert management
and key personnel from other tasks important to the success of
the business. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
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cease selling or using any of our products that incorporate the
asserted intellectual property, which would adversely affect our
revenues;
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pay substantial damages for past use of the asserted
intellectual property;
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obtain a license from the holder of the asserted intellectual
property, which license may not be available on reasonable
terms, if at all and which could reduce profitability; and
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redesign or rename, in the case of trademark claims, our
products to avoid infringing the intellectual property rights of
third parties, which may not be possible and could be costly and
time-consuming if it is possible to do so.
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Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology and processes, we
also rely in part on confidentiality agreements with our
corporate partners, employees, consultants, outside scientific
collaborators and sponsored researchers, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and trade secrets and may not provide
an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently
discover or reverse engineer trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such party. Costly and time consuming
litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain
trade secret protection could adversely affect our competitive
position.
We may
be subject to damages resulting from claims that our employees
or we have wrongfully used or disclosed alleged trade secrets of
other companies.
Many of our employees were previously employed at other medical
device companies focused on the development of dialysis
products, including our competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in
addition to paying monetary damages, we may lose valuable
intellectual property rights. Even if we are successful in
defending against these claims, litigation could result in
substantial costs, damage to our reputation and be a distraction
to management.
Risks
Related to our Common Stock
Our
stock price is likely to be volatile, and the market price of
our common stock may drop.
The market price of our common stock could be subject to
significant fluctuations. Market prices for securities of early
stage companies have historically been particularly volatile. As
a result of this volatility, you may not be able to sell your
common stock at or above the price you paid for the stock. Some
of the factors that may cause the market price of our common
stock to fluctuate include:
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timing of market launch
and/or
market acceptance of our products;
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timing of achieving profitability from operations;
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changes in estimates of our financial results or recommendations
by securities analysts or the failure to meet or exceed
securities analysts expectations;
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actual or anticipated variations in our quarterly operating
results;
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future debt or equity financings;
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developments or disputes with key vendors or customers, or
adverse changes to the purchasing patterns of key customers;
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disruptions in product supply for any reason, including product
recalls, our failure to appropriately forecast supply or demand,
difficulties in moving products across the border, or the
failure of third party suppliers to produce needed products or
components;
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reports by officials or health or medical authorities, the
general media or the FDA regarding the potential benefits of the
System One or of similar dialysis products distributed by other
companies or of daily or home dialysis;
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announcements by the FDA of non-clearance or non-approval of our
products, or delays in the FDA or other foreign regulatory
agency review process;
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product recalls;
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defaults under our material contracts, including without
limitation our credit agreement;
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regulatory developments in the United States and foreign
countries;
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changes in third-party healthcare reimbursements, particularly a
decline in the level of Medicare reimbursement for dialysis
treatments, or the willingness of Medicare contractors to pay
for more than three treatments a week where medically justified;
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litigation involving our company or our general industry or both;
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announcements of technical innovations or new products by us or
our competitors;
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developments or disputes concerning our patents or other
proprietary rights;
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our ability to manufacture and supply our products to commercial
standards;
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significant acquisitions, strategic partnerships, joint ventures
or capital commitments by us or our competitors;
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departures of key personnel; and
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investors general perception of our company, our products,
the economy and general market conditions.
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The stock markets in general have experienced substantial
volatility that has often been unrelated to the operating
performance of individual companies. These broad market
fluctuations may adversely affect the trading price of our
common stock. In the past, following periods of volatility in
the market price of a companys securities, stockholders
have often instituted class action securities litigation against
those companies. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm our profitability and
reputation.
Anti-takeover
provisions in our restated certificate of incorporation and
amended and restated bylaws and under Delaware law could make an
acquisition of us more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.
Provisions in our restated certificate of incorporation and our
amended and restated bylaws may delay or prevent an acquisition
of us. In addition, these provisions may frustrate or prevent
attempts by our stockholders to replace or remove members of our
board of directors. Because our board of directors is
responsible for
48
appointing the members of our management team, these provisions
could in turn affect any attempt by our stockholders to replace
current members of our management team. These provisions include:
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a prohibition on actions by our stockholders by written consent;
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the ability of our board of directors to issue preferred stock
without stockholder approval, which could be used to institute a
poison pill that would work to dilute the stock
ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board
of directors;
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advance notice requirements for nominations of directors or
stockholder proposals; and
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the requirement that board vacancies be filled by a majority of
our directors then in office.
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In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination
is approved in a prescribed manner. These provisions would apply
even if the offer may be considered beneficial by some
stockholders.
If
there are substantial sales of our common stock in the market by
our large existing stockholders, our stock price could
decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell a large number of shares of common
stock, the market price of our common stock could decline
significantly. We have 53,718,213 shares of common stock
outstanding as of December 31, 2010. Except where sales are
made pursuant to an effective registration statement, shares
held by our affiliates may only be sold in compliance with the
volume limitations of Rule 144. These volume limitations
restrict the number of shares that may be sold by an affiliate
in any three-month period to the greater of 1% of the number of
shares then outstanding, which approximates 537,182 shares,
or the average weekly trading volume of our common stock during
the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale. With the higher trading
volumes we have recently observed in our stock, the number of
shares that can be sold by our affiliates pursuant to
Rule 144 is significantly above the 1% of shares
outstanding limitation of Rule 144 as of the time of the
filing of this report.
At December 31, 2010, subject to certain conditions,
holders of an aggregate of approximately 9 million shares
of our common stock have rights with respect to the registration
of these shares of common stock with the Securities and Exchange
Commission, or SEC. If we register their shares of common stock,
they can more easily sell those shares in the public market.
As of December 31, 2010, 6,874,978 shares of common
stock are authorized for issuance under our stock incentive
plan, employee stock purchase plan and outstanding stock
options. As of December 31, 2010, 6,222,962 shares
were subject to outstanding options, of which 3,709,004 were
exercisable and can be freely sold in the public market upon
issuance, subject to the restrictions imposed on our affiliates
under Rule 144.
We have filed a resale registration statement covering
both shares of our common stock that we sold in a May 2008
private placement and shares of our common stock issuable upon
the exercise of a warrant held by DaVita. If the holders of
these shares or shares issued pursuant to the terms of the
warrant are unable to sell these shares under the respective
registration statements, we may be obligated to pay them
damages, which could harm our financial condition. Further,
these resale registration statements could result in downward
pressure on the price of our common stock and may affect the
ability of our stockholders to realize the current trading price
of our common stock.
In 2008, we sold an aggregate of 9,555,556 shares of our
common stock and warrants to purchase an additional
1,911,111 shares of our common stock in a private
placement. We were required to register the common stock and the
common stock issuable upon exercise of the warrants with the
Securities and Exchange Commission, which we did on
August 8, 2008. If the holders of the shares or the
accompanying warrant shares are unable to sell such shares or
warrant shares under the registration statement for more than
30 days
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in any 365 day period after the effectiveness of the
registration statement, we may be obligated to pay damages equal
to up to 1% of the share purchase price per month that the
registration statement is not effective and the investors are
unable to sell their shares.
On July 22, 2010, we issued to DaVita a warrant which,
subject to the achievement of certain System One growth targets,
may be exercisable for up to a cumulative total of
5,500,000 shares of our common stock. In connection with
issuance of this warrant we entered into a registration rights
agreement with DaVita, pursuant to which (subject to certain
conditions) we have agreed to file, on or prior to April 1,
2011, a registration statement on
Form S-3
with respect to the resale by DaVita of any shares of our common
stock issued to DaVita under the warrant. We registered the
shares of common stock issuable upon the exercise of the warrant
on February 16, 2011 on our automatic shelf registration
statement on
Form S-3
(No. 333-170654)
filed on November 17, 2010.
Investors should be aware that the current or future market
price of their shares of our common stock could be negatively
impacted by the sale or perceived sale of all or a significant
number of these shares that are available for sale pursuant to
these registration statements or that will be available for sale
in the future.
Our
outstanding warrants, and the provisions of our Term Loan with
Asahi, may result in substantial dilution to our
stockholders.
Warrants held by DaVita and certain investors in our 2008
private placement could result in the issuance of up to
7,052,155 additional shares of common stock. In addition, in the
event our Term Loan with Asahi reaches maturity, Asahi may
require that all of the principal and interest on the Term Loan
that is unpaid as of the maturity date be converted into shares
of our common stock, with the number of shares to be determined
based upon the average closing stock price of our common stock
during the thirty business days preceding the maturity date. The
issuance and sale of any of these shares could result in
substantial dilution to our stockholders in the form of
immediate and substantial dilution in net tangible book value
per share.
Our
executive officers, directors and current and principal
stockholders own a large percentage of our voting common stock
and could limit new stockholders influence on corporate
decisions or could delay or prevent a change in corporate
control.
Our directors, executive officers and current holders of more
than 5% of our outstanding common stock, together with their
affiliates and related persons, beneficially hold, in the
aggregate, approximately 35% of our outstanding common stock.
David S. Utterberg holds approximately 10% and Credit Suisse
holds approximately 6% of our outstanding common stock. Although
these numbers are lower than they have been historically, due to
certain recent selling by larger affiliated stockholders, these
stockholders, if acting together, may nevertheless still have
the ability to determine the outcome of matters submitted to our
stockholders for approval, including the election and removal of
directors and any merger, consolidation or sale of all or
substantially all of our assets and other extraordinary
transactions. The interests of this group of stockholders may
not always coincide with our corporate interests or the
interests of other stockholders, and they may act in a manner
with which you may not agree or that may not be in the best
interests of other stockholders. This concentration of ownership
may have the effect of:
|
|
|
|
|
delaying, deferring or preventing a change in control of our
company;
|
|
|
|
entrenching our management
and/or Board;
|
|
|
|
impeding a merger, consolidation, takeover or other business
combination involving our company; or
|
|
|
|
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
|
We may
grow through additional acquisitions, which could dilute our
existing shareholders and could involve substantial integration
risks.
As part of our business strategy, we may acquire other
businesses
and/or
technologies in the future. We may issue equity securities as
consideration for future acquisitions that would dilute our
existing stockholders, perhaps significantly depending on the
terms of the acquisition. We may also incur additional debt in
50
connection with future acquisitions, which, if available at all,
may place additional restrictions on our ability to operate our
business. Acquisitions may involve a number of risks, including:
|
|
|
|
|
difficulty in transitioning and integrating the operations and
personnel of the acquired businesses, including different and
complex accounting and financial reporting systems;
|
|
|
|
potential disruption of our ongoing business and distraction of
management;
|
|
|
|
potential difficulty in successfully implementing, upgrading and
deploying in a timely and effective manner new operational
information systems and upgrades of our finance, accounting and
product distribution systems;
|
|
|
|
difficulty in incorporating acquired technology and rights into
our products and technology;
|
|
|
|
unanticipated expenses and delays in completing acquired
development projects and technology integration;
|
|
|
|
management of geographically remote units both in the United
States and internationally;
|
|
|
|
impairment of relationships with partners and customers;
|
|
|
|
customers delaying purchases of our products pending resolution
of product integration between our existing and our newly
acquired products;
|
|
|
|
entering markets or types of businesses in which we have limited
experience;
|
|
|
|
potential loss of key employees of the acquired company; and
|
|
|
|
inaccurate assumptions of the acquired companys product
quality
and/or
product reliability.
|
As a result of these and other risks, we may not realize
anticipated benefits from our acquisitions. Any failure to
achieve these benefits or failure to successfully integrate
acquired businesses and technologies could seriously harm our
business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not Applicable.
We are headquartered in Lawrence, Massachusetts, where we lease
approximately 52,000 square feet under a lease expiring in
2012 used for research and development, general and
administrative support functions, customer service and IT
support services. We have manufacturing facilities consisting of
an 118,000 square foot facility in Tijuana, Mexico with a
lease expiring in October 2011 and a 36,300 square foot
facility in Modena, Italy with a lease expiring in 2012. These
facilities support both our In-Center and System One Segments.
We also have a 35,000 square foot facility through our
relationship with Entrada with a lease expiring in 2012 where
our System One equipment is serviced and repaired, and a
12,369 square foot facility in Rosdorf, Germany with a term
expiring in December 2011, where our filters for the System One
segment are manufactured. We believe that our existing
facilities are adequate for our current needs and that suitable
additional or alternative space will be available at such time
as it becomes needed on commercially reasonable terms.
|
|
Item 3.
|
Legal
Proceedings
|
From time to time we may be a party to various legal proceedings
arising in the ordinary course of our business. We are not
currently subject to any material legal proceedings.
51
|
|
Item 4.
|
[Removed
and Reserved]
|
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock has been quoted on the NASDAQ Global Select
Market under the symbol NXTM since January 3,
2010 and prior to that was quoted on the NASDAQ Global Market
since July 1, 2006 and the NASDAQ National Market since
October 27, 2005. Prior to that time, there was no public
market for our stock. The following table sets forth, for the
periods indicated, the high and low closing sale prices of our
common stock.
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|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.45
|
|
|
$
|
7.69
|
|
Second Quarter
|
|
$
|
15.50
|
|
|
$
|
10.96
|
|
Third Quarter
|
|
$
|
19.40
|
|
|
$
|
13.59
|
|
Fourth Quarter
|
|
$
|
24.88
|
|
|
$
|
19.35
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.98
|
|
|
$
|
2.11
|
|
Second Quarter
|
|
$
|
5.90
|
|
|
$
|
1.93
|
|
Third Quarter
|
|
$
|
7.04
|
|
|
$
|
4.64
|
|
Fourth Quarter
|
|
$
|
8.43
|
|
|
$
|
5.39
|
|
Holders
On February 9, 2011, the last reported sale price of our
common stock was $21.81 per share. As of February 9, 2011,
there were approximately 76 holders of record of our common
stock and approximately 2,500 beneficial holders of our common
stock.
Dividends
We have never paid or declared any cash dividends on our common
stock. We anticipate that we will retain our earnings for future
growth and therefore do not anticipate paying cash dividends in
the future. Our loan agreements with Asahi and SVB restrict our
ability to pay dividends.
Issuer
Purchases of Equity Securities
During 2010, we received 288,992 shares of our common stock
that were surrendered by employees in payment for the minimum
required withholding taxes associated with awards under our 2009
Corporate Bonus and Performance Share Plans and
36,112 shares that were surrendered in payment for the
exercise of stock options. See Note 15 to the consolidated
financial statements for the year ended December 31, 2010
included in this Annual Report on
Form 10-K
for further information.
Comparative
Stock Performance Graph
The following performance graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The comparative stock performance graph below compares the
cumulative stockholder return on our common stock for the period
from December 31, 2005 through December 31, 2010 with
the cumulative total return on (i) the Total Return Index
for the NASDAQ Stock Market (U.S. Companies), which we
refer to as
52
the NASDAQ Composite Index, and (ii) the NASDAQ Medical
Equipment Index. This graph assumes the investment of $100 on
December 31, 2005 in our common stock, the NASDAQ Composite
Index and the NASDAQ Medical Equipment Index and assumes all
dividends are reinvested. Measurement points are the last
trading days of the three month period ended March 31,
June 30, September 30, and December 31, during
2010, 2009, 2008, 2007 and 2006.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among NxStage Medical, Inc, The NASDAQ Composite Index
And The NASDAQ Medical Equipment Index
* $100 invested on 12/31/05 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31.
53
|
|
Item 6.
|
Selected
Financial Data
|
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read together with the information under Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the notes to those consolidated financial statements included
elsewhere in this Annual Report. The selected statements of
operations data for the years ended December 31, 2010, 2009
and 2008 and balance sheet data as of December 31, 2010 and
2009 set forth below have been derived from our audited
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K.
The selected statements of operations data for the years ended
December 31, 2007 and 2006 and balance sheet data as of
December 31, 2008, 2007 and 2006 set forth below have been
derived from the audited consolidated financial statements for
such years not included in this Annual Report.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
179,218
|
|
|
$
|
148,676
|
|
|
$
|
128,763
|
|
|
$
|
59,964
|
|
|
$
|
20,812
|
|
Cost of revenues
|
|
|
121,091
|
|
|
|
111,812
|
|
|
|
108,387
|
|
|
|
65,967
|
|
|
|
26,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
58,127
|
|
|
|
36,864
|
|
|
|
20,376
|
|
|
|
(6,003
|
)
|
|
|
(5,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
34,166
|
|
|
|
30,047
|
|
|
|
27,965
|
|
|
|
21,589
|
|
|
|
14,356
|
|
Research and development
|
|
|
12,900
|
|
|
|
9,814
|
|
|
|
8,890
|
|
|
|
6,335
|
|
|
|
6,431
|
|
Distribution
|
|
|
14,751
|
|
|
|
13,918
|
|
|
|
14,267
|
|
|
|
13,111
|
|
|
|
7,093
|
|
General and administrative
|
|
|
22,774
|
|
|
|
19,532
|
|
|
|
19,239
|
|
|
|
13,046
|
|
|
|
8,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
84,591
|
|
|
|
73,311
|
|
|
|
70,361
|
|
|
|
54,081
|
|
|
|
36,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,464
|
)
|
|
|
(36,447
|
)
|
|
|
(49,985
|
)
|
|
|
(60,084
|
)
|
|
|
(41,892
|
)
|
Other (expense) income, net
|
|
|
(4,480
|
)
|
|
|
(6,755
|
)
|
|
|
(852
|
)
|
|
|
1,750
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(30,944
|
)
|
|
|
(43,202
|
)
|
|
|
(50,837
|
)
|
|
|
(58,334
|
)
|
|
|
(39,630
|
)
|
Provision for income taxes
|
|
|
768
|
|
|
|
265
|
|
|
|
374
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,712
|
)
|
|
$
|
(43,467
|
)
|
|
$
|
(51,211
|
)
|
|
$
|
(58,396
|
)
|
|
$
|
(39,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.66
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.86
|
)
|
|
$
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
|
48,188
|
|
|
|
46,627
|
|
|
|
41,803
|
|
|
|
31,426
|
|
|
|
24,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
104,339
|
|
|
$
|
21,720
|
|
|
$
|
26,642
|
|
|
$
|
34,345
|
|
|
$
|
61,802
|
|
Working capital
|
|
|
119,089
|
|
|
|
36,037
|
|
|
|
34,362
|
|
|
|
40,655
|
|
|
|
64,716
|
|
Total assets
|
|
|
286,094
|
|
|
|
196,978
|
|
|
|
212,066
|
|
|
|
210,386
|
|
|
|
101,725
|
|
Long-term liabilities
|
|
|
97,574
|
|
|
|
78,267
|
|
|
|
52,580
|
|
|
|
46,134
|
|
|
|
5,495
|
|
Accumulated deficit
|
|
|
(308,426
|
)
|
|
|
(276,714
|
)
|
|
|
(233,247
|
)
|
|
|
(182,036
|
)
|
|
|
(123,640
|
)
|
Total stockholders equity(1)(2)(3)(4)(5)
|
|
|
152,129
|
|
|
|
89,446
|
|
|
|
122,447
|
|
|
|
129,717
|
|
|
|
83,409
|
|
|
|
|
(1) |
|
In November 2010, we issued and sold 3.7 million shares of
common stock pursuant to an underwriting agreement with
Canaccord Genuity. Net proceeds from the sale were
$73.4 million. |
54
|
|
|
(2) |
|
In May 2008, we issued and sold 5.6 million unregistered
shares of common stock and warrants to purchase 1.1 million
shares of our common stock. In August 2008, we issued and sold
an additional 4.0 million share of common stock and
warrants to purchase 0.8 million shares of our common
stock. The aggregate net proceeds of both sales was
$42.3 million. |
|
(3) |
|
On October 1, 2007, we issued 6.5 million shares of
common stock at $12.50 per share in connection with the
Medisystems Acquisition. |
|
(4) |
|
On February 7, 2007, we issued and sold to DaVita
2.0 million shares of common stock at a purchase price of
$10.00 per share, for net proceeds of $19.9 million. |
|
(5) |
|
We closed our follow-on public offering on June 14, 2006,
which resulted in the issuance of 6.3 million shares of
common stock at $8.75 per share. Net proceeds from the offering
were $51.3 million. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
Overview
We report the results of our operations in two segments: the
System One segment and the In-Center segment. We distribute our
products in three markets: home, critical care and in-center.
