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, 2007
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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 o No þ
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 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
$208.3 million, as of June 29, 2007, based on the last
reported sale price of the registrants common stock on the
NASDAQ Global Market on June 29, 2007.
There were 36,775,204 shares of the registrants
common stock issued and outstanding as of the close of business
on March 3, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
its 2008 Annual Meeting of Stockholders to be held on
May 29, 2008 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.
2007 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;
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; the adequacy of our funding, our need for and our
ability to obtain additional funding; the timing of 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, 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 possible 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 end-stage renal
disease, or ESRD, and acute kidney failure. Our primary product,
the NxStage System One TM , is a small, portable, easy-to-use
hemodialysis system designed to provide physicians and patients
improved flexibility in how hemodialysis therapy is prescribed
and delivered. Given its design, the System One is particularly
well-suited for home hemodialysis and more frequent, or
daily, dialysis, which clinical literature suggests
provides patients better clinical outcomes and improved quality
of life. The System One is specifically cleared by the United
States Food and Drug Administration, or FDA, for home
hemodialysis as well as hospital and clinic-based dialysis.
Following our recent acquisition of Medisystems Corporation and
certain of its affiliated entities, we also sell needles and
blood tubing sets primarily to dialysis clinics for the
treatment of 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, which we previously referred to as
the chronic market.
ESRD, which affects nearly 500,000 people in the United
States, 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. 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.
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. Given its compact size and lack of
infrastructure requirements, the System One is portable,
allowing patients freedom to travel. We believe these features
provide patients and their physicians new treatment options for
ESRD.
We market the System One to dialysis clinics for chronic
hemodialysis treatment, 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. The clinics in
turn provide the System One to ESRD 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. Typically, our
customers rent the System One equipment on a month to month
basis, although early in 2007, two of our dialysis chain
customers elected to purchase rather than rent System One
equipment. DaVita, our largest customer in the home market,
purchases rather than rents a significant percentage of its
System One equipment. Clinics receive reimbursement from
Medicare, private insurance and patients for dialysis
treatments. We commenced marketing the System One for chronic
hemodialysis treatment in September 2004. As
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of December 31, 2007, 2,223 ESRD patients were prescribed
to receive therapy using the System One at 334 different
dialysis clinics. Substantially all of these patients are
treated at home or are in training to treat themselves at home;
the remaining patients are doing therapy in a clinic.
We are not responsible for, and do not provide, patient
training. We provide training to dialysis clinic staff, who, in
turn, train home hemodialysis patients. Training takes place at
the clinic primarily during the patients prescribed, often
daily, two to three hour treatment sessions. Patient training,
which typically takes two to three weeks, includes basic
instruction on ESRD, operation of the System One and insertion
by the patient or their partner of needles into the
patients vascular access site. Clinics provide testing to
patients and their partners at the conclusion of training to
verify skills and an understanding of System One operation.
Training sessions are reimbursed by Medicare, and there may be a
co-payment requirement to the patient associated with this
training.
Medicare reimburses the same amount per treatment for home and
in-center hemodialysis treatments, up to three treatments per
week. Payment for more than three treatments per week is
available with appropriate medical justification. The adoption
of our System One for more frequent therapy for ESRD would
likely be slowed if Medicare is reluctant or refuses to pay for
these additional treatments.
We also market the System One in the critical care market 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 System
One provides an effective, simple-to-operate alternative to
dialysis systems currently used in the hospital to treat these
acute conditions. We commenced marketing the System One to the
critical care market in February 2003. As of December 31,
2007, 115 hospitals were using the System One to deliver acute
kidney failure and fluid overload therapy.
In addition to the System One, we also sell a line of
extracorporeal disposable products for use primarily in
in-center dialysis treatments for patients with ESRD. These
products, which we obtained in connection with our recently
completed acquisition of Medisystems Corporation, or
Medisystems, and certain of its affiliated entities, 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 it
has achieved leading positions in the U.S. market for both
hemodialysis blood tubing sets and A.V. fistula needles. Our
blood tubing set products include the ReadySet High Performance
Blood Tubing set, and the Streamline. ReadySet has been on the
market since 1993. Streamline is our next generation product
designed to provide improved patient outcomes and lower costs to
dialysis clinics. Our next generation Streamline product was
introduced to the market in 2007 and adoption has been limited
to date. Our needle products line includes AV fistula needle
sets incorporating safety features, first introduced in 1995,
including PointGuard Anti-Stick Needle Protectors and
MasterGuard technology, and ButtonHole needle sets first
introduced in 2002.
For the year ended December 31, 2007, our revenues were
$60.0 million and we incurred a net loss of
$58.4 million. As of December 31, 2007, we had total
assets of $210.4 million, long term liabilities of
$46.1 million and total stockholders equity of
$129.7 million.
Since inception, we have incurred losses every quarter and at
December 31, 2007, we had an accumulated deficit of
approximately $182.0 million. We expect to incur increasing
operating expenses as we continue to grow our business.
Additionally, although we have recently achieved positive gross
margins for our products, in aggregate, as of December 31,
2007 we can not provide assurance that our gross margins will
continue to 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 ability to become profitable
is dependent principally upon implementing design and process
improvements to lower our costs of manufacturing our products,
accessing lower labor cost markets for the manufacture of our
products, increasing our reliability, improving our field
equipment utilization, achieving efficiencies in manufacturing
and supply chain overhead costs, achieving efficient
distribution of our products, achieving a sufficient scale of
operations, and obtaining better purchasing terms, and prices.
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We will need to sell additional equity or issue debt securities
to fund our capital requirements beyond 2008. Any sale of
additional equity or issuance of debt securities will likely
result in dilution to our stockholders, and we cannot be certain
that additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain this additional financing when needed, we may
be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities, which would
likely harm our business. Additionally, beginning in February
2009, we will need to begin paying down the principal of the
debt we borrowed from Merrill Lynch. To the extent we are unable
to obtain additional financing, this obligation to repay debt
will only further increase the need to further delay, reduce the
scope of, or eliminate one or more aspects of our business,
which would likely harm our business.
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.
Recent
Developments
Needle
Purchase Agreement with DaVita Inc.
On January 6, 2008 we entered into a needle purchase
agreement with DaVita pursuant to which DaVita has agreed to
purchase the majority of its safety needle requirements from us
for five years, subject to certain terms and conditions. The
needle purchase agreement expires on January 5, 2013.
DaVita has the right to reduce or eliminate its purchase
requirements under the agreement following the introduction of a
materially improved product (as defined in the agreement) from a
third party. If DaVita exercises this right, we may terminate
the agreement. The needle purchase agreement provides for
liquidated damages in the event DaVita fails to satisfy its
purchase requirements or we fail to meet our supply obligations
to DaVita.
Merrill
Lynch Credit Facility
On November 21, 2007, we obtained a $50.0 million
credit and security agreement from a group of lenders led by
Merrill Lynch Capital, a division of Merrill Lynch Business
Services Inc., for a term of 42 months. The credit facility
is secured by nearly all our assets, other than intellectual
property, and consists of a $30.0 million term loan and a
$20.0 million revolving credit facility. We borrowed
$25.0 million under the term loan in November 2007, and
have the option to borrow the remaining $5 million by
May 21, 2008. We expect that we will borrow this amount. We
used $4.9 million of the proceeds from the term loan to
repay all amounts owed under a term loan dated May 15, 2006
with Silicon Valley Bank. Borrowings under the term loan bear
interest equal to LIBOR plus 6% per annum, fixed on November 21
for our first borrowings (at a rate of 10.77% per year) and at
the date of borrowing for the remaining $5.0 million still
available to be borrowed under the term loan. Interest on the
term loan must be paid on a monthly basis. Beginning on
February 1, 2009, we must repay principal under the term
loan in 29 equal monthly installments. We will also be required
to pay a maturity premium of $900,000 at the time of loan
payoff. NxStages borrowing capacity under the revolving
credit facility is subject to the satisfaction of certain
conditions and calculations of the borrowing amount. There is no
guarantee that we will be able to borrow the full amount, or any
funds, under the revolving credit facility. Any borrowings under
the revolving credit facility will bear interest at LIBOR plus
4.25% per annum There is an unused line fee of 0.75% per annum
and descending deferred revolving credit facility commitment
fees, which are charged in the event the revolving credit
facility is terminated prior to May 21, 2011 of 4% in year
one, 2% in year two, and 1% thereafter.