Within the System One segment, we offer a similar technology
platform of the System One for the home and critical care
markets with different features. We offer primarily needles and
blood tubing sets in the In-Center segment. Our products are
predominantly used by our customers to treat patients suffering
from ESRD or acute kidney failure. We have marketing and sales
efforts dedicated to each market, although nearly all sales in
the In-Center segment are made through distributors.
During 2010, we grew our revenues by 21% from
$148.7 million during 2009 to $179.2 million during
2010, with growth occurring in each market: home, critical care
and in-center. In the home market, revenues increased
$22.3 million, or 35%, during 2010 compared to 2009, with
the significant majority resulting from an increase in the
number of patients prescribed to use and centers offering the
System One. During 2010, we increased both the average number of
patients at existing centers and the number of total centers
offering the System One, through new and existing relationships
with service providers, including DaVita and Fresenius. Critical
care market revenues increased $5.8 million, or 26%, during
2010 compared to 2009, primarily due to increased sales of the
System One resulting from our efforts to increase our market
share and increased sales of disposables from our growing
installed base of System One equipment. In 2011, we expect to
see continued growth in our revenues, primarily driven by the
System One segment due to the annuity nature of our business, as
well as the life-sustaining, non-elective nature of dialysis
therapy. Our two largest customers in the home market, DaVita
and Fresenius, will be important to that growth. If the
purchasing patterns of either of these customers adversely
change, our business will be adversely affected, at least in the
near term. In-center revenues increased $2.5 million, or
4%, during 2010 compared to 2009. The increase was driven by
increased sales of our needle products. We expect future demand
will continue to be susceptible to fluctuation as a result of
increased competition and variations in inventory management
policies with both our distributors and end users.
We continue to see improvements in our financial performance
below the revenue line. We have not yet achieved profitable
operating margins, but we continue to improve gross margins and
cash flows from operating activities. We have consistently
improved gross margin on a quarterly and annual basis from 16%
during 2008 to 25% during 2009 to 32% during 2010. The
improvements in gross margin were primarily driven by lower
overall costs of revenues resulting from improvements in product
design and reliability, leveraging our manufacturing
infrastructure, transition of manufacturing and equipment
service to lower cost labor markets and pricing strategies.
During 2010, cash flows from operating activities were positive
due to improvements in net loss versus 2009 and a
$4.3 million one-time customer prepayment on first quarter
2011 orders. While we expect to see continued improvements to
our cash flows from operating activities, driven in meaningful
part through continued improvement in our gross profits, in the
near term, we expect cash flows from operating activities on a
quarterly basis to fluctuate between negative and positive,
primarily due to changes in working capital. We are encouraged
by the improvements to our operating margins and are continuing
to work hard toward our long-term goal of achieving profitable
operating margins. However, there
55
can be no assurance that we will be able to continue to improve
our operating margins or achieve positive operating margins. Our
ability to become profitable and, its timing and sustainability,
depend principally upon continued improvements in gross margins,
growing revenues, and leverage of our operating infrastructure
including any investment in selling and marketing or research
and development activities.
Statement
of Operations Components
Revenues
In the System One segment we derive our revenues from the sale
and rental of equipment and the sale of disposable products in
the home and critical care markets. In the home market,
customers purchase or rent the System One equipment, including
cycler and PureFlow SL, and then purchase the related disposable
products based on a specific patient prescription. In the
critical care market, we sell or rent the System One and related
disposables to hospital customers. In the In-Center segment, we
derive our revenues from the sale of needles and blood tubing
sets. Nearly all of our sales in the In-Center segment are
through supply and distribution contracts with distributors.
In the home market the majority of our revenue is derived from
recurring sales of disposable products. For customers that
purchase the System One, we recognize revenue from the equipment
sale ratably over the expected service obligation period. For
customers that rent the System One, we recognize revenue on a
monthly basis. We recognize revenues related to the disposable
products upon delivery. Over time, as more home patients are
treated with the System One and more systems are placed in
patient homes, we expect to derive a growing recurring revenue
stream from the sale of related disposables.
Our contracts with dialysis centers in the home market for ESRD
home dialysis patients generally include terms providing for the
sale of disposable products to accommodate up to the number of
prescribed treatments per month per patient and the purchase or
monthly rental of System One cyclers and, in most instances, our
PureFlow SL hardware. These contracts typically have a term of
one to seven years, and may be renewed on a
month-to-month
basis thereafter, subject to a
30-day
termination notice. Under these contracts, if home hemodialysis
is prescribed, supplies are shipped directly to patient homes
and paid for by the treating dialysis center. We also include
vacation delivery terms, providing for the shipment of products
to a designated vacation destination for a specified number of
vacation days. We derive a small amount of revenues from the
sale of supplementary products and services such as ancillaries,
reserve inventory and special deliveries.
In the critical care market we recognize revenues from direct
product sales at the time of shipment or, if applicable,
delivery in accordance with contract terms. Our contracts with
hospitals generally include terms providing for the sale of our
System One hardware and disposables, although we also provide a
hardware rental option. These contracts typically have a term of
one year. We derive a small amount of revenues from the sale of
one-and two-year service contracts following the expiration of
our standard one-year warranty period for System One hardware.
To further support service in the critical care market, we have
a bio-medical training program, whereby we train bio-medical
engineers on how to service and repair certain aspects of the
System One in the critical care setting. Bio-medical training is
typically provided under a two-year contract following the
expiration of our standard one-year warranty period for System
One hardware. As more System One equipment is placed within
hospitals, we expect to derive a growing recurring revenue
stream from the sale of disposable cartridges and fluids as well
as, to a much lesser degree, from the sale of service and
bio-medical training contracts.
In the In-Center segment, nearly all sales to end users are
structured through supply and distribution contracts with
several significant distributors. These contracts typically
contain minimum volume commitments with negotiated pricing
triggers at different volume tiers. Each agreement may be
cancelled upon a material breach, subject to certain cure
rights, and in many instances minimum volume commitments can be
reduced or eliminated upon certain events.
In addition to contractually determined volume discounts, we
offer certain customers rebates based on sales to specific end
users and discounts for early payment. Our revenues are
presented net of these rebates and discounts. As of
December 31, 2010, we had $1.4 million and
$0.5 million reserved against trade accounts
56
receivable for future rebates and discounts for customers in our
In-Center and System One segments, respectively. We recorded
$5.5 million, $8.6 million and $7.3 million
during 2010, 2009 and 2008, respectively, as a reduction of
In-Center segment revenues and $2.3 million,
$1.2 million and $0.7 million during 2010, 2009 and
2008, respectively, as a reduction of System One segment
revenues in connection with rebates and discounts.
Currently nearly all of our revenues have been generated from
sales to customers in the U.S. However, in 2009 we began
selling our System One and certain of our other products
internationally through distributors. For sales to our
international distributors, we recognize revenues from the
equipment sale ratably over the expected term of our remaining
obligation, which is typically five years. We recognize revenues
related to the disposable products upon delivery. However,
effective January 1, 2011, we adopted two new Accounting
Standard Updates, or ASUs, which will affect revenue recognition
for sales to our international distributors within the System
One segment. Under the new ASUs, for international sales
beginning January 1, 2011, we will recognize revenues from
equipment sales to international distributors at the time of
shipment or, if applicable, delivery in accordance with contract
terms. We will adopt the new ASUs prospectively and therefore,
equipment shipped prior to January 1, 2011 will continue to
be recognized as revenues ratably.
Cost
of Revenues
Cost of revenues consists primarily of direct product costs,
material and labor required to manufacture our products, service
of System One equipment that we sell or rent to customers and
manufacturing overhead. It also includes the cost of inspecting,
servicing and repairing System One equipment prior to sale or
during the warranty period and stock-based compensation for
certain personnel. The cost of our products depends on several
factors, including the efficiency of our manufacturing
operations, the cost at which we can obtain labor and products
from third-party suppliers, product reliability and related
servicing costs and the design of our products.
Operating
Expenses
Selling and Marketing. Selling and marketing
expenses consist primarily of salary, benefits and stock-based
compensation for sales and marketing personnel, travel,
promotional and marketing materials and other expenses
associated with providing clinical training to our customers.
Included in selling and marketing are the costs of clinical
educators, usually nurses, we employ to teach our customers
about our products and prepare our customers to instruct their
patients and their partners in the operation of our products and
customer service and technical support personnel.
Research and Development. Research and
development expenses consist primarily of salary, benefits and
stock-based compensation for research and development personnel,
supplies, materials and expenses associated with product design
and development, clinical studies, regulatory submissions,
reporting and compliance and expenses incurred for outside
consultants or firms who furnish services related to these
activities.
Distribution. Distribution expenses include
the freight costs of delivering our products to our customers or
our customers patients, depending on the market and the
specific agreements with our customers, salary, benefits and
stock-based compensation for distribution personnel and the cost
of any equipment lost or damaged in the distribution process. We
use common carriers and freight companies to deliver our
products and do not operate our own delivery service. Also
included in this category are the expenses of shipping products
under warranty from customers back to our service center for
repair and the related expense of shipping a replacement product
to our customers or their patients.
General and Administrative. General and
administrative expenses consist primarily of salary, benefits
and stock-based compensation for our executive management, legal
and finance and accounting staff, fees of outside legal counsel,
fees for our annual audit and tax services, and general expenses
to operate the business, including insurance and other
corporate-related expenses.
57
Results
of Operations
The following table presents, for the periods indicated,
information expressed as a percentage of revenues. This
information has been derived from our consolidated statements of
operations included elsewhere in this Annual Report on
Form 10-K.
You should not draw any conclusions about our future results
from the results of operations for any period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
68
|
%
|
|
|
75
|
%
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32
|
%
|
|
|
25
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
22
|
%
|
Research and development
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
7
|
%
|
Distribution
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
General and administrative
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47
|
%
|
|
|
49
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15
|
)%
|
|
|
(24
|
)%
|
|
|
(39
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Interest expense
|
|
|
(3
|
)%
|
|
|
(5
|
)%
|
|
|
(3
|
)%
|
Other income (expense), net
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Change in fair value of financial instruments
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)%
|
|
|
(5
|
)%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(18
|
)%
|
|
|
(29
|
)%
|
|
|
(40
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2010 and 2009
Revenues
Our revenues for 2010 and 2009 were as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
System One segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
85,762
|
|
|
|
48
|
%
|
|
$
|
63,461
|
|
|
|
43
|
%
|
Critical Care
|
|
|
28,093
|
|
|
|
16
|
%
|
|
|
22,340
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total System One segment
|
|
|
113,855
|
|
|
|
64
|
%
|
|
|
85,801
|
|
|
|
58
|
%
|
In-Center segment
|
|
|
65,363
|
|
|
|
36
|
%
|
|
|
62,875
|
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
179,218
|
|
|
|
100
|
%
|
|
$
|
148,676
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was mainly attributable to increased
sales and rentals of the System One and related disposables in
both the home and critical care markets, primarily as a result
of the growing number of patients using the System One as we
continue to penetrate these markets.
In the home market, revenues increased $22.3 million, or
35%, during 2010 compared to 2009, with the significant majority
resulting from an increase in the number of patients prescribed
to use and centers offering
58
the System One. During 2010, we increased both the average
number of patients at existing centers and the number of total
centers offering the System One, through new and existing
relationships with service providers, including DaVita and
Fresenius. Critical care market revenues increased
$5.8 million, or 26%, during 2010 compared to 2009,
primarily due to increased sales of the System One resulting
from our efforts to further penetrate the market and increased
sales of disposables from our growing number of System One
equipment placed within hospitals. Growth in the critical care
market in 2010 also benefitted from slightly improved economic
conditions compared to 2009. Future demand for our products in
both the home and critical care markets is expected to remain
strong due to the life-sustaining, non-elective nature of
dialysis therapy. As we further penetrate these markets and as
we expand internationally, we expect revenues in the home and
critical care markets to continue to increase.
In-Center segment revenues increased $2.5 million, or 4%,
during 2010 compared to 2009. The increase in revenues was due
to increased sales of our needles. We expect future demand will
continue to be susceptible to fluctuation as a result of
increased competition and variations in inventory management
policies with both our distributors and end users.
Gross
Profit
Our gross profit and gross profit as a percentage of revenues
for 2010 and 2009 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
%
|
|
|
December 31,
|
|
|
%
|
|
|
|
2010
|
|
|
Revenues
|
|
|
2009
|
|
|
Revenues
|
|
|
System One segment
|
|
$
|
42,620
|
|
|
|
37
|
%
|
|
$
|
21,263
|
|
|
|
25
|
%
|
In-Center segment
|
|
|
15,507
|
|
|
|
24
|
%
|
|
|
15,601
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
58,127
|
|
|
|
32
|
%
|
|
$
|
36,864
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross profit was a result of increased revenues
and improvement in gross profit as a percentage of revenues. The
improvement in gross profit as a percentage of revenues was
attributable to improvements in the System One segment,
specifically, lower costs resulting from certain costs saving
initiatives and improvements in product design, decreased
equipment service costs per unit resulting from improved product
reliability, lower overall cost of manufacturing as we continue
to realize the benefits of leveraging our manufacturing
infrastructure, increased relative sales of higher margin
products and certain pricing strategies.
Gross profit for the In-Center segment decreased slightly in
absolute dollars and as a percentage of revenues during 2010
compared to 2009, due to costs incurred related to manufacturing
process improvements to support future growth.
We expect gross profit as a percentage of revenues will continue
to improve over time for three general reasons, all of which we
expect will reduce costs in the future. First, we expect to
introduce additional process improvements and product design
changes that have inherently lower cost than our current
products. Second, we anticipate that increased sales volume and
realization of economies of scale will lead to better purchasing
terms and prices and efficiencies in manufacturing and supply
chain overhead costs. Finally, we expect to continue to improve
product reliability, which would reduce unit service costs.
Additionally, given the longevity of certain of our System One
field equipment assets, in the fourth quarter of 2010 we changed
the estimated useful life of these assets from five to seven
years which will result in lower field equipment depreciation
costs in the near term. However, there is no certainty that our
expectations will be achieved with respect to these cost
reduction plans.
59
Selling
and Marketing
Our selling and marketing expenses for 2010 and 2009 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
System One segment
|
|
$
|
29,377
|
|
|
$
|
26,144
|
|
|
$
|
3,233
|
|
|
|
12
|
%
|
In-Center segment
|
|
|
4,789
|
|
|
|
3,903
|
|
|
|
886
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Selling and marketing
|
|
$
|
34,166
|
|
|
$
|
30,047
|
|
|
$
|
4,119
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expense was primarily the
result of increased personnel and personnel-related costs,
primarily non-cash stock-based compensation expenses, and
increased spending due to expanded marketing programs. We
anticipate that selling and marketing expenses will continue to
increase in absolute dollars but continue to decline as a
percentage of revenues as we broaden our marketing initiatives
to increase public awareness of the System One in the home
market and to support growth in international markets.
Research
and Development
Our research and development expenses for 2010 and 2009 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
Research and development
|
|
$
|
12,900
|
|
|
$
|
9,814
|
|
|
$
|
3,086
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses increased in absolute dollars
but remained consistent as a percentage of revenues at 7% for
both 2010 and 2009. The increase in research and development
expenses was primarily due to increased personnel and
personnel-related costs, primarily non-cash stock-based
compensation expense and increased project related spending.
This increase was partially offset by a decrease in clinical
trials expenses primarily related to our nocturnal IDE as we
completed the study in February 2010. For the near term, we
expect research and development expenses will increase in
absolute dollars but remain relatively constant as a percentage
of revenues as we seek to further enhance and improve the
reliability of our System One and related products and as we
continue with our FREEDOM study, which is designed to quantify
the clinical benefits and costs of daily home therapy
administered to Medicare patients using the System One versus
conventional thrice-weekly dialysis.
Distribution
Our distribution expenses for 2010 and 2009 were as follows (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
System One segment
|
|
$
|
12,960
|
|
|
$
|
12,564
|
|
|
$
|
396
|
|
|
|
3
|
%
|
In-Center segment
|
|
|
1,791
|
|
|
|
1,354
|
|
|
|
437
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distribution
|
|
$
|
14,751
|
|
|
$
|
13,918
|
|
|
$
|
833
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution expenses decreased as a percentage of revenues to
8% for 2010 versus 9% for 2009. Distribution expenses for the
System One segment decreased as a percentage of revenues to 11%
for 2010 versus 15% for 2009, due primarily to efficiencies
gained from economies of scale resulting from increased business
volume, improved product reliability of our System One and
PureFlow SL hardware and better pricing obtained from carriers.
Distribution expenses as a percentage of revenues for the
In-Center segment
60
increased slightly to 3% for 2010 versus 2% for 2009, due
primarily to increased delivery costs for certain products
shipped from our international manufacturing locations to our
customers. We expect that distribution expenses in absolute
dollars will fluctuate modestly from period to period driven in
large part by changes in fuel prices but, overall, we expect
distribution expenses will increase at a lower rate than
revenues due to expected efficiencies gained from increased
business volume and improved reliability of System One equipment.
General
and Administrative
Our general and administrative expenses for 2010 and 2009 were
as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Change
|
|
|
General and administrative
|
|
$
|
22,774
|
|
|
$
|
19,532
|
|
|
$
|
3,242
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased in absolute
dollars but remained consistent as a percentage of revenues at
13% for both 2010 and 2009. The increase in general and
administrative expenses was primarily the result of increased
personnel and personnel-related costs, primarily non-cash
stock-based compensation expenses. These increases were offset
by lower spending on corporate support functions, including
consulting and other professional services, due to our continued
initiatives to control costs. We expect that general and
administrative expenses will decrease as a percentage of
revenues over time as we continue to leverage our existing
infrastructure.