The credit facility includes covenants that (a) require
NxStage to achieve certain minimum net revenue and certain
minimum EBITDA targets relating to the acquired Medisystems
business, (b) place limitations on NxStages and our
subsidiaries ability to incur debt, (c) place
limitations on NxStages and our subsidiaries ability
to grant or incur liens, carry out mergers, and make investments
and acquisitions, and (d) place limitations on
NxStages and our subsidiaries ability to pay
dividends, make other restricted payments, enter into
transactions with affiliates, and amend certain contracts. The
credit agreement 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, Merrill Lynch has a
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number of remedies, including sale of our assets, control of our
cash and cash equivalents, and acceleration of all outstanding
indebtedness. Any of these remedies would likely have a material
adverse effect on our business.
Medisystems
Acquisition
On June 4, 2007, we entered into a stock purchase agreement
with David S. Utterberg under which we agreed to purchase from
Mr. Utterberg the issued and outstanding shares of
Medisystems Corporation and Medisystems Services Corporation,
90% of the issued and outstanding shares of Medisystems Europe
S.p.A. (the remaining equity of which is held by Medisystems
Corporation) and 0.273% of the issued and outstanding equity
participation of Medisystems Mexico s. de R.L. de C.V. (the
remaining equity of which is held by Medisystems Corporation),
which are collectively referred to as the MDS Entities. We refer
to our acquisition of the MDS Entities as the Medisystems
Acquisition. Mr. Utterberg is a director and significant
stockholder of NxStage. The Medisystems Acquisition was
completed on October 1, 2007 and, as a result, each of the
MDS Entities is a direct or indirect wholly-owned subsidiary of
NxStage. In addition, as a result of completion of the
Medisystems Acquisition, the supply agreement, dated January
2007, with Medisystems, under which Medisystems agreed to
provide cartridges for use with the System One, was terminated.
In consideration for the Medisystems Acquisition, we issued
Mr. Utterberg 6.5 million shares of our common stock,
which we refer to as the Shares. As a result of the Medisystems
Acquisition and the issuance of the Shares to
Mr. Utterberg, Mr. Utterbergs aggregate
ownership of our outstanding common stock increased to
approximately 23.2%. In addition, we may be required to issue
additional shares of our common stock to Mr. Utterberg.
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. An aggregate of 1.0 million of the
shares issued to Mr. Utterberg were placed into escrow to
cover potential indemnification claims we may have against him.
In connection with the Medisystems Acquisition and as a result
of Medisystems Corporation, one of the MDS Entities, becoming a
direct or indirect wholly-owned subsidiary of ours, we acquired
rights under an existing license agreement between Medisystems
and DSU Medical Corporation, a Nevada corporation, which is
wholly-owned by Mr. Utterberg, or DSU. We refer to this
agreement as the license agreement. Additionally, as a condition
to the parties obligations to consummate the Medisystems
Acquisition, Mr. Utterberg and DSU entered into a
consulting agreement with us dated October 1, 2007, which
we refer to as the consulting agreement.
Under the license agreement, Medisystems received an exclusive,
irrevocable, sublicensable, royalty-free, fully paid license to
certain DSU patents, or the licensed patents, in exchange for a
one-time payment of $2.7 million. The licensed patents fall
into two categories, those patents that are used exclusively by
the MDS Entities, referred to as the Class A patents, and
those patents that are used by the MDS Entities and other
companies owned by Mr. Utterberg, referred to as the
Class B patents. Pursuant to the terms of the license
agreement, MDS has a license to (1) the Class A
patents, to practice in all fields for any purpose and
(2) the Class B patents, solely with respect to
certain defined products for use in the treatment of
extracorporeal fluid treatments
and/or renal
insufficiency treatments. The license agreement further provides
that the rights of Medisystems under the agreement are qualified
by certain sublicenses previously granted to third parties. We
have agreed that Mr. Utterberg retains the right to the
royalty income under one of these sublicenses.
Under the consulting agreement, Mr. Utterberg and DSU will
provide consulting, advisory and related services to us for a
period of two years following the consummation of the
Medisystems Acquisition. In addition, under the terms of the
consulting agreement, Mr. Utterberg and DSU have agreed
during the term of the agreement not to compete with NxStage
during the term of the consulting agreement in the field defined
in the consulting agreement and not to encourage or solicit any
of our employees, customers or suppliers to alter their
relationship with us. The consulting agreement further provides
that (1) Mr. Utterberg and DSU assign to us certain
inventions and proprietary rights received by him/it during the
term of the agreement and (2) we
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grant Mr. Utterberg and DSU an exclusive, worldwide,
perpetual, royalty-free irrevocable, sublicensable, fully paid
license under such assigned inventions and proprietary rights
for any purpose outside the inventing field, as defined in the
consulting agreement. Under the terms of the consulting
agreement, Mr. Utterberg and DSU will receive an aggregate
of $200,000 per year, plus expenses, in full consideration for
the services and other obligations provided for under the terms
of the consulting agreement. The consulting agreement also
requires Mr. Utterberg and NxStage to indemnify each other
in the event of certain breaches and failures under the
agreement and requires that any such indemnification liability
be satisfied with 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.
Product
Reliability Issue
In the second quarter of 2007, we started to experience an
increased incidence of reported dialysate leaks associated with
our System One cartridges. Although our cartridges were within
our specifications, the reported incidence of leaks was higher
than we have historically observed. When the System One was used
in accordance with its instructions, these leaks presented no
risk to patient health. System One device labeling anticipates
the potential for leaks to occur and specifically warns against
leaks and alerts users of the need to observe treatments in
order to detect leaks. Six patients with reported leaks that
were unobserved by these patients or their partners until after
their treatments were completed, reported hypotension, or low
blood pressure, that was subsequently resolved by a fluid bolus,
with no lasting clinical effects. In early August 2007, we sent
a letter to our patients and customers informing them of the
increased incidence in leaks and reminding them of existing
System One labeling alerting users of the potential for leaks
and instructing them to observe treatments in order to detect
any leaks. We characterized this notification as a voluntary
recall. On August 24, 2007, we elected to initiate a second
step in our recall actions, and decided to physically recall the
affected lots of cartridge inventory being held by home market
customers and patients, and replace the affected inventory with
newer lots of cartridges at no charge. We instructed patients
and customers to destroy all inventory of affected cartridges
they have on hand. We have incurred $2.3 million of charges
for the recall, which consisted of a $1.5 million write off
of inventory and $0.8 million in other costs related to the
return or replacement of cartridges and rework of inventory on
hand. The $1.5 million write-off provision represented the
total value of affected inventory that was then on-hand at the
time. As of December 31, 2007, we had approximately
$1.1 million of affected inventory related to the original
provision remaining on-hand.
Entrada
On March 13, 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 February 28, 2007
through 2012, which term may be extended for additional one-year
periods at the mutual agreement of the parties. Either party may
terminate the service agreement due to a material breach,
generally following a
30-day cure
period. The agreement may also be terminated upon the other
partys insolvency or due to changed circumstances,
including a prolonged labor strike or a change of control of
Entrada.
DaVita
National Service Provider Agreement
On February 7, 2007, we entered into a National Service
Provider Agreement with DaVita, our largest customer. Pursuant
to the terms of the agreement, we granted to DaVita certain
market rights for the NxStage System One and related supplies
for home hemodialysis therapy. We granted DaVita exclusive
rights in a small percentage of geographies, which geographies
collectively represent less than 10% of the U.S. ESRD
patient population, and limited exclusivity in the majority of
all other U.S. geographies, subject to DaVita meeting
certain requirements, including patient volume commitments and
new patient training rates. Under the agreement, we can continue
to sell to other clinics in the majority of geographies. If
certain minimum patient
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numbers or training rates are not achieved, DaVita can lose all
or part of its preferred geographic rights. Under the agreement,
DaVita committed to purchase all of its existing System One
equipment that were currently being rented from NxStage (for a
purchase price of approximately $5 million) and to buy a
significant percentage of its future System One equipment needs.
The initial term of the agreement extends until
December 31, 2009, and DaVita has the option of renewing
the agreement for four additional periods of six months if
DaVita meets certain patient volume targets.
In connection with the National Service Provider Agreement, on
February 7, 2007, we issued and sold to DaVita
2,000,000 shares of our common stock, at a purchase price
of $10.00 per share, for an aggregate purchase price of
$20.0 million.
Membrana
In January 2007, we entered into a long-term supply agreement
with Membrana GmbH, or Membrana, pursuant to which Membrana has
agreed to supply, on an exclusive basis for a period of ten
years, the capillary membranes that we use in the filters used
with the System One. Membrana has agreed to pricing reductions
based on volumes ordered, and we have agreed to purchase a base
amount of membranes per year. The agreement may be terminated
upon a material breach, generally following a
60-day cure
period.
Medisystems
Supply Agreement
In January 2007, we entered into a seven-year agreement with
Medisystems pursuant to which Medisystems agreed to supply to us
no less than 90% of our North American requirements for
disposable cartridges for use with the System One. This
agreement was terminated in connection with the closing of the
Medisystems Acquisition.
Our
Products and Services
We sell the System One in the home and critical care markets.
Following the Medisystems Acquisition, we also sell blood tubing
sets, needles and other extracorporeal products for use
primarily in hemodialysis therapy to the in-center market. Sales
of the System One, ReadySet and A.V. fistula needles accounted
for 94% of our total revenues for the year ended
December 31, 2007, with sales of our System One accounting
for 74%, sales of ReadySet 14% and sales of A.V. fistula needles
6%.
The
System One
Our primary product, the NxStage System One, is a small,
portable, easy-to-use hemodialysis system, which incorporates
multiple design technologies and design features.
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, which received FDA clearance in March 2006 and was
made available to our customers beginning in July 2006. The
PureFlow SL module allows for the preparation of dialysate fluid
in the patients home using ordinary tap water and
dialysate concentrate thereby eliminating the need for bagged
fluids.
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For the home hemodialysis market, the System One is designed to
make home treatment and more frequent treatment easier and more
practical. Although most studies have not been performed using
our product, clinical studies suggest that therapy administered
five to 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
reduction in hypertension, improved anemia status, reduced
reliance on pharmaceuticals, improved nutritional status,
reduced hospitalizations and overall improvement in quality of
life. Published literature also supports the clinical and
quality of life benefits associated with home dialysis therapy.
For the critical care market, our System One is designed to
offer clinicians an alternative that simplifies the delivery of
acute kidney replacement therapy and makes longer or continuous
critical care therapies easier to deliver. The ability of our
system to perform hemofiltration
and/or
isolated ultrafiltration, for which the System One is also FDA
cleared, is advantageous, as many clinicians choose to prescribe
hemofiltration for patients with acute kidney failure.
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, as measured in Kt/V.
Streamline
Our latest generation blood tubing set product is Streamline.
Streamline features an efficient and airless design intended to
result in superior clinical and economic performance. It is
designed to reduce treatment time, minimize waste and optimize
dose delivery, as measured in Kt/V. 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 clinicians ability to satisfy OSHA
anti-stick requirements.
AV
Fistula and Apheresis Needles with MasterGuard Anti-Stick Needle
Protectors
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.
ButtonHole
Needle Set
As an alternative to our AV fistula needles with MasterGuard, we
also offer ButtonHole needles for hemodialysis therapies. This
needle is used by patients that employ the the
constant-site technique, whereby a fistula needle is
inserted in the same place each treatment. Published clinical
experience supports that the incidence of pain, hematoma,
infection 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.
Transducer
Protectors with ViraGuard
Transducer protectors are single-use air filter devices used to
protect hemodialysis pressure monitors during treatments. Our
transducer protectors include the ViraGuard membrane, designed
to maintain the sterility of the fluid pathway and act as a
bacterial and viral barrier as well as a unique airflow design,
intended to allow for a quick response time with few false
alarms.
Medic
The Medic needle/connector device was engineered to help reduce
the risk of accidental needle sticks, as required by OSHA. Medic
can be used with any standard syringe, and is used in
hemodialysis procedures with
10
catheters, AV fistula needles, blood tubing sets and dialysis
priming sets. For apheresis procedures, Medic is designed to
easily access drug vials and blood collection tubes.
Access
Alert
Vascular access complications are a leading cause of
complications during dialysis. To facilitate early
identification and intervention for access-related problems,
dialysis clinics have instituted routine measurement and trend
analysis of access pressures. Medisystems has developed the
Access Alert Pressure Measurement Filter for use with our AV
fistula needles, designed to measure static intra-access
pressure, with no interruption of therapy. These readings can be
used to detect venous, mid-graft and arterial inflow stenosis,
which is the narrowing of a vein or artery that restricts
bloodflow.
Competition
The dialysis therapy market is mature, consolidated and
competitive. We compete with suppliers of hemodialysis and
peritoneal dialysis devices and certain dialysis device
manufacturers that also provide dialysis services. We currently
face direct competition in the United States primarily from
Fresenius Medical Care AG, or Fresenius, Baxter Healthcare, or
Baxter, Gambro AB, or Gambro, B. Braun and others. Fresenius,
Baxter and Gambro each have large and well-established dialysis
products businesses. Foreign competitors, such as Nipro and JMS,
also compete with our newly acquired needle and blood tubing set
businesses.
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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For the home dialysis market, we believe that 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 work well in acute and chronic settings and to
perform hemofiltration, hemodialysis and ultrafiltration. We
believe we compete favorably in terms of cost-effectiveness for
clinics. Although our product is priced at a premium compared to
some competitive products in the market, we allow clinics to
reduce labor costs by offering their patients a home treatment
alternative. We compete unfavorably in terms of sales force
coverage and branding because we have only recently commenced
commercial sales of our System One for home hemodialysis and
have a smaller sales force than most of our competitors.
There is presently an increasing interest in the home
hemodialysis market from our key competitors. Fresenius and
Baxter have each made public statements that they are either
contemplating or actively developing new
and/or
improved systems for home hemodialysis. Fresenius made these
statements in relation to their recent acquisition of Renal
Solutions, Inc., and Baxter made them in relation to the
announcement of a research and development collaboration with
DEKA Research & Development Corporation and HHD, LLC.
We are unable to predict if or when products from these or other
companies may attain regulatory clearance and appear in the
market, or how successful they may be should they be introduced.
When additional viable products are introduced to the market, it
could adversely affect our sales and growth.
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 the Medisystems business has been established since the
1980s. We compete unfavorably in terms of sales force coverage,
as we rely nearly exclusively on distributors, rather than our
own direct sales force.
11
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. As with the home market, we believe we also compete
favorably on the basis of clinical flexibility, given the System
Ones ability to perform hemofiltration, hemodialysis and
ultrafiltration. 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. For
those hospitals that do not perform CRRT or other types of
prolonged therapies, we compete unfavorably in terms of
cost-effectiveness. We compete unfavorably in terms of sales
force coverage and branding, because we have a smaller sales
force than most of our competitors. In the fluid overload
market, which is a very small component of our critical care
business, 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.
Our primary competitors are large, well-established businesses
with significantly more financial and personnel resources and
greater commercial infrastructures than we have. 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 and critical care 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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achieve cost reductions; and
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access the capital needed to support the business.
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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.
Sales and
Marketing
We sell our products in three markets: home, in-center, and
critical care markets. We have separate marketing and sales
efforts dedicated to each market, however, for the in-center
market, we rely almost exclusively upon distributors to sell our
products rather than a direct sales force. Henry Schein is the
primary distributor for our in-center market and our contract
with Schein was recently extended through July 2009.
In 2007, sales to DaVita and Schien represented 19.8% and 21.5%
of our total revenues, respectively, and 47.7% of Scheins
sales of our products in 2007 were derived from sales to DaVita.
DaVita and Schien are expected to remain significant customers
of ours in 2008. No other single customer represented 10% or
more of our revenues in 2007. In 2006, sales to DaVita, Inc.
represented 19.4% of our total revenues. No other single
customer represented 10% or more of our revenues in 2006. In
2005, sales to Clarian Health Partners represented 10.0% of our
total revenues, sales to Renal Care Group represented 12.4% of
our total revenues and sales to Wellbound, Inc. represented
10.5% of our total revenues. No other single customer
represented 10% or more of our revenues in 2005.
Home
We sell the System One to customers in the home market. In this
market, our customers are independent dialysis clinics as well
as dialysis clinics that are part of national chains. Since
Medicare regulations require
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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, and cannot, sell the System One
directly to home patients.