Other
Income and Expense
Interest income is derived primarily from investments in money
market funds. The decrease in interest income is due to lower
interest rates on investments.
Interest expense decreased $1.9 million during 2010
compared to 2009, due primarily to prepayment and other
transaction fees of $2.0 million incurred during 2009 to
pay off the entire debt obligation owed under our credit and
security agreement with General Electric Capital Corporation, or
GE.
The change in other expense during both periods is derived
primarily by foreign currency gains and losses.
Provision
for Foreign Income Taxes
The provision for income taxes of $0.8 million in 2010 and
$0.3 million in 2009 relates primarily to the profitable
operations of certain of our foreign entities.
Comparison
of Years Ended December 31, 2009 and 2008
Revenues
Our revenues for 2009 and 2008 were as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
System One segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
63,461
|
|
|
|
43
|
%
|
|
$
|
48,319
|
|
|
|
38
|
%
|
Critical Care
|
|
|
22,340
|
|
|
|
15
|
%
|
|
|
18,554
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total System One segment
|
|
|
85,801
|
|
|
|
58
|
%
|
|
|
66,873
|
|
|
|
52
|
%
|
In-Center segment
|
|
|
62,875
|
|
|
|
42
|
%
|
|
|
61,890
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,676
|
|
|
|
100
|
%
|
|
$
|
128,763
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The increase in revenues was attributable to increased sales and
rentals of the System One and related disposables in both the
home and critical care markets, primarily as a result of the
growing number of patients using the System One as we continue
to penetrate the market place, and an increase in sales of blood
tubing sets in our In-Center segment.
In the home market, revenues increased $15.1 million, or
31%, in 2009 compared to 2008 as a result of an increase in the
number of patients prescribed to use and centers offering the
System One. During 2009 we increased the average number of
patients at existing centers and the number of total centers
offering the System One. Critical care market revenues increased
$3.8 million, or 20%, in 2009 compared to 2008, primarily
as a result of sales of additional System One units, the growth
of our installed base of units and the associated sales of
disposables due to our efforts to continue to penetrate the
market. In-Center segment revenues increased $1.0 million,
or 2%, in 2009 compared to 2008. The increase in revenues was
due to higher sales volumes of our blood tubing sets, including
Streamline, our newest blood tubing set.
Gross
Profit
Our gross profit and gross profit as a percentage of revenues
for 2009 and 2008 were as follows (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
%
|
|
|
December 31,
|
|
|
%
|
|
|
|
2009
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
System One segment
|
|
$
|
21,263
|
|
|
|
25
|
%
|
|
$
|
8,960
|
|
|
|
13
|
%
|
In-Center segment
|
|
|
15,601
|
|
|
|
25
|
%
|
|
|
11,416
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
36,864
|
|
|
|
25
|
%
|
|
$
|
20,376
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross profit was a result of increased revenues
and improvement in gross profit as a percentage of revenues. The
improvement in gross profit as a percentage of revenues was
primarily attributable to the System One segment, specifically,
lower costs resulting from improvements in reliability and
equipment utilization and lower overall costs of manufacturing
as we continue to realize the benefits of leveraging our
manufacturing infrastructure, certain cost saving initiatives
such as the transition of manufacturing and equipment service to
lower cost labor markets, and improvements in product design and
reliability. Gross profit as a percentage of revenues for the
In-Center segment increased during 2010 compared to 2009, due to
lower manufacturing costs resulting from the benefits of certain
manufacturing process improvements and product design
improvements.
Selling
and Marketing
Our selling and marketing expenses for 2009 and 2008 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
System One segment
|
|
$
|
26,144
|
|
|
$
|
24,491
|
|
|
$
|
1,653
|
|
|
|
7
|
%
|
In-Center segment
|
|
|
3,903
|
|
|
|
3,474
|
|
|
|
429
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Selling and marketing
|
|
$
|
30,047
|
|
|
$
|
27,965
|
|
|
$
|
2,082
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was primarily the
result of increased personnel and personnel-related costs,
including non-cash stock-based compensation expense due to
expanded sales and marketing and customer service functions.
62
Research
and Development
Our research and development expenses for 2009 and 2008 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
Research and development
|
|
$
|
9,814
|
|
|
$
|
8,890
|
|
|
$
|
924
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was primarily
a result of increased personnel and personnel-related costs,
including non-cash stock-based compensation expense, due to
increased headcount. Additionally, expenses for clinical trials
have increased due to increased patient enrollment in our
nocturnal IDE and FREEDOM studies.
Distribution
Our distribution expenses for 2009 and 2008 were as follows (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
System One segment
|
|
$
|
12,564
|
|
|
$
|
12,631
|
|
|
$
|
( 67
|
)
|
|
|
(1
|
)%
|
In-Center segment
|
|
|
1,354
|
|
|
|
1,636
|
|
|
|
(282
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Distribution
|
|
$
|
13,918
|
|
|
$
|
14,267
|
|
|
$
|
(349
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in distribution expenses was primarily a result of
better pricing obtained from carriers and shipping efficiencies.
Distribution expenses for the System One segment remained
relatively consistent year over year but decreased as a
percentage of revenues from 19% during 2008 to 15% during 2009,
due primarily to better pricing obtained from carriers, shipping
efficiencies and improved reliability of our System One and
PureFlow SL hardware. Distribution expenses for the In-center
segment decreased due to shipping efficiencies.
General
and Administrative
Our general and administrative expenses for 2009 and 2008 were
as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
General and administrative
|
|
$
|
19,532
|
|
|
$
|
19,239
|
|
|
$
|
293
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased year over year but
decreased as a percentage of revenue from 15% during 2008 to 13%
during 2009 due to our continued initiative to leverage our
overhead structure. The increase in general and administrative
expenses was primarily a result of increased personnel and
personnel related costs, including non-cash stock-based
compensation expense, offset by a decreases in external services
expense resulting from cost savings measures.
Other
Income and Expense
Interest income decreased $0.5 million in 2009 compared to
2008 due to lower interest rates on investments. Interest income
is derived primarily from investments in money market funds.
Interest expense increased $2.9 million in 2009 compared to
2008 due primarily to prepayment and other transaction fees of
$2.0 million incurred during 2009 to pay off the entire
debt obligation owed under our credit and security agreement
with GE and an increase in outstanding borrowings.
63
The change in other expense during both periods is derived
primarily by foreign currency gains and losses.
The change in fair value of the warrants issued on May 22,
2008 and August 1, 2008 in connection with the private
placement resulted in the recognition of a $3.2 million
gain and the change in fair value of the obligation entered into
on May 22, 2008 in connection with the second tranche
resulted in the recognition of a $0.7 million loss during
2008. The obligation relating to the second tranche was settled
on August 1, 2008 and the fair value on settlement of
$0.6 million was recorded in equity. The exercise price of
the warrants was fixed at $5.50 per share on December 31,
2008 based on the Companys ability to achieve over 3,100
ESRD patients prescribed to receive therapy using the System
One. As a result, beginning January 1, 2009, the warrants
were classified in equity and thereafter, no longer result in
the recognition of changes in fair value in earnings. See
Note 15 to the consolidated financial statements for the
year ended December 31, 2009 included in this Annual Report
on
Form 10-K
for further information.
Provision
for Foreign Income Taxes
The provision for income taxes of $0.3 million in 2009 and
$0.4 million in 2008 relates primarily to the profitable
operations of certain of our foreign entities.
Liquidity
and Capital Resources
We have operated at a loss since our inception in 1998. As of
December 31, 2010, our accumulated deficit was
$308.4 million and we had cash and cash equivalents of
$104.3 million and working capital of $119.1 million.
Our primary ongoing cash requirements will be to fund operating
activities, product development and debt service. Our primary
sources of liquidity are cash on hand and ongoing revenues.
Historically, our business was fairly capital intensive due to
the manner in which we placed our System One equipment in the
home market. Prior to 2007, the significant majority of our
System One placements in the home market were made under a
rental model rather than an outright sale. Over the last three
years, we have increased the number of System Ones we have sold
versus rented, and in 2010, the significant majority of our
System One placements in the home market were made under a sale
versus rental model. Shifting our customers to an equipment
purchase versus rental model allows us to recover the cost of
our products upon initial sale rather than over an extended
period of time, thereby reducing our working capital
requirements. A number of our home market customers, including
DaVita, have committed to purchase, rather than rent, the
significant majority of their future System One equipment
requirements. However, there can be no assurance that we will be
able to continue to expand or sustain the percentage of our
equipment placements that are purchased rather than rented.
Other significant factors affecting the management of our
ongoing cash requirements are our ability to continue to
effectively manage our field equipment assets and working
capital and execute upon cost reduction initiatives to lower
product cost.
For the year ended December 31, 2010, cash flows from
operating activities were positive due to improvements in net
loss versus 2009 and a $4.3 million one-time customer
prepayment on first quarter 2011 orders. While we continue to
make progress in improving our cash flows from operating
activities, we expect cash flows from operating activities in
the near term to fluctuate between negative and positive on a
quarterly basis, primarily due to changes in working capital.
There can be no assurance that we will be able to continue to
improve cash flows from operating activities or whether we will
be able to generate positive cash flows from operating
activities in the future. We believe, based on current
projections and the current nature of our business, that we have
the required resources to fund our ongoing operating
requirements. Our ability to and the rate at which we continue
to improve cash flows from operating activities will depend on
many factors, including growing revenues, continued improvements
in gross margins, leverage of our operating infrastructure and
continued sale versus rental of a significant percentage of our
System One equipment.
We materially improved our cash position in 2010 through the
completion of the registered sale of 3,680,000 shares of
our common stock pursuant to an underwriting agreement with
Canaccord Genuity. We received proceeds of $73.4 million,
net of related expenses, from this offering. The shares issued
in this
64
offering were registered under a registration statement on
Form S-3,
which became effective on November 17, 2010. This
registration statement allows for the potential future
registered sale by us of various other equity and debt
securities, although we have no current plans to make such a
future offering.
We have two material debt instruments. In May 2009, we entered
into a term loan and security agreement with Asahi. The
$40.0 million term loan bears interest at a rate of 8% per
annum, with fifty percent of such interest being deferred until
the maturity date on May 31, 2013. Principal is payable in
one balloon payment at maturity. The term loan is secured by
substantially all of our assets. In the event the term loan
reaches maturity, Asahi may require that all of the principal
and interest on the term loan that is unpaid as of the maturity
date be converted into shares of our common stock, with the
number of shares to be determined based upon the average closing
stock price of our common stock during the thirty business days
preceding the maturity date, subject to certain conditions. We
used $30.0 million of the proceeds to pay off the entire
debt obligation, including prepayment and other transaction
fees, owed under our prior credit and security agreement with
General Electric Capital Corporation.
The term loan and security agreement with Asahi includes certain
affirmative covenants including timely filings and limitations
on contingent debt obligations and sales of assets. At
December 31, 2010, we were in compliance with these
covenants. The term loan and security agreement also contains
customary events of default, including nonpayment,
misrepresentation, breach of covenants, material adverse
effects, and bankruptcy. In the event we fail to satisfy our
covenants, or otherwise go into default, Asahi has a number of
remedies, including sale of our assets and acceleration of all
outstanding indebtedness, subject to the rights of SVBs
senior security interest. Any of these remedies would likely
have a material adverse effect on our business.
We have the flexibility under our term loan with Asahi to seek
up to $40.0 million in additional debt at market interest
rates. In March 2010, we entered into a Loan and Security
Agreement with Silicon Valley Bank, or SVB, for a
$15.0 million revolving line of credit with a maturity date
of April 1, 2012. This Agreement is secured by all or
substantially all of our assets. In connection with this
Agreement, we amended our term loan and security agreement with
Asahi to provide for certain amendments, including granting to
Asahi junior liens on certain of our assets for so long as the
agreement with SVB remains outstanding. Upon termination of all
obligations under that facility, Asahis security will
revert to a security in all assets other than cash, bank
accounts, accounts receivable, field equipment and inventory.
Borrowings under the Agreement bear interest at a floating rate
per annum equal to two percentage points (2.00%) above the prime
rate (initial prime rate of 4.00%). Pursuant to the Agreement,
we have agreed to certain financial covenants relating to
liquidity requirements and adjusted EBITDA, as defined in the
Agreement with SVB. The Agreement contains events of default
customary for transactions of this type, including nonpayment,
misrepresentation, breach of covenants, material adverse effect
and bankruptcy. At December 31, 2010, we were in compliance
with the covenants, there were no outstanding borrowings and we
had nearly all of the $15.0 million credit commitment
available for borrowing under the Agreement.
In May 2008, we entered into a $43 million private
placement agreement to sell an aggregate of 9.6 million
shares of our common stock at a price of $4.50 per share and
warrants to purchase 1.9 million shares of our common stock
at an exercise price of $5.50 per share. The exercise price of
the warrants was fixed at $5.50 per share on December 31,
2008 based on the Companys ability to achieve over 3,100
ESRD patients prescribed to receive therapy using the System
One. The warrants have a term of 5 years and expire on
May 28, 2013 and August 1, 2013 for the first and
second tranches respectively. The warrants also contain a net
share settlement feature that is available to investors in the
private placement once the underlying shares are registered.
Additional provisions require the Company, in the event of a
change of control, to pay promptly to the warrant holder an
amount calculated by the Black-Scholes option pricing formula.
Such payment is required to be in cash or shares in the same
proportion that other stockholders receive in such change of
control transaction.
We maintain postemployment benefit plans for employees in
certain foreign subsidiaries. The plans provide lump sum
benefits, payable based on statutory regulations for voluntary
or involuntary termination. Where required, we obtain an annual
actuarial valuation of the benefit plans. We have recorded a
liability of
65
$1.5 million as other long-term liabilities at
December 31, 2010 for costs associated with these plans.
The expense recorded in connection with these plans was not
significant during 2010, 2009 and 2008.
The following table sets forth the components of our cash flows
for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,111
|
|
|
$
|
(13,157
|
)
|
|
$
|
(53,222
|
)
|
Net cash used in investing activities
|
|
|
(1,216
|
)
|
|
|
(2,065
|
)
|
|
|
(457
|
)
|
Net cash provided by financing activities
|
|
|
81,163
|
|
|
|
10,031
|
|
|
|
47,575
|
|
Foreign exchange effect on cash and cash equivalents
|
|
|
(439
|
)
|
|
|
269
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow
|
|
$
|
82,619
|
|
|
$
|
(4,922
|
)
|
|
$
|
(6,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating
Activities. Net cash provided by operating
activities was $3.1 million during 2010, which represents a
$16.3 million improvement in cash flows from operating
activities from 2009. The improvement during 2010 was
attributable to three main factors. First, we improved our net
loss after adjustments for non-cash charges as we continue to
increase revenue and improve gross margins. Second, net deferred
revenues increased $11.8 million during 2010 as a result of
the increase in the number of customers who chose to purchase,
rather than rent, the System One equipment, which included
amortization of deferred revenues totaling $11.5 million
during 2010. Currently, the majority of our System One
placements in the home market are done under a sales versus
rental model. Finally, working capital requirements increased,
primarily due to inventory requirements, partially offset by a
$4.3 million one-time customer prepayment on first quarter
2011 orders. Net cash used in operating activities decreased
$40.1 million during 2009. The decrease in net cash used in
operating activities during 2009 was primarily due to a decrease
in our net loss after adjustments for non-cash charges as we
continue to reduce product costs, and a decrease in inventory
purchases for the production and placement of System One and
PureFlow SL hardware as a result of reduced costs, improved
reliability and improved management of our field equipment
assets.
Non-cash transfers from inventory to field equipment for the
placement of units with our customers increased
$10.3 million during 2010, to support the growing number of
patients using the System One. Non-cash transfers from inventory
to field equipment for the placement of units with our customers
decreased $11.5 million during 2009, due to improvements
made in managing our field equipment assets, enabling us to
continue to add patients without adding additional field
equipment.
Non-cash transfers from field equipment to deferred costs of
revenues increased $13.8 million during 2010 and decreased
$5.4 million during 2009. This activity fluctuates based on
the number of customers who choose to purchase rather than rent
and customer conversions to purchasing from renting our System
One equipment.
Net Cash Used in Investing Activities. For
each of the periods above, net cash used in investing activities
reflected purchases of property and equipment, primarily for
manufacturing operations and capital improvements to our
facilities, research and development and information technology.
During 2008, net cash used in investing activities included
$1.1 million of proceeds from short-term investments and
decreases in other assets.
Net Cash Provided by Financing Activities. Net
cash provided by financing activities increased by
$71.1 million during 2010 and decreased by
$37.5 million during 2009. Net cash provided by financing
activities during 2010 included net proceeds from the sale of
our common stock of $73.4 million and $12.4 million of
proceeds from stock option and stock purchase plans offset by
cash used to repurchase shares of our common stock that were
surrendered in payment for minimum required withholding taxes
due on issuance of shares of our common stock under our 2009
Bonus Plan and vesting of restricted stock awards under our 2009
Performance Share Plan. Net cash provided by financing
activities during 2009 included $40.0 million of borrowings
under our term loan with Asahi offset by $0.1 million in
fees paid in connection with the Asahi debt issuance,
$30.0 million in repayments of borrowings under our credit
and security
66
agreement with GE and a $0.5 million amendment fee paid in
connection with the March 16, 2009 amendment to our credit
and security agreement with GE. Net cash provided by financing
activities during 2008 included $5.0 million of additional
borrowings under our credit and security agreement with GE and
$42.3 million net proceeds from the sale of
9.6 million shares of our common stock and warrants to
purchase 1.9 million shares of our common stock.
Off-Balance
Sheet Arrangements
Except for operating lease agreements, we do not have any
off-balance sheet arrangements.
Contractual
Obligations
The following table summarizes our contractual commitments as of
December 31, 2010 and the effect those commitments are
expected to have on liquidity and cash flow in future periods
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Debt obligations
|
|
$
|
51,621
|
|
|
$
|
1,665
|
|
|
$
|
49,956
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
2,134
|
|
|
|
1,578
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
63,933
|
|
|
|
39,443
|
|
|
|
21,322
|
|
|
|
3,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,688
|
|
|
$
|
42,686
|
|
|
$
|
71,834
|
|
|
$
|
3,168
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations include the aggregate outstanding
principal amount under our $40.0 million term loan with
Asahi and related deferred interest and estimated interest
payments.
Our purchase obligations include purchase commitments for System
One components, primarily for equipment, blood tubing sets,
needles, and fluids pursuant to contractual agreements with
several of our suppliers that are in the normal course of
business. Certain of these commitments may be extended
and/or
canceled at our option.
Summary
of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States,
or GAAP. The preparation of these consolidated financial
statements requires us to make significant estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. These items are regularly
monitored and analyzed by management for changes in facts and
circumstances, and material changes in these estimates could
occur in the future. Changes in estimates are recorded in the
period in which they become known. We base our estimates on
historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ substantially from our estimates.