We have a home market direct sales force that calls on dialysis
clinics. In addition to specialized sales representatives, we
also employ nurses on our home market sales force to serve as
clinical educators to support our sales efforts.
Currently, there are approximately 4,500 Medicare-certified
dialysis outpatient facilities in the United States.
Ownership of these clinics is highly consolidated with DaVita
controlling approximately 27% and Fresenius controlling
approximately 33%. Smaller chains and independent clinics and
hospitals represent the approximately 40% of remaining clinics.
Our customers include independent clinics as well as large and
smaller chains.
In February 2007, we entered into a national service provider
agreement with DaVita that grants DaVita certain market rights
for the System One and related supplies for home hemodialysis
therapy. Under this agreement, we granted DaVita exclusive
rights in a small percentage of geographies, which geographies
collectively represent less than 10% of the U.S. ESRD
patient population, and limited exclusivity in the majority of
all other U.S. geographies, subject to DaVitas
meeting certain requirements, including patient volume
commitments and new patient training rates. We will continue to
sell to other clinics in the majority of geographies. The
agreement limits, but does not prohibit, the sale by NxStage of
the System One for chronic home hemodialysis therapy to any
provider that is under common control or management of a parent
entity that collectively provides dialysis services to more than
25% of U.S. chronic dialysis patients and that also
supplies dialysis products. NxStage is, therefore, limited to
some extent in its ability to sell the System One for chronic
home hemodialysis therapy to Fresenius. Our national service
provider agreement with DaVita extends until December 31,
2009, and DaVita has the option of renewing the agreement for
four additional periods of six months if DaVita meets certain
patient volume targets.
After renting or selling 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 then rely on the trained technicians and
nurses to train home patients and other technicians and nurses
using the System One, rather than sending our nurses back to the
clinic to train each new patient, nurse or technician. This
approach also allows the clinic and physician to select, train
and support the dialysis patients that will use our system, much
the same way as they manage their patients who are on home
peritoneal dialysis therapy.
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. As of
December 31, 2007, there were 2,223 home hemodialysis
patients prescribed to receive therapy using the System One.
In-center
We sell primarily blood tubing sets and needles to customers in
the in-center market. In this market, our customers are also
independent dialysis clinics as well as dialysis clinics that
are part of national 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. Sales through our primary distributor, Schein,
accounted for 21.5% of net sales for the year ended
December 31, 2007. Our contract with Schein was recently
extended through July 2009.
DaVita is also a significant customer for our in-center
products. DaVita has an agreement to purchase our blood tubing
set products that expires in September 2008, and a separate
agreement for needles that expires in January 2013.
We plan production against distributor purchase orders. Finished
goods are shipped directly to distributor warehouses. Our
customer and clinic services team markets the tubing sets
and/or blood
access devices under the Medisystems brand name. To support
blood tubing set and needle sales, our clinic services personnel
regularly visit or call clinic operators, other than Fresenius
clinics. Clinics owned by Fresenius predominantly use
Fresenius-manufactured blood tubing sets.
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Medisystems has been in the in-center market since 1981.
Critical
Care
We sell the System One to customers in the critical care market.
The System One cycler 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. In the critical
care market, because both acute kidney failure and fluid
overload are typically treated in hospital intensive care units,
our customers are hospitals. We are specifically focusing our
sales efforts in the critical care market on those large
institutions that we believe are most dedicated to increased and
improved dialysis therapy for patients with acute kidney failure
and believe in ultrafiltration as an earlier-stage treatment
option for fluid overload associated with multiple diseases,
including CHF.
We have a critical care direct sales force that calls on
hospitals. In addition to specialized sales representatives, we
also employ nurses in our critical care sales force to serve as
clinical educators to support our sales efforts.
The System One for the critical care market has a list price of
$28,000; this price does not include the related disposables
required for each treatment. After selling or placing a System
One in a hospital, our clinical educators train the
hospitals intensive care unit, or ICU, and acute dialysis
nurses on the proper use of the system 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.
We began promoting our System One product for use in the
critical care market in February 2003. As of December 31,
2007, we had 115 hospitals as critical care customers.
Customer
Support Services
We primarily use a depot service model for equipment servicing
and repair for the home market. If a device malfunctions and
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. In addition, we ship monthly supplies via
common carrier and courier services directly to home patients,
dialysis clinics and hospitals.
In addition to depot service, the critical care market also
demands field service calls for cycler servicing and repair. The
nature of the hospital environment, coupled with the practices
of other ICU dialysis equipment suppliers, frequently
necessitates
on-site
support for our systems installed in this environment.
We maintain telephone service coverage
24-hours a
day, seven days a week, to respond to technical questions raised
by patients, clinics and hospitals concerning all of our
products, including the System One, needles and blood tubing
sets.
Clinical
Experience and Results
Over 100 published articles have reported on the benefits of
daily dialysis therapy. Although most 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 hypertension,
improved anemia status, reduced reliance on pharmaceuticals,
improved nutritional status, reduced hospitalizations and
overall improvement in quality of life.
In late 2005, 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 benefits and cost savings of daily home
therapy administered to Medicare patients with the NxStage
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.
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The study will compare Medicare patients using the NxStage
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 NxStage 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 approximately $65,000
annually, with dialysis services representing approximately 25%
of this cost, while the cost of hospitalizations, drugs and
physician fees make up more than 50%. Studies indicate daily
therapy may materially reduce overall Medicare costs for the
care of chronic dialysis patients, particularly through reduced
hospitalization and drug costs.
More recently, we announced FDA approval of an investigational
device exemption, or IDE, study intended to support a home
nocturnal indication for the System One. We hope to complete the
study and submit our application for a nocturnal indication to
the FDA in late 2008 or early 2009.
In addition to the FREEDOM and nocturnal studies, we 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 also completed a study of
ultrafiltration with the System One for fluid overload
associated with CHF.
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 hemodialysis 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. We also seek
to develop new products that supplement positively 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, 2007, 2006 and 2005, we
incurred research and development expenses of $6.3 million,
$6.4 million and $6.3 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 rights to a number of patents, trademark, copyrights, trade
secrets and other intellectual property directly related and
important to our business.
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As of December 31, 2007, we had 29 issued U.S. and
international patents and 48 U.S., international and foreign
pending patent applications.
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Patent No.
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Regime
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Filed
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Expiration Date
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Description
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6,254,567
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U.S.
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2/23/2000
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2/26/2019
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Addresses fluids requirement by regenerating dialysate
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6,554,789
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U.S.
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2/25/2000
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2/14/2017
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Panels defined by seals and overlying panels
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6,572,576
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U.S.
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7/7/2001
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7/2/2021
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Leak detection by flow reversal
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6,572,641
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U.S.
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4/9/2001
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4/9/2021
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Fluid warmer that removes air
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6,579,253
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U.S.
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2/25/2000
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2/14/2017
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Balancing chambers are defined by panels of the circuit
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6,582,385
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U.S.
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2/19/1998
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2/19/2018
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Addresses fluids requirement by purifying waste
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6,589,482
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U.S.
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2/25/2000
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2/14/2017
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Panels form a combination to mutually displace waste and
replacement fluid
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6,595,943
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U.S.
|
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2/25/2000
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2/14/2017
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Blood pressure control in filter to optimize throughput
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6,638,477
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U.S.
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2/25/2000
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2/14/2017
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Divert part of waste stream to control ultrafiltration or rinse
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6,638,478
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U.S.
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2/25/2000
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2/14/2017
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Mechanically coupled flow assemblies that balance flow of
incoming and outgoing fluid streams, respectively
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6,649,063
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U.S.
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7/12/2001
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10/7/2021
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Using the filter to generate sterile replacement fluid
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6,673,314
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U.S.
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2/25/2000
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2/14/2017
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Supply notification including third-party notification by network
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6,702,561
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U.S.
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7/12/2001
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9/8/2021
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Potting distribution channel molded into filter housing
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6,743,193
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U.S.
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7/17/2001
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7/17/2021
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Hermetic valve design
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6,830,553
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U.S.
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2/25/2000
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2/14/2017
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Sterile filter in replacement fluid line
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6,852,090
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U.S.
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5/24/2001
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12/10/2017
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Balancing chambers are defined by circuit portions defined in
cooperation with the base
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6,872,346
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U.S.
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3/20/2003
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5/14/2023
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Manufacturing method for filters using radiant heat to seal
filter fibers
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6,955,655
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U.S.
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6/27/2001
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10/7/2017
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Frequent treatment with simple setup
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6,979,309
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U.S.
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1/7/2002
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6/19/2017
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New frequent hemofiltration
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7,004,924
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U.S.
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10/19/1998
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2/11/2018
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Methods, systems, and kits for the extracorporeal processing of
blood
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7,040,142
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U.S.
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1/4/2002
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2/9/2022
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Method and apparatus for leak detection in blood circuits
combining external fluid detection and air infiltration detection
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7,087,033
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U.S.
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7/8/2002
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8/22/2021
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Method and apparatus for leak detection in a fluid line
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7,112,273
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U.S.
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9/26/2003
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10/4/2023
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Volumetric fluid balance control for extracorporeal blood
treatment
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7,147,613
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U.S.
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3/8/2004
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8/29/2020
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Measurement of fluid pressure in a blood treatment device
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7,214,312
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U.S.
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07/12/2001
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07/08/2022
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Fluid circuits, systems, and processes for extracorporeal blood
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7,226,538
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U.S.
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07/13/2007
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01/21/2022
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Fluid processing apparatus
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7,267,658
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U.S.
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02/25/2000
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03/06/2021
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|
Renal replacement therapy device for controlling fluid balance
treated
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7,300,413
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U.S.
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02/25/2000
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05/04/2021
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Blood processing machine and system using fluid circuit cartridge
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EP969887
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EP (UK)
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2/5/1998
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2/14/2017
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Frequent treatment with simple setup
|
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.
16
In connection with the Medisystems Acquisition, we also acquired
exclusive license rights to a portfolio of patents. The licensed
patents fall into two categories: those that are used
exclusively by the MDS Entities, which we refer to as
Class A patents, and those patents that are used by the MDS
Entities and other companies owned by Mr. Utterberg, which
we refer to as the Class B patents. Pursuant to the terms
of our license agreement with DSU Medical Corporation, we have a
license to (1) the Class A patents, to practice in all
fields for any purpose and (2) the Class B patents,
solely with respect to certain defined products for use in the
treatment of extracorporeal fluid treatments
and/or renal
insufficiency treatments. This license agreement further
provides that our rights under the agreement 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 issued patents licensed by
us under the license agreement that are fundamental to the
manufacture and sale of Medisystems core products.
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Subject Matter
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Patent Number
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Patent Expiration
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Pump Segment Having Connected, Parallel Branch Line
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US 5360395
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11/1/2011
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Pump Segment Having Connected, Parallel Branch Line: Continuation
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US 6440095
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5/5/2017
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|
Blood Set Priming Method & Apparatus
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US 5895368
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9/23/2016
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|
Blood Set Priming Method & Apparatus: Div
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US 6290665
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3/11/2018
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Reversing Flow Blood Processing System
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US 6177409
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6/10/2018
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New Reverso
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US 6695807
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|
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1/18/2022
|
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Turbo Cap for Blood Processing
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US 6517508
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11/3/2019
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Measuring Vascular Access Pressure Access Alert
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US 6346084
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1/10/2020
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Universal Connector MEDIC
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US 5071413
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12/10/2008
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Guarded Winged Needle Assembly: File Wrapper Continuation (FWC)
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US 5112311
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5/12/2009
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Guarded Winged Needle Assembly: FWC-2
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US 5266072
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11/30/2010
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Guarded Winged Needle Assembly (Method): Div. Of Continuation
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US 5433703
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7/18/2012
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Easy Use Needle Protector Sheath
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US 5704924
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1/11/2016
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European Guarded Winged Needle Assembly
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EUR 436646
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8/31/2011
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European Guarded Winged Needle Assembly:
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Divisional
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EUR 558162
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1/9/2010
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Japan Easy Use Needle Protector Sheath
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JP 3809563
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12/20/2016
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Luer Connector with Integral Closure
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US 5385372
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1/31/2012
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Squeeze Clamp for Flexible Tubing
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US 6089527
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10/3/2017
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Squeeze Clamp for Flexible Tubing
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US 6113062
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5/20/2018
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Divisional Squeeze Clamp for Flexible Tubing
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US 6196519
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9/15/2019
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Canada Squeeze Clamp for Flexible Tubing
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CN 2308052
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9/22/2018
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Injection Site for Male Luer LocksiteTM
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US 7025744
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10/4/2022
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In addition to the issued patents and pending patent
applications owned by us and the issued patents and patent
applications licensed to 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.
17
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 in connection with their employment,
consulting or advisory relationship 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. Specifically, we assemble, package and label our
PureFlow SL disposables within our 35,000 square foot
facility in Fresnillo, Mexico. We manufacture components used in
our System One cartridge assembly in our 45,000 square foot
facility in Lawrence, Massachusetts, and assemble the disposable
cartridge, some blood tubing sets, Medics and tranducer
protectors in our 118,000 square foot facility in Tijuana,
Mexico. We manufacture our dialyzers internally, within our
12,369 square foot facility in Rosdorf, Germany. We
outsource the manufacture of premixed dialysate and needles. We
rely on internal manufacturing and outsourcing for the System
One cycler, PureFlow SL and blood tubing sets.
We have a 32,000 square foot molding facility in Modena,
Italy, which molds components used in the products we
manufacture ourselves in Tijuana, Mexico, as well as supplies
the molded components for finished goods manufactured by
Kawasumi Laboratories, Inc., or Kawasumi, as described below.
We have single-source suppliers of components, but 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. These agreements, currently in place with
several key suppliers, are intended to establish commitments to
supply product. We do not have supply agreements in place with
all of our single-source suppliers.
We have certain agreements that grant certain suppliers
exclusive or semi-exclusive supply rights. We contract for the
manufacture of the majority of our finished goods of ReadySet
blood tubing sets and all our needles from Kawasumi,
headquartered in Tokyo, Japan, with manufacturing facilities in
Thailand. The current agreement with Kawasumi for the
manufacture of blood tubing sets expires in March 2009. 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 of 80% of an agreed upon blood tubing sets purchase goal
over the term of the agreement. We believe that this minimum
purchase commitment is less than our anticipated requirements
for blood tubing sets. We are presently negotiating with
Kawasumi to determine if this supply agreement for blood tubing
sets will be extended beyond March 2009. We can not be certain
that this agreement will be renewed or extended on favorable
terms, if at all, that we would be able to manufacture
independently the volume of products currently manufactured by
Kawasumi, and therefore whether we would have sufficient
capacity to meet all of our customer demand, that we would be
able to manufacture products at the same cost at which we
currently purchase products from Kawasumi or that we could find
a third party to supply blood tubing sets on favorable terms, if
at all, the failure of any of which could impair our business.
We also have an agreement with Kawasumi for the manufacture of
needle sets. Virtually all of these needle sets rely on our
patented guarded needle set technology. In February 2007, we
agreed with Kawasumi to extend their needle set supply agreement
through February 2011. We have committed to purchase from
Kawasumi a minimum of 80% of an agreed upon needle set purchase
goal over the three-year extended term of the contract. We
believe that this minimum purchase commitment is less than our
anticipated requirements for needles.
18
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 for a period of ten years, the capillary
membranes that we use in the filters used with the System One
for ten years. Membrana has agreed to pricing reductions based
on volumes ordered and we have agreed to purchase a base amount
of membranes per year. The agreement may be terminated upon a
material breach, generally following a sixty day cure period.
KMC Systems, Inc., or KMC, manufactures the System One cycler
for us pursuant to an agreement that obligates KMC to continue
to provide product to us at least through mid-2008. This
agreement also allows us the option to manufacture for ourselves
an increasing portion of cyclers as we deem appropriate over any
remaining term, as mutually agreed by the parties. The contract
may be terminated upon a material breach, generally following a
30-day cure
period. We presently do not intend to seek renewal of this
agreement after its termination this year.