Note 2 to the consolidated financial statements for the
year ended December 31, 2010 included in this Annual Report
on
Form 10-K
describes the significant accounting policies used in the
preparation of our consolidated financial statements. A summary
of those accounting policies and estimates that we believe are
most critical to fully understanding and evaluating our
financial results is set forth below. This summary should be
read in conjunction with our consolidated financial statements
and the related notes included elsewhere in this Annual Report
on
Form 10-K.
Revenue
Recognition
We recognize revenue from product sales and services when
earned. Revenues are recognized when: (a) there is
persuasive evidence of an arrangement, (b) the product has
been shipped or services and supplies have been provided to the
customer, (c) the sales price is fixed or determinable and
(d) collection is reasonably assured. Our revenue
arrangements with multiple elements are divided into separate
units of accounting if specified criteria are met, including
whether the delivered element has stand-alone value to the
customer and
67
whether there is objective and reliable evidence of the fair
value of the undelivered items. The consideration received is
allocated among the separate units based on their respective
fair values, and the applicable revenue recognition criteria are
applied to each of the separate units.
Certain agreements with distributors allow for product returns
and credits. For shipment of product sold to distributors,
revenue is recognized at the time of sale if a reasonable
estimate of future returns or refunds can be made. If a
reasonable estimate of future returns or refunds cannot be made,
we recognize revenue using the sell-through method.
Under the sell-through method, revenue and related
costs of revenue is deferred until the final resale of such
products to end customers.
In addition to contractually determined volume discounts, in
many agreements we offer rebates based on sales to specific end
customers and discounts for early payment. Rebates and discounts
are recorded as a reduction of sales and trade accounts
receivable, based on our best estimate of the amount of probable
future rebate or discount on current sales.
System
One Segment
We derive revenue in the home market from the sales of
hemodialysis therapy to customers in which the customer either
purchases or rents the System One
and/or
PureFlow SL hardware and purchases a specified number of
disposable products and, in some instances, service.
For customers that purchase the System One and PureFlow SL
hardware, we must determine whether (a) the equipment has
stand-alone value and (b) the fair value of the undelivered
items, typically the disposables and, in most instances service,
can be determined. If either criteria is not met, which is
generally the case, the arrangement is accounted for as a single
unit of accounting and the fees received upon the completion of
delivery of equipment are deferred and recognized as revenue on
a straight-line basis over the expected term of our remaining
obligation and direct costs relating to the delivered equipment
are amortized over the same period as the related revenue, while
disposable products revenue is recognized on a monthly basis
upon delivery. If both criteria are met, then the items are
accounted for separately as delivered.
Under the rental arrangements revenue is recognized on a monthly
basis in accordance with agreed upon contract terms and pursuant
to binding customer purchase orders and fixed payment terms.
In the critical care market, we structure sales of the System
One as direct product sales and have no significant post
delivery obligations with the exception of standard warrant
obligations. We recognize revenue from direct product sales at
the time of shipment or, if applicable, delivery in accordance
with contract terms.
Our contracts for the System One in the critical care market
provide for training, technical support and warranty services to
our customers. We recognize training and technical support
revenue when the related services are performed. In the case of
extended warranty, the service revenue is recognized ratably
over the warranty period.
In-Center
Segment
In the In-Center segment, nearly all sales to end users are
structured through supply and distribution contracts with
distributors. Some of our distribution contracts for the
In-Center segment contain minimum volume commitments with
negotiated pricing discounts at different volume tiers. Each
agreement may be cancelled upon a material breach, subject to
certain curing rights, and in many instances minimum volume
commitments can be reduced or eliminated upon certain events.
Inventory
Valuation
Inventories are valued at the lower of cost or estimated market.
We regularly review our inventory quantities on hand and related
cost and record a provision for excess or obsolete inventory
primarily based on an estimated forecast of product demand for
each of our existing product configurations. We also review our
inventory value to determine if it reflects lower of cost or
market, with market determined based on net realizable value.
Appropriate consideration is given to inventory items sold at
negative gross margins, purchase
68
commitments and other factors in evaluating net realizable
value. The medical device industry is characterized by rapid
development and technological advances as well as regulatory and
quality manufacturing guidelines that could result in
obsolescence of inventory. Additionally, our estimates of future
product demand may prove to be inaccurate.
Field
Equipment
Field equipment consists of equipment being utilized under
disposable-based rental agreements as well as service
pool cyclers. Service pool cyclers are cyclers owned and
maintained by us that are swapped for cyclers that need repairs
or maintenance by us while being rented or owned by a patient.
We continually monitor the number of cyclers in the service
pool, as well as cyclers that are in-transit or otherwise not
being used by a patient, and assess whether there are any
indicators of impairment for such equipment. We also review
field equipment carrying value for reasonableness. We consider
factors such as actual equipment disposals and our ability to
verify the equipments existence in the field to identify
lost equipment. Charges for lost equipment are included in
distribution expenses.
We capitalize field equipment at cost and amortize field
equipment through cost of revenues using the straight-line
method over an estimated useful life. We review the estimated
useful life of our field equipment periodically for
reasonableness and make changes when appropriate. Factors
considered in determining the reasonableness of the useful life
include industry practice and the typical amortization periods
used for like equipment, the frequency and scope of service
returns and the impact of historical and planned future design
improvements.
Accounting
for Stock-Based Awards
Stock-based compensation expense is estimated as of the grant
date based on the fair value of the award and is recognized as
expense over the requisite service period, which generally
equals the vesting period, based on the number of awards that
are expected to vest. Estimating the fair value for stock
options requires judgment, including the expected term of our
stock options, volatility of our stock, expected dividends,
risk-free interest rates over the expected term of the options
and the expected forfeiture rate. In connection with our
performance based programs, we make assumptions principally
related to the number of awards that are expected to vest after
assessing the probability that certain performance criteria will
be met.
Valuation
of Intangibles and Other Long-Lived Assets
For our long-lived assets including intangible assets, we assess
the carrying value of these assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important include, but are not
limited to, significant underperformance relative to historical
or projected future results, significant negative industry
factors and significant changes in strategy or operations that
negatively affect the utilization of our long-lived assets. If
an impairment review is triggered, we evaluate the carrying
value of intangible assets based on estimated undiscounted
future cash flows over the remaining useful life of the assets
and comparing that value to the carrying value of the assets.
The amount of impairment, if any, is measured based on fair
value, which is determined using projected discounted future
operating cash flows. The cash flows that are used contain our
best estimates, using appropriate and customary assumptions and
projections at the time. If the cash flow estimates or the
significant operating assumptions upon which they are based
change in the future, we may be required to record additional
impairment charges.
Goodwill
We assess goodwill for impairment annually in the fourth quarter
and whenever events or circumstances indicate impairment may
exist. Goodwill may be considered impaired if we determine that
the carrying value of our reporting unit, including goodwill,
exceeds the reporting units fair value. Our reporting
units are our System One and In-center operating segments.
Assessing the impairment of goodwill requires us to make
assumptions and judgments including the identification of
reporting units and determination of the fair value of the net
assets of our reporting units. We estimate reporting unit fair
value using a discounted cash flow
69
approach which requires the use of assumptions and judgments
including estimates of future cash flows and the selection of
discount rates. Our annual impairment testing indicated no
significant risk of impairment based upon changes in value that
are reasonably likely to occur. However, changes in these
estimates and assumptions could materially affect the estimated
fair values of reporting units.
Accounting
for Income Taxes
We periodically assess our income tax positions and record tax
benefits for all years subject to examination based upon our
evaluation of the facts, circumstances and information available
at the reporting date. If our judgment as to the likely
resolution of the position changes, if the matter is ultimately
settled or if the statute of limitation expires, the effects of
the change would be recognized in the period in which the
change, resolution or expiration occurs.
We file federal, state and foreign tax returns based on our
interpretation of tax laws and regulations and record estimates
based on these judgments and interpretations. We have
accumulated significant losses since our inception in 1998.
Since the net operating losses may potentially be utilized in
future years to reduce taxable income, all of our tax years
remain open to examination by the major taxing jurisdictions to
which we are subject.
Related-Party
Transactions
A discussion of related-party transactions is included in
Note 16 to the consolidated financial statements for the
year ended December 31, 2010 included in this Annual Report
on
Form 10-K.
Recent
Accounting Pronouncements
A discussion of recent accounting pronouncements is included in
Note 2 to the consolidated financial statements for the
year ended December 31, 2010 included in this Annual Report
on
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Exposure
Our investment portfolio consists primarily of money market
funds. We manage our investment portfolio in accordance with our
investment policy. The primary objectives of our investment
policy are to preserve principal, maintain a high degree of
liquidity to meet operating needs and obtain competitive returns
subject to prevailing market conditions. Our investments are
subject to changes in credit rating and changes in market value.
These investments are also subject to interest rate risk and
will decrease in value if market interest rates increase. Due to
the conservative nature of our investments, we believe interest
rate risk is mitigated. Our investment policy specifies the
credit quality standards for our investments and limits the
amount of exposure from any single issue, issuer or type of
investment.
Foreign
Currency Exposure
We operate a manufacturing and research facility in Germany as
well as manufacturing facilities in Italy and Mexico. We
purchase materials for those facilities and pay our employees at
those facilities in Euros and Pesos. In addition, we purchase
products for resale in the United States from foreign companies
and have agreed to pay them in currencies other than the
U.S. dollar, including the Euro and Peso. We also have
contracts with key suppliers that expose us to foreign currency
risks, including the Euro and the Thai Baht. As a result, our
expenses and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates. In periods when the
U.S. dollar declines in value as compared to the foreign
currencies in which we incur expenses, our foreign-currency
based expenses increase when translated into U.S. dollars.
Although it is possible to do so and we may in the future, we do
not currently hedge our foreign currency transactions since the
exposure has not been material to our historical operating
results. A 10% movement in the Euro, Peso and Baht would have an
overall impact to the statement of operations of approximately
$4.5 million for 2010, which would have been approximately
2% of total annual expenses.
70
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
NXSTAGE
MEDICAL, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
71
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of NxStage Medical, Inc.
We have audited the accompanying consolidated balance sheets of
NxStage Medical, Inc. as of December 31, 2010 and 2009, and
the related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2010. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of NxStage Medical, Inc. at December 31,
2010 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
NxStage Medical, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 18, 2011 expressed
an unqualified opinion thereon.
Boston, Massachusetts
February 18, 2011
72
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104,339
|
|
|
$
|
21,720
|
|
Accounts receivable, net
|
|
|
14,107
|
|
|
|
14,238
|
|
Inventory
|
|
|
34,950
|
|
|
|
28,117
|
|
Prepaid expenses and other current assets
|
|
|
2,084
|
|
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
155,480
|
|
|
|
65,302
|
|
Property and equipment, net
|
|
|
8,290
|
|
|
|
10,336
|
|
Field equipment, net
|
|
|
13,660
|
|
|
|
21,726
|
|
Deferred cost of revenues
|
|
|
40,081
|
|
|
|
27,799
|
|
Intangible assets, net
|
|
|
25,412
|
|
|
|
28,208
|
|
Goodwill
|
|
|
42,698
|
|
|
|
42,698
|
|
Other assets
|
|
|
473
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
286,094
|
|
|
$
|
196,978
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,811
|
|
|
$
|
19,827
|
|
Accrued expenses
|
|
|
19,537
|
|
|
|
9,377
|
|
Current portion of long-term debt
|
|
|
43
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
36,391
|
|
|
|
29,265
|
|
Deferred revenues
|
|
|
55,366
|
|
|
|
38,490
|
|
Long-term debt
|
|
|
40,454
|
|
|
|
37,854
|
|
Other long-term liabilities
|
|
|
1,754
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
133,965
|
|
|
|
107,532
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock: par value $0.001,
5,000,000 shares authorized; no shares issued and
outstanding as of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
Common stock: par value $0.001, 100,000,000 shares
authorized; 54,043,317 shares issued as of
December 31, 2010 and 46,795,859 shares issued and
outstanding as of December 31, 2009
|
|
|
53
|
|
|
|
47
|
|
Additional paid-in capital
|
|
|
465,642
|
|
|
|
365,548
|
|
Accumulated deficit
|
|
|
(308,426
|
)
|
|
|
(276,714
|
)
|
Accumulated other comprehensive income
|
|
|
85
|
|
|
|
565
|
|
Treasury stock, at cost: 325,104 shares as of
December 31, 2010
|
|
|
(5,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
152,129
|
|
|
|
89,446
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
286,094
|
|
|
$
|
196,978
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
73
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
179,218
|
|
|
$
|
148,676
|
|
|
$
|
128,763
|
|
Cost of revenues
|
|
|
121,091
|
|
|
|
111,812
|
|
|
|
108,387
|
|
Gross profit
|
|
|
58,127
|
|
|
|
36,864
|
|
|
|
20,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
34,166
|
|
|
|
30,047
|
|
|
|
27,965
|
|
Research and development
|
|
|
12,900
|
|
|
|
9,814
|
|
|
|
8,890
|
|
Distribution
|
|
|
14,751
|
|
|
|
13,918
|
|
|
|
14,267
|
|
General and administrative
|
|
|
22,774
|
|
|
|
19,532
|
|
|
|
19,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
84,591
|
|
|
|
73,311
|
|
|
|
70,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(26,464
|
)
|
|
|
(36,447
|
)
|
|
|
(49,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3
|
|
|
|
35
|
|
|
|
485
|
|
Interest expense
|
|
|
(4,597
|
)
|
|
|
(6,522
|
)
|
|
|
(3,877
|
)
|
Other income (expense), net
|
|
|
114
|
|
|
|
(268
|
)
|
|
|
4
|
|
Change in fair value of financial instruments
|
|
|
|
|
|
|
|
|
|
|
2,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,480
|
)
|
|
|
(6,755
|
)
|
|
|
(852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(30,944
|
)
|
|
|
(43,202
|
)
|
|
|
(50,837
|
)
|
Provision for income taxes
|
|
|
768
|
|
|
|
265
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,712
|
)
|
|
$
|
(43,467
|
)
|
|
$
|
(51,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.66
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
|
|
48,188
|
|
|
|
46,627
|
|
|
|
41,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
74
NXSTAGE
MEDICAL, INC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Income
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2007
|
|
|
36,771,893
|
|
|
$
|
37
|
|
|
$
|
311,172
|
|
|
$
|
(182,036
|
)
|
|
$
|
544
|
|
|
|
|
|
|
$
|
129,717
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,211
|
)
|
|
|
|
|
|
|
|
|
|
|
(51,211
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,374
|
)
|
Issuance of common stock, net of issuance costs
|
|
|
9,555,556
|
|
|
|
10
|
|
|
|
37,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,890
|
|
Exercise of stock options
|
|
|
71,547
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Shares issued under employee stock purchase and incentive plan
|
|
|
95,102
|
|
|
|
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377
|
|
Shares issued to Directors in lieu of cash
|
|
|
54,487
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
46,548,585
|
|
|
|
47
|
|
|
|
355,266
|
|
|
|
(233,247
|
)
|
|
|
381
|
|
|
|
|
|
|
|
122,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,467
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,467
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,283
|
)
|
Reclassificaion warrant liability to equity
|
|
|
|
|
|
|
|
|
|
|
1,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,858
|
|
Exercise of stock options
|
|
|
86,927
|
|
|
|
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Shares issued under employee stock purchase and incentive plan
|
|
|
116,799
|
|
|
|
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Shares issued to Directors in lieu of cash
|
|
|
43,548
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
7,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
46,795,859
|
|
|
|
47
|
|
|
|
365,548
|
|
|
|
(276,714
|
)
|
|
|
565
|
|
|
|
|
|
|
|
89,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,712
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,712
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,192
|
)
|
Issuance of common stock, net of issuance costs
|
|
|
3,680,000
|
|
|
|
4
|
|
|
|
73,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,354
|
|
Exercise of stock options
|
|
|
1,831,253
|
|
|
|
1
|
|
|
|
12,034
|
|
|
|
|
|
|
|
|
|
|
|
(642
|
)
|
|
|
11,393
|
|
Exercise of warrants
|
|
|
250,610
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
Shares issued under employee restricted stock and bonus plans
|
|
|
1,412,453
|
|
|
|
1
|
|
|
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
(4,583
|
)
|
|
|
(2,982
|
)
|
Shares issued under employee stock purchase plan
|
|
|
61,387
|
|
|
|
|
|
|
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
638
|
|
Shares issued to Directors in lieu of cash
|
|
|
11,755
|
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
11,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
54,043,317
|
|
|
$
|
53
|
|
|
$
|
465,642
|
|
|
$
|
(308,426
|
)
|
|
$
|
85
|
|
|
$
|
(5,225
|
)
|
|
$
|
152,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
75
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(31,712
|
)
|
|
$
|
(43,467
|
)
|
|
$
|
(51,211
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22,379
|
|
|
|
20,778
|
|
|
|
19,201
|
|
Amortization of inventory
step-up
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Stock-based compensation
|
|
|
15,351
|
|
|
|
9,226
|
|
|
|
5,842
|
|
Change in fair value of financial instruments
|
|
|
|
|
|
|
|
|
|
|
(2,536
|
)
|
Other
|
|
|
2,319
|
|
|
|
2,690
|
|
|
|
1,038
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
235
|
|
|
|
(2,208
|
)
|
|
|
(4,761
|
)
|
Inventory
|
|
|
(28,744
|
)
|
|
|
(9,209
|
)
|
|
|
(23,431
|
)
|
Prepaid expenses and other assets
|
|
|
(877
|
)
|
|
|
1,513
|
|
|
|
747
|
|
Accounts payable
|
|
|
(2,781
|
)
|
|
|
2,568
|
|
|
|
(4,626
|
)
|
Accrued expenses and other liabilities
|
|
|
10,065
|
|
|
|
(119
|
)
|
|
|
(3,641
|
)
|
Deferred revenues
|
|
|
16,876
|
|
|
|
5,071
|
|
|
|
10,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,111
|
|
|
|
(13,157
|
)
|
|
|
(53,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,556
|
)
|
|
|
(1,725
|
)
|
|
|
(3,037
|
)
|
Maturities of short-term investments
|
|
|
|
|
|
|
|
|
|
|
1,100
|
|
Decrease (Increase) in other assets
|
|
|
340
|
|
|
|
(340
|
)
|
|
|
1,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,216
|
)
|
|
|
(2,065
|
)
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
73,354
|
|
|
|
|
|
|
|
42,284
|
|
Proceeds from stock option and purchase plans
|
|
|
12,446
|
|
|
|
673
|
|
|
|
372
|
|
Purchase of treasury stock
|
|
|
(4,583
|
)
|
|
|
|
|
|
|
|
|
Proceeds from loans and lines of credit
|
|
|
|
|
|
|
39,895
|
|
|
|
5,000
|
|
Repayments on loans and lines of credit
|
|
|
(54
|
)
|
|
|
(30,537
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
81,163
|
|
|
|
10,031
|
|
|
|
47,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and cash equivalents
|
|
|
(439
|
)
|
|
|
269
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
82,619
|
|
|
|
(4,922
|
)
|
|
|
(6,603
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
21,720
|
|
|
|
26,642
|
|
|
|
33,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
104,339
|
|
|
$
|
21,720
|
|
|
$
|
26,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,628
|
|
|
$
|
4,749
|
|
|
$
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
365
|
|
|
$
|
401
|
|
|
$
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from inventory to field equipment
|
|
$
|
20,567
|
|
|
$
|
10,315
|
|
|
$
|
21,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from field equipment to deferred cost of revenues
|
|
$
|
21,185
|
|
|
$
|
7,358
|
|
|
$
|
12,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
76
NXSTAGE
MEDICAL, INC.