We purchase bicarbonate-based premixed dialysate from B. Braun
and our lactate-based premixed dialysate from Laboratorios PISA,
or PISA. We have a long-term supply agreement with B. Braun that
obligates B. Braun to supply the dialysate to us through 2009 in
exchange for modest minimum purchase requirements of
approximately $100,000 per year. The contract may be terminated
upon a material breach, generally following a
30-day cure
period. We have entered into a supply agreement with PISA that
obligates PISA to supply dialysate to us through 2008 in
exchange for annual purchase commitments of approximately
$1.0 million. The contract may be terminated upon a
material breach, generally following a
30-day cure
period. We anticipate seeking to negotiate an extension of our
agreement with PISA past December 2008. We can not be certain
that this agreement will be renewed or extended on favorable
terms, if at all, that we would be able to obtain lactate based
bagged premixed dialysate from another third party supplier on
favorable terms, if at all, that we would be able to meet our
customer demand for bagged premixed dialysate, either through a
third party or by manufacturing bagged premixed dialysate
ourselves, or some combination thereof, the failure of any of
which could impair our business,
We are currently purchasing our PureFlow SL module and chassis
from Enercon. We are operating under a short-term supply
agreement with Enercon that obligates Enercon to supply this
equipment to us through July 2008. There are no minimums or
exclusivity clauses associated with this agreement, and the
agreement renews on a year to year basis, unless prior written
notice is given by either party. The contract may be terminated
upon a material breach, generally following a
30-day cure
period. We presently do not intend to seek renewal of this
agreement with respect to our PureFlow SL module after its
termination.
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 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 from the
FDA before they may be commercially distributed in the United
States. 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.
The FDA classifies medical devices into one of three classes:
Class I, Class II or Class III
depending on the FDAs assessment of the degree of risk
associated with the device and the controls it deems necessary
to reasonably ensure the devices safety and effectiveness.
The FDA has deemed our System One to be a Class II medical
device and we have marketed it as such in the United States.
19
Class I devices are those for which safety and
effectiveness can be assured by adherence to a set of general
controls, which include compliance with facility registration
and product listing requirements, reporting of adverse events,
and appropriate, truthful and non-misleading labeling,
advertising and promotional materials. Class II devices are
also subject to these same general controls, as well as any
other special controls deemed necessary by the FDA to ensure the
safety and effectiveness of the device. These special controls
can include performance standards, post-market surveillance,
patient registries and FDA guidelines. Pre-market review and
clearance by the FDA for Class II devices is accomplished
through the 510(k) pre-market notification procedure, unless the
device is exempt. When 510(k) clearance is required, a
manufacturer must submit a pre-market notification to the FDA
demonstrating that the proposed device is substantially
equivalent in intended use and in safety and effectiveness to a
legally marketed device that is not subject to premarket
approval, i.e., a device that was legally marketed prior to
May 28, 1976 and for which the FDA has not yet required
premarket approval; a device which has been reclassified from
Class III to Class II or I; or 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. After a device receives 510(k) clearance, any
modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or possibly a
pre-market approval. Class III devices are devices for
which insufficient information exists that general or special
controls will provide reasonable assurance of safety and
effectiveness, and the devices are life-sustaining,
life-supporting, or implantable, or of substantial importance in
preventing the impairment of human health, or present a
potential, unreasonable risk of illness or injury.
Class III devices requiring an approved pre-market approval
application to be marketed are devices that were regulated as
new drugs prior to May 28, 1976, devices not found
substantially equivalent to devices marketed prior to
May 28, 1976 and Class III
pre-amendment
devices, which are devices introduced in the U.S. market
prior to May 28, 1976, that by regulation require
pre-market approval.
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 23
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 22 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 IV
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. 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
20
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 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 significant modifications
to the manufacturing process, labeling, use and design of a
device that is approved through the pre-market approval process.
Pre-market approval 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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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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21
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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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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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recalls and notices of correction or removal.
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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 have been submitted to
comply with FDAs blood loss policy for routine dialysis
treatments. This policy requires 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 three times. In our first inspection, one
observation was made, but was rectified during the inspection,
requiring no further response from us. Our last two inspections,
including our most recent inspection in March 2006, resulted in
no observations. Medisystems has been inspected by the FDA on
eight 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 have not sought approval for
our products outside of the United States, Canada and the
European Union, or EU. 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. Although we
have obtained CE marking approval in the EU for our System One,
this CE marking is not up to date. Before we would be able to
market our current products in the
22
EU, we would be required to submit additional regulatory
documentation. We are not currently marketing the System One in
the European Union.
The Medisystems 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. Medisystems maintains six Medical
Device Licenses in Canada for these products. We have received
CE marking in the EU for AV fistula needles, apheresis needles,
Medic and its Reverso product. At this time no other Medisystems
products have been approved for CE marking.
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 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.
23
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, or, in several states, apply regardless of the
payor. Sanctions under these federal and state laws may include
civil monetary penalties, exclusion of a manufacturers
products from reimbursement under government programs, criminal
fines and imprisonment.
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, or PHI. HIPAA
further requires that covered entities enter into agreements
meeting certain regulatory requirements with their business
associates, as such term is defined by HIPAA, which, among other
things, obligate the business associates to safeguard the
covered entitys PHI against improper use and disclosure.
While not directly regulated by HIPAA, a business associate may
face significant contractual liability pursuant to such an
agreement if the business associate breaches the agreement or
causes the covered entity to fail to comply with HIPAA. In the
course of our business operations, we have entered into several
business associate agreements with certain of our customers that
are also covered entities. Pursuant to the terms of these
business associate agreements, we have 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.
Accordingly, we incur compliance related costs in meeting
HIPAA-related obligations under business associate agreements to
which we are a party. Moreover, if we fail to meet our
contractual obligations under such agreements, we may incur
significant liability.
In addition, HIPAAs criminal provisions could potentially
be applied to a non-covered entity that aided and abetted the
violation of, or conspired to violate HIPAA, although we are
unable at this time to determine conclusively whether our
actions could be subject to prosecution in the event of an
impermissible disclosure of health information to us. Also, many
state laws regulate the use and disclosure of health
information, and are not necessarily preempted by HIPAA, in
particular those laws that afford greater protection to the
individual than does HIPAA. Finally, in the event we change our
business model and become a HIPAA covered entity, we would be
directly subject to HIPAA, its rules and its civil and criminal
penalties.
Reimbursement
Home
and In-Center Care
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 rent or sell 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 2005 USRDS
report, Medicare is the primary payor for approximately 81% of
patients using hemodialysis and PD. It is believed that 15% of
patients are covered by commercial insurance, with the remaining
4% 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.
24
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. For patients eligible for Medicare based solely on
ESRD, generally patients under age 65, Medicare eligibility
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 generally 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 composite rate for dialysis
services reimbursed based on the composite rate 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
composite rate, leaving the secondary insurance or the patient
responsible for the remaining 20%. The Medicare composite rate
is set by Congress and is intended to cover virtually all costs
associated with each dialysis treatment, excluding physician
services and certain separately billable drugs and laboratory
services. There is some regional variation in the composite
rate, but, the national average for the last three quarters of
2007 was $152 per treatment for independent clinics and $157 per
treatment for hospital-based dialysis facilities. This was an
increase from approximately $149 per treatment for independent
clinics and $154 per treatment for hospital-based dialysis
facilities in 2006, due to two recent changes in Medicare
reimbursement. As a result of legislation enacted in 2003 and
first implemented in 2005, the Centers for Medicare and Medicaid
Services, or CMS, shifted a portion of Medicare reimbursement
dollars for dialysis from separately billable drugs to the
composite rate for dialysis services. This drug add-on to the
composite rate is subject to an increase based on the estimated
rate of growth of drugs and biologicals. For 2007, an additional
0.5% has been shifted from separately billable drugs to the
composite rate. In addition, Congress passed an additional 1.6%
increase to the composite rate for treatments received on or
after April, 2007. For 2008, CMS again shifted an additional
0.5% from separately billable drugs to the composite rate such
that the 2008 national average composite rate is about $153 per
treatment for independent clinics and about $158 per treatment
for hospital-based dialysis facilities. Depending upon patient
case mix, reimbursement may be further improved, based on the
case-mix adjustment to the composite rate implemented as a
result of the 2003 legislation. Under the case-mix adjustment,
Medicare now pays more for larger patients and those under the
age of 65. This may be beneficial to our customers, as to date
our patient population has tended to be younger and larger than
the ESRD national average.