We are a medical device company that develops, manufactures and
markets innovative products for the treatment of kidney failure,
fluid overload and related blood treatments and procedures. Our
primary product, the NxStage System One, or System One, was
designed to satisfy an unmet clinical need for a system that can
deliver the therapeutic flexibility and clinical benefits
associated with traditional dialysis machines in a smaller,
portable, easy-to-use form that can be used by healthcare
professionals and trained lay users alike in a variety of
settings, including patient homes, as well as more traditional
care settings such as hospitals and dialysis clinics. Given its
design, the System One is particularly well-suited for home
hemodialysis and a range of dialysis therapies including more
frequent, or daily, dialysis, which clinical
literature suggests provides patients better clinical outcomes
and improved quality of life. The System One is cleared or
approved for commercial sale in the United States, Europe and
Canada for the treatment of acute and chronic kidney failure and
fluid overload. The System One is cleared specifically by the
United States Food and Drug Administration, or FDA, for home
hemodialysis as well as therapeutic plasma exchange, or TPE, in
a clinical environment. We also sell needles and blood tubing
sets primarily to dialysis clinics for the treatment of
end-stage renal disease, or ESRD, which we refer to as the
in-center market. These products are cleared or approved for
commercial sale in the United States, Europe, Canada and other
select markets. We believe our largest future product market
opportunity is for our System One used in the home hemodialysis
market, or home market, for the treatment of ESRD.
For the year ended December 31, 2010, cash flows from
operating activities were positive due to improvements in net
loss versus 2009 and a $4.3 million one-time customer
prepayment on first quarter 2011 orders. While we continue to
make progress in improving our cash flows from operating
activities, we expect cash flows from operating activities in
the near term to fluctuate between negative and positive on a
quarterly basis, primarily due to changes in working capital.
There can be no assurance that we will be able to continue to
improve cash flows from operating activities or whether we will
be able to generate positive cash flows from operating
activities in the future. We believe, based on current
projections and the current nature of our business, that we have
the required resources to fund our ongoing operating
requirements. Our ability to and the rate at which we continue
to improve cash flows from operating activities will depend on
many factors, including growing revenues, continued improvements
in gross margins, leverage of our operating infrastructure and
continued sale versus rental of a significant percentage of our
System One equipment.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of NxStage Medical, Inc. and our wholly-owned
subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Certain
reclassifications have been made to prior years financial
statements to conform to the 2010 presentation.
Use of
Estimates
The preparation of our consolidated financial statements in
conformity with generally accepted accounting principles in the
United States requires management to make estimates and
assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
77
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
We recognize revenue from product sales and services when
earned. Revenues are recognized when: (a) there is
persuasive evidence of an arrangement, (b) the product has
been shipped or services and supplies have been provided to the
customer, (c) the sales price is fixed or determinable and
(d) collection is reasonably assured. Our revenue
arrangements with multiple elements are divided into separate
units of accounting if specified criteria are met, including
whether the delivered element has stand-alone value to the
customer and whether there is objective and reliable evidence of
the fair value of the undelivered items. The consideration
received is allocated among the separate units based on their
respective fair values, and the applicable revenue recognition
criteria are applied to each of the separate units.
Certain agreements with distributors allow for product returns
and credits. For shipment of product sold to distributors,
revenue is recognized at the time of sale if a reasonable
estimate of future returns or refunds can be made. If a
reasonable estimate of future returns or refunds cannot be made,
we recognize revenue using the sell-through method.
Under the sell-through method, revenue and related
costs of revenue is deferred until the final resale of such
products to end customers.
In addition to contractually determined volume discounts, in
many agreements we offer rebates based on sales to specific end
customers and discounts for early payment. Rebates and discounts
are recorded as a reduction of sales and trade accounts
receivable, based on our best estimate of the amount of probable
future rebate or discount on current sales.
System
One Segment
We derive revenue in the home market from the sales of
hemodialysis therapy to customers in which the customer either
purchases or rents the System One
and/or
PureFlow SL hardware and purchases a specified number of
disposable products and, in some instances, service.
For customers that purchase the System One and PureFlow SL
hardware, we must determine whether (a) the equipment has
stand-alone value and (b) the fair value of the undelivered
items, typically the disposables and, in most instances service,
can be determined. If either criteria is not met, which is
generally the case, the arrangement is accounted for as a single
unit of accounting and the fees received upon the completion of
delivery of equipment are deferred and recognized as revenue on
a straight-line basis over the expected term of our remaining
obligation and direct costs relating to the delivered equipment
are amortized over the same period as the related revenue, while
disposable products revenue is recognized on a monthly basis
upon delivery. If both criteria are met, then the items are
accounted for separately as delivered.
Under the rental arrangements revenue is recognized on a monthly
basis in accordance with agreed upon contract terms and pursuant
to binding customer purchase orders and fixed payment terms.
In the critical care market, we structure sales of the System
One as direct product sales and have no significant post
delivery obligations with the exception of standard warrant
obligations. We recognize revenue from direct product sales at
the time of shipment or, if applicable, delivery in accordance
with contract terms.
Our contracts for the System One in the critical care market
provide for training, technical support and warranty services to
our customers. We recognize training and technical support
revenue when the related services are performed. In the case of
extended warranty, the service revenue is recognized ratably
over the warranty period.
In-Center
Segment
In the In-Center segment, nearly all sales to end users are
structured through supply and distribution contracts with
distributors. Some of our distribution contracts for the
In-Center segment contain minimum volume commitments with
negotiated pricing discounts at different volume tiers. Each
agreement may be
78
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cancelled upon a material breach, subject to certain curing
rights, and in many instances minimum volume commitments can be
reduced or eliminated upon certain events.
Foreign
Currency Translation and Transactions
Assets and liabilities of our foreign operations are translated
into U.S. dollars at current exchange rates, and income and
expense items are translated at average rates of exchange
prevailing during the year. Gains and losses realized from
transactions denominated in foreign currencies, including
intercompany balances not considered permanent investments, are
included in the consolidated statements of operations and
totaled $0.1 million, $0.3 million and
$0.1 million in 2010, 2009 and 2008, respectively.
Cash,
Cash Equivalents, Marketable Securities and Restricted
Cash
We consider all highly-liquid investments purchased with
original maturities of 90 days or less to be cash
equivalents. Cash equivalents include amounts invested in
federal agency securities, commercial paper and money market
funds. Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
We had $0.6 million of restricted cash classified as other
assets at December 31, 2009 related primarily to standby
letters of credit to guarantee annual VAT refunds in Italy.
Concentration
of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and accounts receivable. We maintain our cash
in treasury obligation money market funds and bank deposit
accounts which, at times, may exceed federally insured limits.
We believe that the financial institutions that hold our cash
are financially sound and, accordingly, minimal credit risk
exists with respect to these balances.
Concentration of credit risk with respect to accounts receivable
is limited to certain customers to whom we make substantial
sales. One customer represented 23% of accounts receivable at
December 31, 2010. One customer represented 19% of accounts
receivable at December 31, 2009. To reduce risk, we
routinely assess the financial strength of our customers and
closely monitor their amounts due and, as a result of our
assessment, believe that our accounts receivable credit risk
exposure is limited. Historically, we have not experienced any
significant credit losses related to an individual customer or
group of customers in any particular industry or geographic
area. We maintain an allowance for doubtful accounts based on an
analysis of historical losses from uncollectible accounts and
risks identified for specific customers who may not be able to
make required payments. Provisions for the allowance for
doubtful accounts are recorded in general and administrative
expenses in the accompanying consolidated statements of
operations.
Activity related to allowance for doubtful accounts consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Provision
|
|
|
|
|
|
Balance at
|
|
Year Ended
|
|
Beginning of Year
|
|
|
(Recoveries)
|
|
|
Write-offs
|
|
|
End of Year
|
|
|
December 31, 2010
|
|
$
|
725
|
|
|
|
(86
|
)
|
|
$
|
(38
|
)
|
|
$
|
601
|
|
December 31, 2009
|
|
$
|
918
|
|
|
|
|
|
|
$
|
(193
|
)
|
|
$
|
725
|
|
December 31, 2008
|
|
$
|
296
|
|
|
$
|
694
|
|
|
$
|
(72
|
)
|
|
$
|
918
|
|
We use and are dependent upon a number of single source
suppliers of components, subassemblies and finished goods. We
are dependent on the ability of our suppliers to provide
products on a timely basis and on favorable pricing terms. The
loss of certain principal suppliers or a significant reduction
in product availability from principal suppliers would have a
material adverse effect on us, at least in the near term. We
believe that our relationships with our suppliers are
satisfactory.
79
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Measures
Certain financial and non financial assets and liabilities
recorded at fair value have been classified as Level 1, 2
or 3 within the fair value hierarchy as described in the
accounting standard. Fair values determined by Level 1
inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to
access. Fair values determined by Level 2 inputs utilize
data points that are observable such as quoted prices, interest
rates and yield curves for similar instruments and model-derived
valuations whose inputs are observable. Fair values determined
by Level 3 inputs utilize unobservable data points for the
asset or liability.
Inventory
Inventory is stated at the lower of cost, determined using the
first-in
first-out method (FIFO), or market (net realizable value). We
record a provision for any excess or obsolete inventory when
warranted based on estimated forecast of product demand and
existing product configurations. We also review our inventory
value to determine if it reflects the lower of cost or market
based on factors such as inventory items sold at negative gross
margins and purchase commitments.
Property
and Equipment and Field Equipment
Property and equipment and field equipment are recorded at cost
less accumulated depreciation. Depreciation is provided over the
estimated useful lives of the related assets using the
straight-line method for financial statement purposes. The
estimated useful life of our assets are periodically reviewed
for reasonableness. Changes in useful lives are accounted for
prospectively. Repairs and maintenance are expensed as incurred.
When property and equipment are retired, sold or otherwise
disposed of, the assets carrying amount and related
accumulated depreciation are removed from the accounts and any
gain or loss is included in operations. When field equipment is
sold, the assets carrying amount and related accumulated
depreciation is removed from the accounts and any gain or loss
is deferred and recognized in operations on a straight-line
basis over the same period as the related revenues.
Construction in process is stated at cost, which includes the
cost of construction and other direct costs attributable to the
construction. No provision for depreciation is made on
construction in process until such time as the relevant assets
are completed and put into use. Construction in process at
December 31, 2010 and 2009 primarily represents machinery
and equipment under installation.
Field equipment consists of equipment being utilized under
disposable-based rental agreements as well as service
pool equipment. Service pool equipment is equipment owned
and maintained by us that are swapped for equipment that need
repairs or maintenance by us while being rented or owned by a
customer. We record a provision for any excess, lost or damaged
equipment when warranted based on an assessment of the number of
equipment in the service pool, as well as equipment that are
in-transit or otherwise not being used by a customer.
Write-downs for equipment are included in distribution expenses.
The estimated useful lives of property and equipment and field
equipment are as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
Useful Life
|
|
Manufacturing equipment and tooling
|
|
|
5 to 6 years
|
|
Molds
|
|
|
4 years
|
|
Leasehold improvements
|
|
|
Lesser of 5 years or lease term
|
|
Computer and office equipment
|
|
|
3 years
|
|
Furniture
|
|
|
5 to 7 years
|
|
Field equipment
|
|
|
5 to 7 years
|
|
80
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangibles
and Other Long Lived Assets
Intangible assets are carried at cost less accumulated
amortization. For assets with determinable useful lives,
amortization is computed using the straight-line method over the
estimated economic lives of the respective intangible assets,
ranging from eight to fourteen years. Long-lived assets,
including intangible assets, are tested for recoverability
whenever events or circumstances indicate that their carrying
value may not be recoverable. The amount of impairment, if any,
is measured based on fair value, which is determined using
estimated discounted cash flows to be generated from such assets
or group of assets. During 2010, 2009 and 2008, no such
impairment was recognized. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less selling
costs.
Goodwill
Goodwill relates to amounts that arose in connection with the
acquisition of Medisystems Corporation and certain affiliated
entities, which we refer to collectively as Medisystems. We
believe the factors contributing to the goodwill that resulted
from acquiring Medisystems include (but are not limited to),
increased manufacturing capacity and efficiency, securing
long-term rights to certain technology and brand names and
strengthening long-term customer relationships common to both
Medisystems and us. We test goodwill at least annually for
impairment, or more frequently when events or changes in
circumstances indicate that the goodwill might be impaired. This
impairment test is performed annually during the fourth quarter.
Goodwill may be considered impaired if the carrying value of the
reporting unit, including goodwill, exceeds the reporting
units fair value. Reporting unit fair value is estimated
using a discounted cash flow approach. During 2010, 2009 and
2008, no such impairment was recognized. Our reporting units are
our System One and In-center operating segments. When testing
goodwill for impairment we primarily look to the fair value of
the System One segment, as a majority of the goodwill relates to
the System One segment. The goodwill recognized upon acquiring
Medisystems is not deductible for tax purposes.
Stock-Based
Compensation
Stock-based compensation expense is estimated as of the grant
date based on the fair value of the award. We use the
Black-Scholes option pricing model to estimate the fair value of
stock options and quoted market prices of our common stock to
estimate fair value of restricted stock. The expected term is
estimated using the simplified method, as defined in Staff
Accounting Bulletin No. 107. The risk free interest
rate for each grant is equal to the U.S. Treasury rate in
effect at the time of grant for instruments with an expected
life similar to the expected option term. Because of our limited
trading history as a public company, the stock volatility
assumption is based on an analysis of our historical volatility
and the volatility of the common stock of comparable companies
in the medical device and technology industries. The dividend
yield of zero is based upon the fact that we have not
historically granted cash dividends, and do not expect to issue
dividends in the foreseeable future.
We recognize stock-based compensation expense over the requisite
service period, which generally equals the vesting period, net
of forfeitures. Forfeiture rates are estimated based on
historical pre-vesting forfeiture history and are updated on a
quarterly basis to reflect actual forfeitures of unvested awards
and other known events. For awards that vest based on
employment, we recognize the associated compensation expense on
a straight-line basis. For performance based awards, we
recognize expense using the graded vesting methodology based on
the number of shares expected to vest. Compensation expense
associated with these performance based awards is adjusted
quarterly to reflect subsequent changes in the estimated outcome
of performance-related conditions until the date the results are
determined.
81
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
Costs
We accrue estimated costs that we may incur under our product
warranty programs at the time the product revenue is recognized,
based on contractual rights and historical experience. Warranty
expense is included in cost of revenues in the consolidated
statements of operations. The following is a rollforward of our
warranty accrual (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
Year Ended
|
|
Beginning of Year
|
|
Provision
|
|
Usage
|
|
End of Year
|
|
December 31, 2010
|
|
$
|
205
|
|
|
$
|
452
|
|
|
$
|
(389
|
)
|
|
$
|
268
|
|
December 31, 2009
|
|
$
|
235
|
|
|
$
|
331
|
|
|
$
|
(361
|
)
|
|
$
|
205
|
|
December 31, 2008
|
|
$
|
220
|
|
|
$
|
366
|
|
|
$
|
(351
|
)
|
|
$
|
235
|
|
Distribution
Expenses
Distribution expenses are charged to operations as incurred and
consist of costs incurred in shipping product to and from
customers and the cost of any equipment lost or damaged in the
distribution process. Shipping and handling costs billed to
customers are included in revenues and totaled $0.3 million
in 2010 and $0.2 million in both 2009 and 2008.
Research
and Development Costs
Research and development costs are charged to operations as
incurred.
Income
Taxes
We record the tax effect of transactions when such transactions
are recorded in our consolidated statement of operations. We
record a deferred tax asset or liability based on the difference
between the financial statement and tax basis of assets and
liabilities, as measured by the enacted tax rates. Our provision
for income taxes represents the amount of taxes currently
payable, if any, plus the change in the amount of net deferred
tax assets or liabilities. A valuation allowance is provided
against net deferred tax assets if recoverability is uncertain
on a more likely than not basis.
We periodically assess our exposures related to our provisions
for income taxes and accrue for contingencies that may result in
potential tax obligations. For those positions where it is more
likely than not that a tax benefit will be sustained, we record
the largest amount of tax benefit with a greater than
50 percent likelihood of being realized upon ultimate
settlement with a taxing authority that has full knowledge of
all relevant information. For those income tax positions where
it is not more likely than not that a tax benefit will not be
sustained, no tax benefit is recognized in the financial
statements. We recognize interest and penalties for uncertain
tax positions in income tax expense.
We file federal, state and foreign tax returns. We have
accumulated significant losses since our inception in 1998.
Since the net operating losses may potentially be utilized in
future years to reduce taxable income, all of our tax years
remain open to examination by the major taxing jurisdictions to
which we are subject.
Comprehensive
Loss
We have chosen to disclose comprehensive loss, which consists of
net loss and other comprehensive income (loss), in the
consolidated statement of changes in stockholders equity.
Other comprehensive income (loss) primarily includes foreign
currency translation adjustments that are excluded from results
of operations.
82
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subsequent
Events
Events occurring subsequent to December 31, 2010 have been
evaluated for potential recognition or disclosure in the
consolidated financial statements.
Recent
Accounting Pronouncements
Effective January 1, 2010, we adopted an accounting
standard update regarding accounting for transfers of financial
assets. As codified under Accounting Standards Codification, or
ASC 860, this update prescribes the information that a reporting
entity must provide in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a
transferors continuing involvement in transferred
financial assets. Specifically, among other aspects, the update
amends Statement of Financial Accounting Standards No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, or SFAS 140, by
removing the concept of a qualifying special-purpose entity from
SFAS 140 and removes the exception from applying FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (revised), to variable interest entities
that are qualifying special-purpose entities. It also modifies
the financial-components approach used in SFAS 140. Because
the update is effective for transfers of financial assets
occurring on or after January 1, 2010 and we have not had
any such transactions subsequent to January 1, 2010 to
date, the adoption of this update did not have an impact on our
consolidated financial statements.
Effective January 1, 2010, we adopted an accounting
standard update regarding fair value measurements. As codified
under ASC 820, this update requires additional disclosures
about fair value measurements including transfers in and out of
Levels 1 and 2 and a higher level of disaggregation for the
different types of financial instruments. For the reconciliation
of Level 3 fair value measurements, information about
purchases, sales, issuances and settlements should be presented
separately. Because this update addresses disclosure
requirements, the adoption of this update did not impact our
financial position, results of operations or cash flows.
In September 2009, the FASB issued two new Accounting Standard
Updates, or ASUs, affecting revenue recognition: ASU
No. 2009-13,
Multiple-Deliverable Revenue Arrangements, and ASU
No. 2009-14,
Certain Revenue Arrangements That Include Software
Elements. The revised guidance primarily provides two
significant changes to the previous guidance for
multiple-deliverable revenue recognition arrangements. First, it
eliminates the need for objective and reliable evidence of the
fair value for the undelivered element in order for a delivered
item to be treated as a separate unit of accounting. Second, it
eliminates the residual method to allocate the arrangement
consideration. In addition, the guidance also expands the
disclosure requirements for revenue recognition. We adopted
these ASUs effective January 1, 2011, as required, using
the prospective method as permitted under the guidance.
Accordingly, this guidance will be applied to all revenue
arrangements entered into or materially modified on or after
January 1, 2011. Based upon our evaluation of the new
guidance, the impact of adopting this new guidance on our
results of operations will be limited to products sold
internationally through distributors in the System One segment,
which revenue has not been significant in the historical
periods. Additionally, the adoption of these ASUs will result in
expanded disclosures around revenue recognition.
|
|
3.
|
Significant
Revenue Contracts
|
National
Service Provider Agreement with DaVita Inc., or
DaVita
In February 2007, we entered into a National Service Provider
Agreement, or the Original Agreement with DaVita, a significant
customer, in which we agreed to sell the System One and PureFlow
SL hardware along with the right to purchase disposable products
and service on a monthly basis. The Original Agreement included
other terms such as development efforts, training, market
collaborations and volume discounts. The
83
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Original Agreement expired on December 31, 2009, but sales
continued in accordance with the terms specified in the Original
Agreement.
In July 2010, we entered into a First Amended and Restated
National Service Provider Agreement, or the Amended Agreement,
with DaVita which supersedes the Original Agreement. Pursuant to
the terms of the Amended Agreement, we will continue to sell the
System One and PureFlow SL hardware along with the right to
purchase disposable products and service on a monthly basis. The
Amended Agreement includes other terms such as rebates, training
and volume discounts.
The sale of equipment and other items included in the Original
Agreement and the Amended Agreements were considered to be
multiple-element sales arrangements pursuant to ASC 605,
Revenue Recognition. We have determined that we cannot
account for the sale of equipment as a separate unit of
accounting. Therefore, fees received upon the completion of
delivery of equipment under the Original and Amended Agreements
are deferred and recognized as revenues on a straight-line basis
over the expected term of our obligation to supply disposables
and service, which is seven years, and direct costs relating to
the delivered equipment are deferred and amortized over the same
period as the related revenues.
In connection with the Amended Agreement we issued to DaVita a
warrant that may vest and become exercisable to purchase up to
5.5 million shares of our common stock based upon the
achievement of certain DaVita and NxStage System One home
patient growth targets on separate measurement dates occurring
on June 30, 2011, 2012 and 2013. The warrants have an
exercise price of $14.22 per share, are non-transferable, must
be exercised in cash and, if vested, expire during 2013. The
warrants will be measured at fair value through their date of
vesting using the Black-Scholes option pricing model, and
recognized as a reduction of revenues, based on the number of
warrants expected to vest, over the same period as the related
product revenues which is 7 to 10 years. Estimates of the
number of warrants expected to vest and the fair value of the
warrants will be revised each reporting period through the date
of vesting. The reduction of revenues recorded in connection
with these warrants was not significant during 2010.
Asahi
Strategic Business Alliance
In May 2009, we entered into a series of agreements with Asahi
Kasei Kuraray Medical, or Asahi, a leading medical supply
company headquartered in Japan which we consider to be a single
arrangement. The agreements are multi-faceted and include a Term
Loan and Security Agreement, or Loan Agreement, and a Technology
and Trademark License Agreement, or License Agreement.
Under the terms of the Loan Agreement, Asahi agreed to provide
us with $40.0 million of debt financing. The four year loan
bears interest at 8% annually, with 50% of the interest deferred
to maturity in May 2013. We estimated the fair value of the loan
at issuance using quoted prices for similar debt instruments,
level 2 measurements within the fair value hierarchy. The
fair value of the loan of $36.3 million was recorded in our
consolidated financial statements, net of a $3.7 million
discount. The discount will be amortized ratably over the term
of the loan into interest expense. In accordance with the terms
of the License Agreement, we granted Asahi a royalty-free
license to our Streamline blood tubing set technology and
production technology to make and sell our current dialyzer
design. We estimated the fair value of the license using an
income approach, namely the relief from royalty approach, which
requires assumptions related to future cash flows, assumed
royalty rates and a discount rate, level 3 measurements
within the fair value hierarchy. The fair value of the license
of $3.7 million was recorded as deferred revenue and will
be recognized as revenue over the estimated life of the
underlying patents, of six to seven years. The deferral of the
consideration allocated to the license represents a noncash
operating activity.
84
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
System
One Segment Distribution Arrangements
In 2009, we began entering into arrangements with distributors
to sell the System One equipment and related disposables and
certain of our other products internationally. The arrangements
typically have a term of five years and may be terminated upon
material breach by either party.
The sale of equipment and other items included in these
arrangements were considered to be multiple-element sales
arrangements pursuant to ASC 605, Revenue
Recognition. We have determined that we cannot account for
the sale of equipment as a separate unit of accounting.
Therefore, fees received upon the completion of delivery of
equipment under these arrangements are deferred and recognized
as revenues on a straight-line basis over the longer of the
economic life of the equipment or the expected term of our
obligation to supply disposables pursuant to the agreement,
which is typically five years. We have deferred both the
unrecognized revenues and direct costs relating to the delivered
equipment, which costs are being amortized over the same period
as the related revenues. However, effective January 1, 2011
we adopted two new Accounting Standard Updates, or ASUs, which
will affect revenue recognition for sales to our international
distributors. Under the amended guidance, beginning
January 1, 2011, we will recognize revenues from equipment
sale and related direct costs at the time of shipment or, if
applicable, delivery in accordance with contract terms. The
adoption of this amended guidance will not impact the accounting
for sales prior to January 1, 2011. We will continue to
recognize revenues from these equipment sales ratably.
Inventory includes material, labor and overhead. The components
of inventory are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Purchased components
|
|
$
|
14,928
|
|
|
$
|
10,110
|
|
Work in process
|
|
|
6,372
|
|
|
|
5,744
|
|
Finished goods
|
|
|
13,650
|
|
|
|
12,263
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,950
|
|
|
$
|
28,117
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Property
and Equipment, Field Equipment and Deferred Cost of
Revenues
|
A summary of the components of property and equipment, net are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Manufacturing equipment and tooling
|
|
$
|
10,683
|
|
|
$
|
9,804
|
|
Leasehold improvements
|
|
|
3,913
|
|
|
|
4,846
|
|
Computer and office equipment
|
|
|
2,272
|
|
|
|
2,283
|
|
Molds
|
|
|
1,848
|
|
|
|
1,803
|
|
Furniture
|
|
|
238
|
|
|
|
471
|
|
Construction-in-process
|
|
|
1,179
|
|
|
|
1,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,133
|
|
|
|
20,826
|
|
Less accumulated depreciation
|
|
|
(11,843
|
)
|
|
|
(10,490
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
8,290
|
|
|
$
|
10,336
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for property and equipment was
$3.3 million, $3.4 million and $3.0 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
85
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of field equipment, net are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Field equipment
|
|
$
|
42,753
|
|
|
$
|
48,381
|
|
Less accumulated depreciation
|
|
|
(29,093
|
)
|
|
|
(26,655
|
)
|
|
|
|
|
|
|
|
|
|
Field equipment, net
|
|
$
|
13,660
|
|
|
$
|
21,726
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for field equipment, which is recorded in
costs of revenues in the consolidated statement of operations,
was $8.1 million, $9.8 million and $9.0 million
for the years ended December 31, 2010, 2009 and 2008,
respectively.
Amortization expense of deferred cost of revenues was
$8.1 million, $4.6 million and $3.5 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
|
|
6.
|
Goodwill
and Intangible Assets
|
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Estimated
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
Useful
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Life
|
|
|
Bloodline, needle and other patented and unpatented technology
|
|
$
|
6,200
|
|
|
$
|
(2,519
|
)
|
|
$
|
6,200
|
|
|
$
|
(1,744
|
)
|
|
|
8 years
|
|
Trade names
|
|
|
2,300
|
|
|
|
(534
|
)
|
|
|
2,300
|
|
|
|
(370
|
)
|
|
|
14 years
|
|
Customer relationships
|
|
|
26,000
|
|
|
|
(6,035
|
)
|
|
|
26,000
|
|
|
|
(4,178
|
)
|
|
|
14 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
34,500
|
|
|
$
|
(9,088
|
)
|
|
$
|
34,500
|
|
|
$
|
(6,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recognized amortization expense of $2.8 million during
each of 2010, 2009 and 2008. We will record $2.8 million of
amortization expense for each of the years ending
December 31, 2011 through 2015 and $11.4 million in
the aggregate thereafter related to the above intangible assets.
Basic loss per share is computed by dividing loss available to
common stockholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the
period. The computation of diluted loss per share is similar to
basic loss per share, except that the denominator is increased
to include the number of additional common shares that would
have been outstanding if the potentially dilutive common shares
had been issued.
The following potential common stock equivalents, as calculated
using the treasury stock method, were not included in the
computation of diluted net loss per share as their effect would
have been anti-dilutive due to the net loss incurred (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Options to purchase common stock
|
|
|
3,072
|
|
|
|
584
|
|
|
|
275
|
|
Restricted stock
|
|
|
913
|
|
|
|
888
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,974
|
|
|
|
1,472
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Payroll, compensation and related benefits
|
|
$
|
7,109
|
|
|
$
|
4,433
|
|
Customer prepayment
|
|
|
4,316
|
|
|
|
|
|
Distribution expenses
|
|
|
2,228
|
|
|
|
1,616
|
|
Other
|
|
|
5,884
|
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,537
|
|
|
$
|
9,377
|
|
|
|
|
|
|
|
|
|
|
In November 2007, we obtained a $50.0 million credit and
security agreement with a term of 42 months from a group of
lenders led by Merrill Lynch Capital, a division of Merrill
Lynch Business Services Inc., which was subsequently acquired by
General Electric Capital, or GE. The credit facility consisted
of a $30.0 million term loan and a $20.0 million
revolving credit facility. On March 16, 2009, the Company
amended its credit and security agreement with GE. The amendment
postponed principal payments under the term loan for three
months from April through June 2009, and modified certain
covenants and the interest rate on the term loan and revolving
credit facility. Interest on the amended term loan was 11.12%
per annum payable on a monthly basis. We were also required to
pay a maturity premium of $0.9 million at the time of loan
payoff. We accrued the maturity premium as additional interest
over the term. The revolving credit facility of the loan
included an unused line fee of 0.75% per annum and descending
deferred revolving credit facility commitment fees, which would
be charged in the event the revolving credit facility was
terminated prior to May 21, 2011. We paid a
$0.5 million amendment fee in connection with the March
2009 amendment. Concurrent with entering into the term loan with
Asahi in June 2009, we terminated the GE credit and security
agreement and repaid all outstanding borrowings owed, including
$2.0 million of prepayment and other transactions fees
which were recorded to interest expense during 2009.
In June 2009, we closed a $40.0 million term loan and
security agreement with Asahi. Borrowings bear interest at a
rate of 8% per annum payable in arrears on
November 1st and May 1st, with fifty percent of
such interest being deferred until the maturity date on
May 31, 2013. Principal is payable in one balloon payment
at maturity. The term loan is secured by substantially all of
our assets. The term loan may be prepaid, without penalty, at
our option. In the event the term loan reaches maturity, Asahi
may require that all of the principal and interest on the term
loan that is unpaid as of the maturity date be converted into
shares of our common stock, with the number of shares to be
determined based upon the average closing stock price of our
common stock during the thirty business days preceding the
maturity date. Under no circumstance would we be obligated to
issue more than 10% of the number of our shares of common stock
outstanding on the maturity date to Asahi in satisfaction of
this obligation; provided that we and Asahi may mutually agree,
in each of our own sole discretion, to increase the 10%
limitation up to 20%. The term loan and security agreement with
Asahi includes certain affirmative covenants including timely
filings and limitations on contingent debt obligations and sales
of assets. The term loan and security agreement also contains
customary events of default, including nonpayment,
misrepresentation, breach of covenants, material adverse
effects, and bankruptcy. In the event we fail to satisfy the
covenants, or otherwise go into default, Asahi has a number of
remedies, including sale of our assets and acceleration of all
outstanding indebtedness, subject to SVBs senior security
interest. Borrowings under the term loan and security agreement
were recorded at their estimated fair value at issuance, net of
a $3.7 million discount. The discount is being recorded to
interest expense over the term of the agreement, through
May 31, 2013.
87
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2010, we entered into a loan and security agreement
with Silicon Valley Bank, or the SVB Agreement, for a
$15.0 million revolving line of credit with a maturity date
of April 1, 2012. The SVB Agreement is secured by all or
substantially all of our assets. In connection with the SVB
Agreement, we amended the term loan and security agreement with
Asahi to provide for certain amendments, including granting to
Asahi junior liens on certain of our assets for so long as the
SVB Agreement remains outstanding. Upon termination of all
obligations under that facility, Asahis security will
revert to a security in all assets other than cash, bank
accounts, accounts receivable, field equipment and inventory.
Borrowings under the SVB Agreement bear interest at a floating
rate per annum equal to two percentage points (2.00%) above the
prime rate (initial prime rate of 4.00%). Pursuant to the SVB
Agreement, we have agreed to certain financial covenants
relating to liquidity requirements and adjusted EBITDA, as
defined in the SVB Agreement. The SVB Agreement contains events
of default customary for transactions of this type, including
nonpayment, misrepresentation, breach of covenants, material
adverse effect and bankruptcy. We have not drawn any amounts
under the SVB Agreement and, at December 31, 2010, we were
in compliance with the covenants.
In addition to the $40.0 million term loan, we have one
Euro denominated loan outstanding of $43 thousand, which expires
in September 2011, and is included in current liabilities.
Annual maturities of principal under our debt obligations
outstanding at December 31, 2010, gross of a
$2.2 million discount, are as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
43
|
|
2012
|
|
|
|
|
2013(1)
|
|
|
42,667
|
|
|
|
|
|
|
|
|
$
|
42,710
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes $2.7 million of deferred interest related
to the Asahi term loan. |
|
|
10.
|
Business
Segment and Geographic Information
|
After an evaluation of the business activities regularly
reviewed by our chief operating decision-maker for which
separate discrete financial information is available, we
determined that we have two reporting segments, System One and
In-Center. Beginning in the first quarter of 2009, we allocated
previously unallocated cost of revenues to our System One and
In-Center segments. Prior year segment information has been
revised to conform to the current presentation.
The accounting policies of the reportable segments are the same
as those described in Note 2, Summary of Significant
Accounting Policies. The profitability measure employed by
us and our chief operating decision maker for making decisions
about allocating resources to segments and assessing segment
performance is segment (loss) profit, which consists of sales,
less cost of sales, selling and marketing and distribution
expenses.
Our management measures are designed to assess performance of
these operating segments excluding certain items. As a result,
certain corporate expenses are excluded from the segment
operating performance measures, including research and
development expenses and general and administrative expenses, as
they are managed centrally.
Within the System One segment, we derive revenues from the sale
and rental of the System One and PureFlow SL equipment and the
sale of disposable products in the home and critical care
markets. The home market is devoted to the treatment of ESRD
patients in the home, while the critical care market is devoted
to the treatment of hospital-based patients with acute kidney
failure or fluid overload. Within the System One segment, we
sell a similar technology platform of the System One with
different features to the home and critical care markets. Some
of our largest customers in the home market provide outsourced
renal dialysis
88
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
services to some of our customers in the critical care market.
Sales of product to both markets are made primarily through
dedicated sales forces and distributed directly to the customer,
or the patient, with certain products sold through distributors
internationally.
Within the In-Center segment, we sell blood tubing sets and
needles for hemodialysis and needles for apheresis primarily for
the treatment of ESRD patients at dialysis centers. Nearly all
In-Center products are sold through national distributors.
Our reportable segments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System One
|
|
In-Center
|
|
Unallocated
|
|
Total
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
113,855
|
|
|
$
|
65,363
|
|
|
$
|
|
|
|
$
|
179,218
|
|
Segment profit (loss)
|
|
|
283
|
|
|
|
8,927
|
|
|
|
(35,674
|
)
|
|
|
(26,464
|
)
|
Segment assets
|
|
|
86,469
|
|
|
|
16,329
|
|
|
|
183,296
|
|
|
|
286,094
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
85,801
|
|
|
$
|
62,875
|
|
|
$
|
|
|
|
$
|
148,676
|
|
Segment (loss) profit
|
|
|
(17,445
|
)
|
|
|
10,344
|
|
|
|
(29,346
|
)
|
|
|
(36,447
|
)
|
Segment assets
|
|
|
74,534
|
|
|
|
17,346
|
|
|
|
105,098
|
|
|
|
196,978
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
66,873
|
|
|
$
|
61,890
|
|
|
$
|
|
|
|
$
|
128,763
|
|
Segment (loss) profit
|
|
|
(23,092
|
)
|
|
|
10,075
|
|
|
|
(36,968
|
)
|
|
|
(49,985
|
)
|
Substantially all of our revenues are derived from the sale of
the System One and related products, which cannot be used with
any other dialysis system, and from needles and blood tubing
sets to customers located in the United States.
The following table summarizes the number of customers who
individually comprise greater than 10% of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Customer A
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
18
|
%
|
Customer B
|
|
|
16
|
%
|
|
|
28
|
%
|
|
|
39
|
%
|
Customer C
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
Sales to Customer A are primarily in the System One segment and
sales to Customer B and Customer C are to significant
distributors in the In-Center segment. A portion of Customer
Bs sales of our products are to customer A. All of
Customer Cs sales of our products are to Customer A.
89
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents a reconciliation of the total
segment assets to total assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Total segment assets
|
|
$
|
102,798
|
|
|
$
|
91,880
|
|
Corporate assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
104,339
|
|
|
|
21,720
|
|
Property and equipment, net
|
|
|
8,290
|
|
|
|
10,336
|
|
Intangible assets, net
|
|
|
25,412
|
|
|
|
28,208
|
|
Goodwill
|
|
|
42,698
|
|
|
|
42,698
|
|
Prepaid and other assets
|
|
|
2,557
|
|
|
|
2,136
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
286,094
|
|
|
$
|
196,978
|
|
|
|
|
|
|
|
|
|
|
Long-lived tangible assets consist of property and equipment and
field equipment. The following table presents total long-lived
tangible assets by geographic area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
16,796
|
|
|
$
|
25,922
|
|
|
$
|
35,924
|
|
Europe
|
|
|
4,536
|
|
|
|
5,290
|
|
|
|
5,679
|
|
Mexico
|
|
|
618
|
|
|
|
850
|
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,950
|
|
|
$
|
32,062
|
|
|
$
|
42,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Commitments
and Contingencies
|
We enter into arrangements to purchase inventory requiring
minimum purchase commitments in the ordinary course of business.