CMS rules limit the number of hemodialysis treatments paid for
by Medicare to three per week, unless there is medical
justification for the additional treatments. The determination
of medical justification must be made at the local Medicare
contractor level on a
case-by-case
basis. A clinics decision as to how much it is
25
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.
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 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 diagnosis related group, or
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.
Employees
As of December 31, 2007, we had 1,399 full-time
employees, 3 part-time employees and 63 seasonal or
temporary employees. From time to time we also employ
independent contractors to support our engineering, marketing,
sales, clinical and administrative organizations.
Where To
Find More Information
Our Annual Report 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 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, our SEC
filings are available to the public on the SECs website
(www.sec.gov).
26
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
We
expect to derive a significant percentage of our future revenues
from the rental or sale of our System One and a limited number
of other products.
Since our inception, we have devoted substantially all 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 Medisystems Acquisition, 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
broadens our product offerings, we expect that nearly all of our
revenues will be derived from the sale of a limited number of
key products primarily applicable to the dialysis business. We
expect that in 2008 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 Medisystems disposable
products, including blood tubing sets and needles. To the extent
that any of our primary products is not commercially successful
or is 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 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, the number
of patients receiving peritoneal dialysis was approximately
26,000 in 2005, representing approximately 8% of all patients
receiving dialysis treatment for ESRD in the United States. Very
few ESRD patients receive hemodialysis treatment outside of the
clinic setting. Because the adoption of home hemodialysis has
been limited to date, the number of patients who desire to, and
are capable of, administering their own hemodialysis treatment
with a system such as the System One is unknown and there is
limited data upon which to make estimates. Further, the number
of nephrologists and dialysis clinics willing to prescribe home
hemodialysis or establish and support home hemodialysis programs
is also unknown. 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 willing to establish and support home
hemodialysis therapies. We do not know whether the number of
home-based dialysis patients will be greater or fewer than the
number of patients performing peritoneal dialysis. 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
costs associated with providing more frequent dialysis, market
acceptance will likely be impacted 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 a significant number of our customers are
unable to obtain such additional reimbursement, which will
likely negatively impact the rate and extent of any further
market expansion of our System One for home hemodialysis.
Finally we are still early in the market launch of the System
One for home hemodialysis. We received our home use clearance
for the System One from the FDA in June 2005 and we will need to
continue to devote significant resources to developing the
market. We cannot be certain that this market will develop, how
quickly it will develop or how large it will be.
27
We
will require significant capital to build our business, and
financing may not be available to us on reasonable terms, if at
all.
We believe that the home hemodialysis market is the largest
market opportunity for our System One. In this market, a
significant percentage of our home customers rent rather than
purchase System One equipment. As a result, we generate, and
expect to continue generating in the future, a significant
percentage of our revenues and cash flow from the use of System
One equipment over time rather than upfront from the sale of
System One equipment. This sales model requires significant
amounts of working capital to manufacture System One equipment
for rental to dialysis clinics. Our agreement with DaVita signed
in early 2007 departs from the rental model, which helps us to
conserve cash flow. In that agreement, DaVita agreed to purchase
all of its System One equipment then being rented from us and to
buy a significant percentage of its future System One equipment
needs. It is not clear whether we will be able to replicate this
sales model with a significant number of other customers in the
future. In 2007, only two of our customers, one of which was
DaVita, purchased equipment. However, the percentage of our home
patients using purchased systems is significant, approximately
47.1%. We have also not yet achieved profitability, which
imposes additional requirements for cash.
We will need to sell additional equity or issue debt securities
to fund our capital requirements beyond 2008. Any sale of
additional equity or issuance of debt securities will likely
result in dilution to our stockholders, and we cannot be certain
that additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain this additional financing when needed, we may
be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities, which would
likely harm our business. Additionally, beginning in February
2009, we will need to begin paying down the principal of the
debt we borrowed from Merrill Lynch. To the extent we are unable
to obtain additional financing, this obligation to repay debt
will only further increase the need to further delay, reduce the
scope of, or eliminate one or more aspects of our business,
which would likely harm our business.
We
have limited operating experience, a history of net losses and
an accumulated deficit of $182.0 million at
December 31, 2007. We cannot guarantee if, when and the
extent that we will become profitable, or that we will be able
to maintain profitability once it is achieved.
Since inception, we have incurred losses every quarter and at
December 31, 2007, we had an accumulated deficit of
approximately $182.0 million. We expect to incur increasing
operating expenses as we continue to grow our business.
Additionally, although we have recently achieved positive gross
margins for our products, in aggregate, as of December 31,
2007, we can not provide assurance that our gross margins will
remain positive, continue to 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 ability to
become profitable is dependent principally upon implementing
design and process improvements to lower our costs of
manufacturing our products, accessing lower labor cost markets
for the manufacture of our products, increasing our reliability,
improving our field equipment utilization, achieving
efficiencies in manufacturing and supply chain overhead costs,
achieving efficient distribution of our products, achieving a
sufficient scale of operations, and obtaining better purchasing
terms and prices.
Our PureFlow SL module, introduced into the market in July 2006,
is a recently implemented design improvement intended to improve
our profitability. PureFlow SL is an accessory module to the
System One that allows for the preparation of high purity
dialysate in the patients home using ordinary tap water
and dialysate concentrate, allowing patients with ESRD to more
conveniently and effectively manage their home hemodialysis
therapy by eliminating the need for bagged fluids. The gross
margin of this product is expected to be more favorable to
NxStage than the gross margin on our bagged fluids and is an
important part of our strategy to achieve profitability. Since
its launch, PureFlow SL penetration has reached approximately
70% of all of our home patients. The product is still early in
its commercial launch and we continue to work to improve product
reliability, and to introduce PureFlow SL product design
enhancements that will improve utilization of disposables and
user experience. Any failure to further improve reliability and
user experience, and to reduce the utilization of disposables,
each of which is critical to achieving improved margins for
28
PureFlow SL. Failure to further improve reliability will also
negatively impact our distribution costs, which would adversely
affect our ability to achieve profitability.
In March 2007, we began moving the manufacture of our products
from Massachusetts to Mexico. At the end of 2007, we were
manufacturing our Pureflow SL disposables and a limited
percentage of our Cyclers in Mexico as well as servicing a
limited percentage of our Cyclers in Mexico. Our System One
cartridge had already been manufactured in Mexico by Medisystems
at the time of the Medisystems Acquisition. Our ability to
continue to shift manufacturing and servicing to Mexico, in
order to take advantage of lower labor costs, is an important
part of our strategy to achieve profitability. Any failure or
unforeseen difficulties in transitioning additional
manufacturing and servicing to Mexico and to maintain or improve
product reliability in the process, would adversely affect our
ability to achieve profitability.
We
entered into a secured credit facility with Merrill Lynch in
November 2007, and as of December 31, 2007, we had borrowed
$25 million thereunder. We may not be able to borrow the
full amount available under that credit facility, and we will
need to begin repaying principal on the amounts we have already
borrowed under that credit facility in February 2009. Further,
if we fail to comply with all terms and covenants under our
credit agreement, we may go into default under the credit
facility which could trigger, among other things, the
acceleration of all of our indebtedness thereunder or the sale
of our assets.
On November 21, 2007 we obtained a $50.0 million
credit and security agreement from a group of lenders led by
Merrill Lynch Capital, a division of Merrill Lynch Business
Services Inc., for a term of 42 months. The credit facility
is secured by nearly all of our assets, other than intellectual
property and consists of a $30.0 million term loan and a
$20.0 million revolving credit facility. We borrowed
$25.0 million under the term loan in November 2007, and
have the option to borrow the remaining $5.0 million by
May 21, 2008. We expect that we will borrow this amount. We
used $4.9 million of the proceeds from the term loan to
repay all amounts owed under a term loan dated May 15, 2006
with Silicon Valley Bank. Borrowings under the term loan bear
interest equal to LIBOR plus 6% per annum, fixed on November 21
for our first borrowings (at a rate of 10.77% per annum) and at
the date of borrowing for the remaining $5.0 million still
available to be borrowed under the term loan. Interest on the
term loan must be paid on a monthly basis. Beginning on
February 1, 2009, we must repay principal under the term
loan in 29 equal monthly installments. We will also be required
to pay a maturity premium of $900,000 at the time of loan
payoff. Our borrowing capacity under the revolving credit
facility is subject to the satisfaction of certain conditions
and calculation of the borrowing amount. There is no guarantee
that we will be able to borrow the full amount, or any funds
under the revolving credit facility. Any borrowings under the
revolving credit facility will bear interest at LIBOR plus 4.25%
per annum. There is an unused line fee of 0.75% per annum and
descending deferred revolving credit facility commitment fees,
which are charged in the event the revolving credit facility is
terminated prior to May 21, 2011 of 4% in year one, 2% in
year two, and 1% thereafter.