In connection with the October 1, 2007 acquisition of
Medisystems, we assumed a supply and distribution agreement with
Kawasumi, a Japanese contract manufacturer, which we refer to as
the Original Agreement. The Original Agreement originally
covered both blood tubing sets and needles for the In-Center
segment. On May 6, 2008, we entered into a new supply and
distribution agreement with Kawasumi, or the New Agreement,
which supersedes the Original Agreement with respect to the
supply of blood tubing sets. The Original Agreement continues to
govern the purchase and sale of needles. The initial term of the
New Agreement was extended through January 2012. Pursuant to the
New Agreement, Kawasumi agreed not to sell blood tubing sets to
any other entity in the United States and we agreed to purchase
certain annual minimum quantities of blood tubing sets. The
initial term of the Original Agreement was recently
automatically extended through February 2014. Pursuant to the
Original Agreement, we agreed to purchase certain annual minimum
quantities of needles.
On March 1, 2007, we entered into a long-term agreement
with the Entrada Group, or Entrada, to establish manufacturing
and service operations in Mexico, initially for our cycler and
PureFlow SL disposables and later for our PureFlow SL hardware.
The agreement obligates Entrada to provide us with manufacturing
space, support services and a labor force through 2012. Subject
to certain exceptions, we are obligated for facility fees
through the term of the agreement which approximate
$0.2 million annually. The agreement may be terminated by
either party upon material breach, generally following a
30-day cure
period, or upon the insolvency of the other party.
In January 2007, we entered into a long-term supply agreement
with Membrana, pursuant to which Membrana has agreed to supply,
on an exclusive basis, capillary membranes for use in the
filters used with
90
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the System One for ten years. In exchange for Membranas
agreement to pricing reductions based on volumes ordered, we
have agreed to purchase a base amount of membranes per year from
Membrana. The agreement may be terminated by either party upon a
material breach, generally following a
60-day cure
period, or upon the insolvency of the other party.
We maintain our corporate headquarters in a leased building
located in Lawrence, Massachusetts and maintain our
manufacturing operations in Mexico, Germany, and Italy. Our
lease agreement at our headquarters expires in July 2012 with an
option to renew for five years. Our leased manufacturing
facilities are subject to lease agreements with termination
dates beginning in 2011. The lease agreements contain certain
provisions that require us to pay executory costs such as real
estate taxes, operating expenses and common utilities. The total
amount of rental payments due over the lease term is being
charged to rent expense on the straight-line method over the
term of the lease. Rent expense, net of sublease income, was
$1.7 million for both the years ended December 31,
2010 and 2009 and $1.8 million for the year ended
December 31, 2008. The lease agreement for our headquarters
included a tenant improvement allowance paid by the landlord of
$0.6 million, which has been recorded as both a leasehold
improvement and a deferred rent obligation. All of our leases
are accounted for as operating leases.
The future minimum rental payments as of December 31, 2010
under our operating leases are as follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
1,578
|
|
2012
|
|
|
551
|
|
2013
|
|
|
5
|
|
|
|
|
|
|
|
|
$
|
2,134
|
|
|
|
|
|
|
Deferred income tax assets and liabilities reflect the tax
effects of differences in the recognition of income and expense
items for tax and financial reporting purposes.
Deferred tax assets (liabilities), the majority of which are
non-current, are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
105,578
|
|
|
$
|
95,610
|
|
Research and development credits
|
|
|
6,438
|
|
|
|
5,271
|
|
Other
|
|
|
5,495
|
|
|
|
6,843
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
117,511
|
|
|
|
107,724
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,432
|
)
|
|
|
(4,938
|
)
|
Intangible assets
|
|
|
(9,707
|
)
|
|
|
(11,048
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(12,139
|
)
|
|
|
(15,986
|
)
|
Net deferred tax assets before valuation allowance
|
|
|
105,372
|
|
|
|
91,738
|
|
Less: Valuation allowance
|
|
|
(105,372
|
)
|
|
|
(91,738
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
91
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, we had federal and state net
operating loss carryforwards of approximately $280 million
and $244 million, respectively, available to offset future
taxable income, if any. Substantially all net losses are in the
United States. The federal and state net operating loss
carryforwards will expire between 2019 and 2030 if not utilized.
We also had federal and state research and development credit
carryforwards of $4.4 million and $4.3 million, which
begin to expire in 2015 if not utilized. During 2010, the
deferred tax valuation allowance increased by approximately
$13.6 million, primarily as the result of increases to net
operating losses. A full valuation allowance has been recorded
in the accompanying consolidated financial statements to offset
our deferred tax assets because the future realizability of such
assets is uncertain. Utilization of the net operating loss
carryforwards may be subject to annual limitations due to the
ownership percentage change limitations provided by the Internal
Revenue Code Section 382 and similar state provisions. In
the event of a deemed change in control under Internal Revenue
Code Section 382, an annual limitation imposed on the
utilization of net operating losses may result in the expiration
of all or a portion of the net operating loss carryforwards.
The deferred tax assets above exclude deductions related to the
exercise of stock options subsequent to the adoption of the
guidance related to share-based payments. We will realize the
benefit of these losses through increases to stockholders
equity in future periods when and if the losses are utilized to
reduce future tax payments.
The provision for income taxes of $0.8 million,
$0.3 million and $0.4 million in 2010, 2009 and 2008,
respectively, relates primarily to the profitable operations of
certain foreign entities.
A reconciliation of the U.S. federal statutory tax rate to
the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Stock compensation
|
|
|
9.2
|
%
|
|
|
(2.6
|
)%
|
|
|
(2.3
|
)%
|
State income tax, net of federal tax benefit
|
|
|
5.3
|
%
|
|
|
4.9
|
%
|
|
|
0.0
|
%
|
Valuation allowance
|
|
|
(53.0
|
)%
|
|
|
(38.5
|
)%
|
|
|
(34.2
|
)%
|
Other, net
|
|
|
2.0
|
%
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(2.5
|
)%
|
|
|
(0.6
|
)%
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had unrecognized tax benefits of $0.5 million and
$0.1 million at December 31, 2010 and 2009,
respectively that would, if recognized, affect our effective tax
rate. We do not anticipate a significant change in the amount of
these unrecognized tax benefits over the next twelve months.
Since we are in a loss carryforward position, we are generally
subject to US federal, state, local and foreign income tax
examinations by tax authorities for all years for which a loss
carryforward is available.
|
|
13.
|
Stock
Plans and Stock-Based Compensation
|
Stock
Incentive Plans
We maintain the 2005 Stock Incentive Plan, or the 2005 Plan,
that governs awards to both employees and non-employees. The
2005 Plan replaced and superseded our 1999 Stock Option and
Grant Plan, or the 1999 Plan, except that awards granted under
the 1999 Plan remain in effect pursuant to their original terms.
Pursuant to an amendment to the 2005 Plan approved by our
shareholders in May 2009, each share award issued after
May 28, 2009 other than options or stock appreciation
rights will reduce the number of total shares available for
grant by 1.23 shares. A total of 9.5 million shares
have been authorized for grant under the 2005 Plan and, at
December 31, 2010, 316,915 shares are available for
future grant.
92
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unless otherwise specified by our Board of Directors or
Compensation Committee of the Board, stock options issued to
employees under the 2005 Plan expire seven years from the date
of grant and generally vest over a period of four years. In
general, all stock options issued under the 1999 Plan expire ten
years from the date of grant and the majority of these awards
granted under the 1999 Plan were exercisable upon the date of
grant into restricted common stock, which vested over a period
of four years. Stock option grants to directors expire five
years from the date of grant and vest 100% on date of grant. We
settle stock option exercises and restricted stock vesting with
newly issued common shares.
We also maintain a performance based restricted stock plan, or
the Performance Share Plan, in which we commit to grant shares
of restricted stock to certain employees and executive officers
based on the achievement of certain annual corporate financial
performance metrics. The restricted stock, if awarded, vests
over a requisite service period of three years. Further, we
maintain a bonus plan, or Corporate Bonus Plan, for the benefit
of our employees. Payout under the Corporate Bonus Plan is based
on individual performance and the achievement of certain annual
corporate financial performance metrics and is paid in shares of
our common stock, or in cash, at the discretion of the
Compensation Committee. The estimated payout under the Corporate
Bonus Plan is recognized as compensation expense during the
performance year and is classified as a liability, until
settlement, on our consolidated balance sheet. A significant
majority of the compensation expense associated with the
Corporate Bonus Plans for the 2010 and 2009 performance years
has been classified as stock-based compensation expense because
these amounts have been or will be paid in shares of our common
stock.
Our 2005 Employee Stock Purchase Plan, or the 2005 Purchase
Plan, authorized the issuance of up to 650,000 shares of
common stock to participating employees through a series of
periodic offerings. Each six-month offering period begins in
January and July. An employee becomes eligible to participate in
the 2005 Purchase Plan once he or she has been employed for at
least three months and is regularly employed for at least
20 hours per week for more than three months in a calendar
year. The price at which employees can purchase common stock in
an offering is 95 percent of the closing price of our
common stock on the NASDAQ Global Select Market on the lower of
the first or last day of the offering period, unless otherwise
determined by the Board or Compensation Committee. As of
December 31, 2010, the maximum number of shares available
for future issuance under the 2005 Purchase Plan is 335,101.
Stock
Options
A summary of the status of stock options granted under all of
our plans at December 31, 2010, and changes during the year
then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
Remaining
|
|
Stock Options
|
|
Shares
|
|
|
Price
|
|
|
Intrinsic Value
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Outstanding at beginning of year
|
|
|
6,850,050
|
|
|
$
|
6.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,398,300
|
|
|
$
|
10.86
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,831,253
|
)
|
|
$
|
6.57
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(194,135
|
)
|
|
$
|
10.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
6,222,962
|
|
|
$
|
7.75
|
|
|
$
|
106,578
|
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and exercisable
|
|
|
3,709,004
|
|
|
$
|
7.76
|
|
|
$
|
63,507
|
|
|
|
3.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested, exercisable and expected to vest
|
|
|
6,015,966
|
|
|
$
|
7.75
|
|
|
$
|
103,073
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value for stock options is calculated based on the
market price of our common stock as of December 31, 2010,
less the exercise price of the underlying awards, excluding
out-of-the-money
awards. The
93
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
total fair value of options that vested during the years ended
December 31, 2010, 2009 and 2008 was $6.6 million,
$6.0 million and $5.7 million, respectively. The
aggregate intrinsic value of options exercised is calculated
based on the market price of our common stock on the exercise
date, less the exercise price of underlying award and was
$21.7 million, $0.3 million and $0.2 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
The weighted-average fair value of options granted during the
years ended December 31, 2010, 2009 and 2008 was $5.84,
$1.33 and $2.85 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected life (in years)
|
|
4.75
|
|
4.75
|
|
4.75
|
Risk-free interest rate
|
|
1.17% - 2.58%
|
|
1.71% - 2.58%
|
|
2.40% - 3.70%
|
Expected stock price volatility
|
|
64% to 65%
|
|
65% to 75%
|
|
67%
|
Expected dividend yield
|
|
|
|
|
|
|
Restricted
Stock
The total fair value of restricted stock that vested was
$1.8 million during the year ended December 31, 2010
and $0.1 million during each of the years ended
December 31, 2009 and 2008. The weighted-average fair value
of restricted stock granted during the years ended
December 31, 2010, 2009 and 2008 was $10.00, $2.11 and
$14.98 per unit, respectively. The following table summarizes
the status of the unvested restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-date
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Intrinsic Value
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Nonvested at December 31, 2009
|
|
|
1,226,564
|
|
|
$
|
2.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
757,144
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(804,075
|
)
|
|
$
|
2.22
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(26,250
|
)
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
1,153,383
|
|
|
$
|
7.34
|
|
|
$
|
28,696
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
The weighted-average fair value of stock purchase rights granted
as part of the 2005 Purchase Plan during the years ended
December 31, 2010, 2009 and 2008 was $2.72, $0.97 and $0.87
per share, respectively. The fair value of the employees
stock purchase rights was estimated using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected life (in months)
|
|
6
|
|
6
|
|
6
|
Risk-free interest rate
|
|
0.20% - 0.22%
|
|
0.18% - 0.33%
|
|
1.6% - 3.4%
|
Expected stock price volatility
|
|
64%
|
|
65%
|
|
65% - 67%
|
Expected dividend yield
|
|
|
|
|
|
|
There were 61,387, 103,551 and 85,691 shares issued under
the 2005 Purchase Plan for the years ended December 31,
2010, 2009 and 2008, respectively, which resulted in share-based
compensation expense of
94
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.2 million for the year ended December 31, 2010 and
$0.1 million for each of the years ended December 31,
2009 and 2008.
Stock-based
Compensation Expense
The following table presents stock-based compensation expense
included in the consolidated statements of operations (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of revenues
|
|
$
|
2,347
|
|
|
$
|
1,593
|
|
|
$
|
1,053
|
|
Selling and marketing
|
|
|
5,540
|
|
|
|
3,507
|
|
|
|
2,247
|
|
Research and development
|
|
|
2,222
|
|
|
|
774
|
|
|
|
520
|
|
General and administrative
|
|
|
5,242
|
|
|
|
3,352
|
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
15,351
|
|
|
$
|
9,226
|
|
|
$
|
5,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, approximately $14.0 million
of unrecognized stock compensation cost related to nonvested
stock options and restricted stock (net of estimated
forfeitures) is expected to be recognized over a
weighted-average period of 2.0 years.
Other
Compensation Plans
We maintain postemployment benefit plans for employees in
certain foreign subsidiaries. The plans provide lump sum
benefits, payable based on statutory regulations for voluntary
or involuntary termination. Where required, we obtain an annual
actuarial valuation of the benefit plans. We have recorded a
liability of $1.5 million and $1.6 million at
December 31, 2010 and 2009, respectively, as other
long-term liabilities for costs associated with these plans. The
expense recorded in connection with these plans was not
significant during 2010, 2009 and 2008.
|
|
14.
|
Employee
Benefit Plan
|
We have a 401(k) retirement plan, or the 401(k) Plan, for the
benefit of eligible employees, as defined. Each participant may
elect to contribute up to 25% of his or her compensation to the
401(k) Plan each year, subject to certain IRS limitations. We
contribute 100% of the first 3% of the employees
contribution and 50% of the next 2% of the employees
contribution. We contributed $1.0 million,
$1.0 million and $0.9 million to the 401(k) Plan
during the years ended December 31, 2010, 2009 and 2008,
respectively.
In November 2010, we filed an automatic shelf registration
statement on
Form S-3,
which will allow us to offer and sell, from time to time in one
or more offerings common or preferred stock, debt securities or
warrants for the purchase of common or preferred stock as we
deem prudent or necessary to raise capital at a later date. On
November 23, 2010, we completed the sale of
3,680,000 shares of our common stock pursuant to an
underwriting agreement with Canaccord Genuity at a price of
$20.04 per share. We received proceeds of $73.4 million,
net of related expenses, and intend to use the proceeds for
working capital and general corporate purposes.
During 2010 we received 288,992 shares that were
surrendered by employees in payment for the minimum required
withholding taxes due on issuance of shares of our common stock
under the 2009 Corporate Bonus Plan and vesting of restricted
stock awards under the 2009 Performance Share Plan.
Additionally, during 2010, we received 36,112 shares that
were surrendered in payment for the exercise of
95
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock options. These shares have been classified as treasury
stock in the consolidated balance sheets. The settlement of the
2009 Corporate Bonus Plan obligation of $1.6 million during
the first quarter of 2010 in shares of our common stock
represents a noncash financing activity.
In May 2008, we entered into a $43.0 million private
placement agreement to sell an aggregate of 9.6 million
shares of our common stock at a price of $4.50 per share and
warrants to purchase 1.9 million shares of our common stock
at an exercise price of $5.50 per share to certain accredited
investors managed by a single advisor, OrbiMed Advisors LLC, and
other affiliates, including a member of the Companys board
of directors. The private placement took place in two closings,
on May 28, 2008 and August 1, 2008. The proceeds from
both tranches, net of transaction costs, were approximately
$42.3 million.
We are required to register the common stock and the common
stock issuable upon exercise of the warrants with the Securities
and Exchange Commission, which was done on August 8, 2008.
If the holders of the shares or the accompanying warrant shares
are unable to sell such shares or warrant shares under the
registration statement for more than 30 days in any
365 day period after the effectiveness of the registration
statement, we may be obligated to pay damages equal to up to 1%
of the share purchase price per month that the registration
statement is not effective and the investors are unable to sell
their shares.
The fair value of the warrants at issuance was $5.1 million
and was recorded as a liability on our consolidated balance
sheet and in equity as a reduction of the total proceeds
received from the transaction. We recognized a $3.2 million
gain in other expense during 2008 related to changes in fair
value of outstanding warrants. These amounts were determined
using the Black-Scholes option pricing model and calculated
using the following assumptions: 67% volatility; expected term
of 5 years; 1.6% 3.4% risk-free interest rate;
and 0% dividend. The fair value of the warrants issued in
connection with the private placement represents a noncash
financing activity.
The exercise price of the warrants to purchase shares of our
common stock issued in connection with this private placement
was fixed at $5.50 per share on December 31, 2008 based on
our achievement of over 3,100 ESRD patients prescribed to
receive therapy using the System One. As a result, the fair
value of these warrants of $1.9 million at
December 31, 2008 was reclassified from a current liability
to equity on January 1, 2009. The reclassification on
January 1, 2009 represents a noncash financing activity.
The warrants have a term of 5 years and expire on
May 28, 2013 and August 1, 2013 for the first and
second tranches, respectively. The warrants also contain a net
share settlement feature that is available to investors once the
underlying shares are registered. Additional provisions require
us, in the event of a change of control, to pay promptly to the
warrant holder an amount calculated by the Black-Scholes option
pricing formula. Such payment is required to be in cash or
shares in the same proportion that other stockholders receive in
such change of control transaction. As of December 31,
2010, 1.6 million warrants are outstanding and expire on
May 28, 2013 or August 1, 2013.
Our obligation to issue the second tranche in the May 2008
private placement met the definition of a derivative instrument
under ASC 815. We recognized a $0.7 million loss
during 2008 related to the fair value of this derivative
instrument upon settlement, which was recorded in other expenses
and in equity as a reduction of the total proceeds received from
the transaction. This amount was determined using the
Black-Scholes option pricing model and calculated using the
following assumptions: 76% volatility; expected term of
32 days; 1.9% risk-free interest rate; and 0% dividend. The
fair value of the derivative instrument issued in connection
with the private placement represents a noncash financing
activity.
|
|
16.
|
Related-Party
Transactions
|
On June 4, 2007, we entered into a stock purchase agreement
with David S. Utterberg, a director and significant stockholder,
under which we agreed to purchase from Mr. Utterberg the
issued and outstanding shares of Medisystems Corporation and
certain affiliated entities in exchange for the issuance of
6.5 million
96
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares of our common stock. We may be required to issue
additional shares of common stock to Mr. Utterberg because,
pursuant to the terms of the stock purchase agreement,
Mr. Utterberg and we have agreed to indemnify each other in
the event of certain breaches or failures, and any such
indemnification amounts must be paid in shares of our common
stock, valued at the time of payment. However, we will not be
required to issue shares for indemnification purposes that in
the aggregate would exceed 20% of the then outstanding shares of
our common stock without first obtaining stockholder approval,
and any such shares will not be registered under the Securities
Act of 1933, as amended. In connection with the acquisition of
Medisystems, we assumed a $2.8 million liability owed to
Lifestream Medical Corporation, a Nevada corporation (formerly
known as DSU Medical Corporation), which is wholly-owned by
Mr. Utterberg. We paid the liability during 2008. As a
condition to the parties obligations to consummate the
Medisystems acquisition, Mr. Utterberg and Lifestream
Medical Corporation entered into a consulting agreement with us,
dated October 1, 2007. We paid Mr. Utterberg and
Lifestream Medical Corporation $150,000 and $200,000 during 2009
and 2008, respectively, in consideration for services performed
under this agreement. Finally, in connection with the
Medisystems acquisition, we also agreed that if
Mr. Utterberg is no longer a director of NxStage, our Board
of Directors will nominate for election to our Board of
Directors any director nominee proposed by Mr. Utterberg,
subject to certain conditions.
In May 2008, we entered into Securities Purchase Agreements
relating to a $43.0 million private placement of shares of
our common stock and warrants to purchase shares of our common
stock. The private placement took place in two closings, on
May 28, 2008 and August 1, 2008. Participants in the
private placement consisted of unaffiliated and affiliated
accredited institutional investors. One of these investors, the
Sprout Group, is affiliated with one of our Board members,
Dr. Philippe O. Chambon. The Sprout Group purchased
1.0 million shares and warrants to purchase
0.2 million shares of our common stock at a price similar
to that of unaffiliated investors. Under applicable rules of the
NASDAQ Global Market, the second closing of the private
placement, which included all shares issued to the Sprout Group
and other affiliated accredited institutional investors, was
subject to stockholder approval, which was obtained at a special
meeting on July 31, 2008.
We entered into a Securities Purchase Agreement with OrbiMed
Advisors, LLC, or OrbiMed, in connection with the private
placement which required that we appoint one individual
nominated by OrbiMed to our Board of Directors upon the earlier
of the second closing of the private placement or sixty days
after the first closing of the private placement. The
appointment of Mr. Jonathan Silverstein, a general partner
of OrbiMed, on July 23, 2008, to the Board satisfied this
requirement. OrbiMed purchased an aggregate of 5.6 million
shares and warrants to purchase 1.1 million shares of our
common stock in connection with the private placement at a price
similar to that of unaffiliated investors. Mr. Silverstein
subsequently resigned from our Board on January 20, 2011.
|
|
17.
|
Fair
Value Measurements
|
At December 31, 2010, we had $84.8 million in money
market funds, included in cash and cash equivalents, measured at
fair value on a recurring basis utilizing quoted prices
(unadjusted) in active markets of identical assets, also
referred to as level 1 inputs.
The carrying amounts reflected in the consolidated balance
sheets for cash, accounts receivable, prepaids and other current
and non-current assets, accounts payable and accrued expenses
approximate fair value due to their short-term nature.
The carrying amount of our long-term debt approximates fair
value at December 31, 2010. The fair value of our long-term
debt was estimated using inputs derived principally from market
observable data, including current rates offered to us for debt
of the same or similar remaining maturities. Within the
hierarchy of fair value measurements, these are level 2
inputs.
97
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Quarterly
Financial Data (Unaudited)
|
The following table sets forth selected quarterly information
(unaudited) (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
Revenues
|
|
$
|
40,408
|
|
|
$
|
44,008
|
|
|
$
|
45,033
|
|
|
$
|
49,769
|
|
Gross profit(1)
|
|
|
11,813
|
|
|
|
13,762
|
|
|
|
14,960
|
|
|
|
17,592
|
|
Net loss
|
|
|
(8,999
|
)
|
|
|
(8,256
|
)
|
|
|
(8,164
|
)
|
|
|
(6,293
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
2009
|
|
2009
|
|
Revenues
|
|
$
|
33,735
|
|
|
$
|
36,398
|
|
|
$
|
38,033
|
|
|
$
|
40,510
|
|
Gross profit
|
|
|
7,055
|
|
|
|
8,817
|
|
|
|
9,545
|
|
|
|
11,447
|
|
Net loss(2)
|
|
|
(12,228
|
)
|
|
|
(12,515
|
)
|
|
|
(10,047
|
)
|
|
|
(8,677
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
(1) |
|
During the fourth quarter of 2010, we changed the estimated
useful life of certain of our field equipment assets from five
to seven years which resulted in a reduction in costs of
revenues of $0.5 million during the three months ended
December 31, 2010. |
|
(2) |
|
During the three months ended June 30, 2009, we incurred
prepayment and other transaction fees of $2.0 million,
which were recorded to interest expense, to pay off the entire
debt obligation owed under our credit and security agreement
with GE. |
98
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
December 31, 2010. The term disclosure controls and
procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
companys management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of NxStages
disclosure controls and procedures as of December 31, 2010,
our chief executive officer and chief financial officer
concluded that, as of such date, NxStages disclosure
controls and procedures were effective at the reasonable
assurance level.
No change in NxStages internal control over financial
reporting occurred during the fiscal quarter ended
December 31, 2010 that has materially affected, or is
reasonably likely to materially affect, NxStages internal
control over financial reporting.
Managements
Report on Internal Control over Financial Reporting
We, as management of NxStage Medical, Inc., are responsible for
establishing and maintaining adequate internal control over
financial reporting. Pursuant to the rules and regulations of
the Securities and Exchange Commission, internal control over
financial reporting is a process designed by, or under the
supervision of, the companys principal executive and
principal financial officer, or persons performing similar
functions, and effected by the companys board of
directors, management and other personnel, 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 and
includes those policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
|
99
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management has evaluated the effectiveness of its internal
control over financial reporting as of December 31, 2010,
based on the control criteria established in a report entitled
Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on such evaluation, we have concluded that NxStages
internal control over financial reporting is effective as of
December 31, 2010.
The independent registered public accounting firm of
Ernst & Young LLP, as auditors of NxStages
consolidated financial statements, has issued an attestation
report on its assessment of NxStages internal control over
financial reporting.
100
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of NxStage Medical, Inc.
We have audited NxStage Medical, Incs internal control
over financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). NxStage Medical,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, NxStage Medical, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of NxStage Medical, Inc. as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the three years in the period ended
December 31, 2010, and our report dated February 18,
2011 expressed an unqualified opinion thereon.
Boston, Massachusetts
February 18, 2011
101
|
|
Item 9B.
|
Other
Information
|
We have included information about our executive officers in
Part I of the report under the caption Executive
Officers.
The information required by Part III,
Items 10-14
of this report is incorporated by reference from our definitive
proxy statement for our 2011 Annual Meeting of Stockholders.
Such information will be contained in the sections of such proxy
statement captioned Stock Ownership of Certain Beneficial
Owners and Management, Proposal 1
Election of Directors, Corporate Governance,
Information about Executive Officer and Director
Compensation, Certain Relationships and Related
Transactions, Other Matters
Section 16(a) Beneficial Ownership Reporting
Compliance.
Certain documents relating to the registrants corporate
governance, including the Code of Business Conduct and Ethics,
which is applicable to the registrants directors, officers
and employees and the charters of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee of the registrants Board of Directors, are
available on the registrants website at
http://www.nxstage.com.
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) Financial Statements
The following consolidated financial statements are filed as
part of this Annual Report under Item 8
Financial Statements and Supplementary Data:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
72
|
|
Consolidated Balance Sheets
|
|
|
73
|
|
Consolidated Statements of Operations
|
|
|
74
|
|
Consolidated Statements of Changes in Stockholders Equity
|
|
|
75
|
|
Consolidated Statements of Cash Flows
|
|
|
76
|
|
Notes to Consolidated Financial Statements
|
|
|
77
|
|
(b) Exhibits
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are incorporated herein by reference and
are filed as part of this Annual Report on
Form 10-K.
(c) Financial Statement Schedules
None. No financial statement schedules have
been filed as part of this Annual Report on Form
10-K because
they are either not applicable or the required information has
been included in the accompanying notes to the consolidated
financial statements.
102
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
NXSTAGE MEDICAL, INC.
|
|
|
|
By:
|
/s/ Jeffrey
H. Burbank
|
Jeffrey H. Burbank
President and Chief Executive Officer
February 18, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jeffrey
H. Burbank
Jeffrey
H. Burbank
|
|
President, Chief Executive Officer and Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Robert
S. Brown
Robert
S. Brown
|
|
Chief Financial Officer and Senior Vice President (Principal
Financial and Accounting Officer)
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Philippe
O. Chambon
Philippe
O. Chambon, M.D., Ph.D.
|
|
Chairman of the Board of Directors
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Daniel
A. Giannini
Daniel
A. Giannini
|
|
Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Craig
W. Moore
Craig
W. Moore
|
|
Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Reid
Perper
Reid
Perper
|
|
Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Earl
R. Lewis
Earl
R. Lewis
|
|
Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ Nancy
J. Ham
Nancy
J. Ham
|
|
Director
|
|
February 18, 2011
|
|
|
|
|
|
/s/ David
S. Utterberg
David
S. Utterberg
|
|
Director
|
|
February 18, 2011
|
103
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
|
Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation
|
|
S-1/A
|
|
|
3.4
|
|
|
10/7/2005
|
|
333-126711
|
|
3
|
.2
|
|
Amended and Restated By-Laws
|
|
S-1/A
|
|
|
3.5
|
|
|
10/7/2005
|
|
333-126711
|
|
4
|
.1
|
|
Specimen Certificate evidencing shares of common stock
|
|
S-1/A
|
|
|
4.1
|
|
|
10/7/2005
|
|
333-126711
|
|
4
|
.2
|
|
Form of Securities Purchase Agreement, dated May 22, 2008
and a schedule of signatories thereto
|
|
8-K
|
|
|
4.1
|
|
|
5/23/2008
|
|
000-51567
|
|
4
|
.3
|
|
Form of Warrant to Purchase Common Stock
|
|
8-K
|
|
|
4.2
|
|
|
5/23/2008
|
|
000-51567
|
|
10
|
.1#
|
|
1999 Stock Option and Grant Plan, as amended
|
|
S-1/A
|
|
|
10.1
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.2#
|
|
Form of Incentive Stock Option Agreement under the 1999 Stock
Option and Grant Plan, as amended
|
|
S-1/A
|
|
|
10.2
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.3#
|
|
Form of Nonstatutory Stock Option Agreement under the 1999 Stock
Option and Grant Plan, as amended
|
|
S-1/A
|
|
|
10.3
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.4#
|
|
2005 Stock Incentive Plan, as amended by Amendment No. 1,
together with Form of Incentive Stock Option Agreement, Form of
Nonstatutory Stock Option Agreement and Form of Restricted Stock
Agreement
|
|
10-Q
S-1/A
10-K
|
|
|
10.3
10.22
10.5
|
|
|
11/7/2007
10/20/2005
3/16/2007
|
|
000-51567
333-126711
000-51567
|
|
10
|
.5#
|
|
2005 Employee Stock Purchase Plan, as amended by Amendment
No. 1
|
|
10-K
|
|
|
10.5
|
|
|
3/7/2008
|
|
000-51567
|
|
10
|
.6#
|
|
Employment Agreement dated October 19, 2005 between the
Registrant and Jeffrey H. Burbank
|
|
S-1/A
|
|
|
10.12
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.7#
|
|
Employment Agreement dated October 18, 2005 between the
Registrant and Joseph E. Turk, Jr.
|
|
S-1/A
|
|
|
10.15
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.8#
|
|
Employment Agreement dated October 18, 2005 between the
Registrant and Winifred L. Swan
|
|
S-1/A
|
|
|
10.16
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.9#
|
|
Employment Agreement dated November 27, 2006 between
Registrant and Robert S. Brown
|
|
10-K
|
|
|
10.1
|
|
|
3/16/2007
|
|
000-51567
|
|
*10
|
.10
|
|
Employment Agreement dated August 16, 2007 between
Registrant and Michael J. Webb
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.11#
|
|
Form of Indemnification Agreement entered into between the
Registrant and each of its Directors and Executive Officers
|
|
S-1/A
|
|
|
10.21
|
|
|
9/21/2005
|
|
333-126711
|
|
10
|
.12#
|
|
Summary of 2006 Executive Compensation and 2006 Corporate Bonus
Plan
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.13#
|
|
Director Compensation Policy
|
|
10-Q
|
|
|
10.2
|
|
|
5/5/2006
|
|
000-51567
|
|
10
|
.14
|
|
Standard Form Commercial Lease dated October 17, 2000
between the Registrant and Heritage Place, LLC, as amended by
Modification to Standard Form Commercial Lease
|
|
S-1
|
|
|
10.1
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.15
|
|
Supply Agreement dated as of October 26, 2004 between the
Registrant and B. Braun Medizintechnologie GmbH
|
|
S-1
|
|
|
10.17
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.16
|
|
Supply Agreement dated as of January 5, 2007 between the
Registrant and Membrana GmbH
|
|
10-K
|
|
|
10.27
|
|
|
3/16/2007
|
|
000-51567
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
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Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
10
|
.17
|
|
First Amended and Restated National Service Provider Agreement
dated as of July 22, 2010 between the Registrant and DaVita
Inc.
|
|
10-Q
|
|
|
10.01
|
|
|
8/6/2010
|
|
000-51567
|
|
10
|
.18
|
|
Extracorporeal Disposables Distribution Agreement, dated
July 25, 2007, by and between Medisystems Corporation and
Henry Schein
|
|
10-Q
|
|
|
10.4
|
|
|
11/7/2007
|
|
000-51567
|
|
10
|
.19
|
|
Supply and Distribution Agreement, dated February 1, 2001
by and between Medisystems Corporation and Kawasumi
Laboratories, Inc.
|
|
10-Q
|
|
|
10.6
|
|
|
11/7/2007
|
|
000-51567
|
|
10
|
.20
|
|
Investors Rights Agreement dated June 30, 1999
between the Registrant and the Investors, as amended on
January 24, 2000, May 24, 2001, April 15, 2003,
August 18, 2004, December 23, 2004 and July 8,
2005
|
|
S-1
|
|
|
10.9
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.21
|
|
Needle Purchase Agreement, dated January 6, 2008, by and
between the Registrant and DaVita Inc.
|
|
10-K
|
|
|
10.37
|
|
|
3/7/2008
|
|
000-51567
|
|
10
|
.22
|
|
Shelter Agreement, dated March 21, 2007 by and among the
Registrant, Entrada Partners and Entrada Group de Mexico, S. de
R.L. de C.V.
|
|
10-Q
|
|
|
10.6
|
|
|
5/9/2007
|
|
000-51567
|
|
10
|
.23
|
|
Supply and Distribution Agreement, dated May 6, 2008, by
and between Medisystems Corporation and Kawasumi Laboratories,
Inc.
|
|
10-Q
|
|
|
10.43
|
|
|
8/8/2008
|
|
000-51567
|
|
10
|
.24
|
|
Supply Agreement, dated April 10, 2009, by and between the
Registrant and Laboratorios PiSA
|
|
10-Q/A
|
|
|
10.45
|
|
|
10/19/2009
|
|
000-51567
|
|
10
|
.25
|
|
Extracorporeal Disposables Distribution Agreement, dated
June 15, 2009, by and between Medisystems Corporation and
Gambro Renal Products, Inc.
|
|
10-Q
|
|
|
10.46
|
|
|
8/7/2009
|
|
000-51567
|
|
10
|
.26
|
|
Term Loan and Security Agreement effective June 5, 2009 by
and between the Registrant, EIR Medical, Inc., Medisystems
Services Corporation, Medisystems Corporation, as Borrowers, and
Medimexico s. de R.L. de C.V., NxStage Verwaltungs GmbH, NxStage
GmbH & Co. KG and Medisystems Europe S.p.A., as
Guarantors and Asahi Kasei Kuraray Medical, Co., Ltd., as the
Lender
|
|
10-Q
|
|
|
10.47
|
|
|
8/7/2009
|
|
000-51567
|
|
10
|
.27
|
|
Amendment, dated as of March 10, 2010, to the Term Loan and
Security Agreement, effective June 5, 2009, by and between
the Registrant, EIR Medical, Inc., Medisystems Services
Corporation, Medisystems Corporation, as Borrowers, and Asahi
Kasei Kuraray Medical, Co., Ltd., as the Lender
|
|
10-Q
|
|
|
10.49
|
|
|
5/5/2010
|
|
000-51567
|
|
10
|
.28
|
|
Technology and Trademark License Agreement effective
June 15, 2009 by and between the Registrant and Asahi Kasei
Kuraray Medical Co., Ltd.
|
|
10-Q
|
|
|
10.48
|
|
|
8/7/2009
|
|
000-51567
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
|
Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
10
|
.29
|
|
Loan and Security Agreement, dated March 10, 2010, by and
among Silicon Valley Bank, as the Lender, and the Registrant,
EIR Medical, Inc., Medisystems Corporation and Medisystems
Services Corporation, as Borrowers
|
|
10-Q/A
|
|
|
10.48
|
|
|
7/22/2010
|
|
000-51567
|
|
10
|
.30
|
|
Warrant to Purchase Shares of Common Stock, dated July 22,
2010, issued to DaVita Inc.
|
|
10-Q
|
|
|
10.2
|
|
|
8/6/2010
|
|
000-51567
|
|
10
|
.31
|
|
Registration Rights Agreement, dated July 22, 2010, between
the Registration and DaVita Inc.
|
|
10-Q
|
|
|
10.3
|
|
|
8/6/2010
|
|
000-51567
|
|
*21
|
.1
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
*23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
|
|
|
|
|
|
|
|
|
|
*31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Exchange
Act
Rules 13a-14a
or 15d-14a, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
*32
|
.1
|
|
Certification of Chief Financial Officer pursuant to Exchange
Act
Rules 13a-14a
or 15d-14a, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
*32
|
.1
|
|
Certification of Chief Executive Officer pursuant to Exchange
Act
Rules 13a-14(b)
or 15d-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
*32
|
.2
|
|
Certification of Chief Financial Officer pursuant to Exchange
Act
Rules 13a-14(b)
or 15d-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Securities
and Exchange Commission. |
|
# |
|
Management contract or compensatory plan or arrangement filed as
an Exhibit to this report pursuant to 15(a) and 15(c) of
Form 10-K. |
106