The credit facility includes covenants that (a) require us
to achieve certain minimum net revenue and certain minimum
EBITDA targets relating to the acquired Medisystems business,
(b) place limitations on our and our subsidiaries
ability to incur debt, (c) place limitations on our and our
subsidiaries ability to grant or incur liens, carry out
mergers, and make investments and acquisitions, and
(d) place limitations on our and our subsidiaries
ability to pay dividends, make other restricted payments, enter
into transactions with affiliates, and amend certain contracts.
The credit agreement 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, Merrill
Lynch has a number of remedies, including sale of our assets,
control of our cash and cash equivalents, and acceleration of
all outstanding indebtedness. Any of these remedies would likely
have a material adverse effect on our business.
29
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 product lines compete directly against products produced by
Fresenius Medical Care AG, Baxter Healthcare, Gambro AB, B.
Braun and others, each of which markets 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 in some
instances many of our Medisystems products, 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. Finally, one of
our competitors, Gambro AB, has been, until recently, subject to
an import hold imposed by the FDA on its acute and chronic
dialysis machines. It is not clear what the home and critical
care market impact will be now that the import hold is lifted.
We believe the overall impact of the import hold has been
positive to us, however, we cannot be sure of the magnitude of
the impact the import hold has had on revenues.
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
safety, convenience or effectiveness or are offered at lower
prices. Fresenius and Baxter have each made public statements
that they are either contemplating or actively developing new
and/or
improved systems for home hemodialysis. Fresenius made these
statements in relation to their recent acquisition of Renal
Solutions, Inc., and Baxter made them in relation to the
announcement of a research and development collaboration with
DEKA Research & Development Corporation and HHD, LLC.
We are unable to predict if or when products from these or other
companies 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 would adversely affect our sales and growth. 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.
The
success and growth of our business will depend upon our ability
to achieve expanded market acceptance of our System One and
Streamline products.
Our System One products still have limited product and brand
recognition and have only been used at a limited number of
dialysis clinics and hospitals. 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 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 difficult for us to
grow our business. We may have difficulty gaining widespread or
rapid acceptance of the System One for a number of reasons
including:
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the failure by us to demonstrate to patients, operators of
dialysis clinics, nephrologists, dialysis nurses and others that
our product is equivalent or superior to existing therapy
options, or that the cost or risk associated with use of our
product is not greater than available alternatives;
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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 dialysis clinics;
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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, safer, easier to use or less expensive than ours;
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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 continued availability of satisfactory reimbursement from
healthcare payors, including Medicare.
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In addition, the future growth of our business depends, to a
lesser degree, upon the successful launch and market acceptance
of our latest generation blood tubing set product, Streamline.
Streamline is designed to be a high-quality, high-performance
blood tubing set that promises to yield valuable savings and
improved patient outcomes for those clinics that adopt it for
use. Market penetration of this product is quite limited to
date, and it is not possible to predict whether and to what
extent current and future customers will elect to use this
product instead of more established or competitive blood tubing
sets. If we are unable to convert customers to the Streamline
product and receive more widespread commercial acceptance of
this product, our ability to achieve our growth objectives could
be impaired.
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
U.S. Congress more than 30 years ago, Medicare
provides comprehensive and well-established reimbursement in the
United States for ESRD. With over 80% of U.S. 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
rent or sell 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 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. 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. In the next two years, Medicare will be
switching from intermediaries to Medicare authorized
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.
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 to them.
As we
continue to commercialize the System One, Streamline and our
other products, we may have difficulty managing our growth and
expanding our operations successfully .
As the commercial launch of the System One and Streamline
continues, we will need to expand our regulatory, 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
31
infrastructure, operational, financial and management controls
and reporting systems and procedures. Such growth could place a
strain on our administrative and 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 on the product reliability of our System
One product, our ability to grow our business and achieve
profitability could be impaired.
Our System One is still early in its product launch, and our
PureFlow SL module was only introduced during the third quarter
of 2006. We continue to experience product reliability issues
associated with these products that are higher than we expect
long-term, and have led us to incur increased service and
distribution costs, as well as increase the size of our field
equipment base. This, in turn, negatively impacts our gross
margins and increases our working capital requirements.
Additionally, product reliability issues can also lead to
decreases in customer satisfaction and our ability to grow or
maintain our revenues. We continue to work to improve product
reliability for these products, and have achieved some
improvements to date. If we are unable to continue to improve
product reliability of our System One products, our ability to
achieve our growth objectives as well as profitability could be
significantly impaired.
Most recently, in the second quarter of 2007, we started to
experience an increased incidence of reported dialysate leaks
associated with our System One cartridges. The reported
incidence of leaks was higher than we have historically
observed. When the System One was used in accordance with its
instructions, these leaks presented no risk to patient health.
System One device labeling anticipates the potential for leaks
to occur and specifically warns against leaks and alerts users
of the need to observe treatments in order to detect leaks. Six
patients with reported leaks, that were unobserved by these
patients or their partners until after their treatments were
completed, reported hypotension, or low blood pressure, resolved
by a fluid bolus, with no lasting clinical effect. In early
August 2007, we sent a letter to our patients and customers
informing them of the increased incidence in leaks and reminding
them of existing System One labeling alerting users of the
potential for leaks and instructing them to observe treatments
in order to detect any leaks. We characterized this notification
as a voluntary recall. On August 24, 2007, we elected to
initiate a second step in our recall actions, and decided to
physically recall the affected lots of cartridge inventory being
held by home market customers and patients, and replace the
affected inventory with newer lots of cartridges at no charge.
We instructed patients and customers to destroy all inventory of
affected cartridges they had on hand. As of December 31,
2007, we incurred $2.3 million of charges for the recall,
which consisted of a $1.5 million write off of inventory on
hand at the time and $0.8 million in other costs related to
the return or replacement of cartridges. As of December 31,
2007, we had approximately $1.1 million of affected
inventory related to the original provision on hand.
We
have a significant amount of System One field equipment, and our
ability to effectively manage this asset could negatively impact
our working capital requirements and future
profitability.
Because the majority of our System One home care business
continues to rely upon an equipment rental model, our ability to
manage System One equipment is important to minimizing our
working capital requirements. 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 barrier
would negatively impact our working capital requirements and
future profitability.
Our
national service provider agreement with DaVita confers certain
geographic market rights to DaVita and limits our ability to
sell the System One in the home market to Fresenius, both of
which may present a barrier to adoption of the System One in the
home.
Fresenius and DaVita own and operate the two largest chains of
dialysis clinics in the United States. Fresenius controls
approximately 33% of the U.S. dialysis clinics and is the
largest worldwide manufacturer of dialysis systems. DaVita
controls approximately 27% of the U.S. dialysis clinics,
and has entered into a preferred supplier agreement with Gambro
pursuant to which Gambro will provide a significant majority of
32
DaVitas dialysis equipment and supplies for a period of at
least 10 years. Each of Fresenius and DaVita may choose to
offer their dialysis patients only the dialysis equipment
manufactured by them or their affiliates, to offer the equipment
they contractually agreed to offer or to otherwise limit access
to the equipment manufactured by competitors.
Our recent agreement with DaVita confers certain market rights
for the System One and related supplies for home hemodialysis
therapy. DaVita is granted exclusive rights in a small
percentage of geographies, which geographies collectively
represent less than 10% of the U.S. ESRD patient
population, and limited exclusivity in the majority of all other
U.S. geographies, subject to DaVitas meeting certain
requirements, including patient volume commitments and new
patient training rates. Under the agreement, we can continue to
sell to other clinics in the majority of geographies. If certain
minimum patient numbers or training rates are not achieved,
DaVita can lose all or part of its preferred geographic rights.
The agreement further limits, but does not prohibit, the sale by
NxStage of the System One for chronic home patient hemodialysis
therapy to any provider that is under common control or
management of a parent entity that collectively provides
dialysis services to more than 25% of U.S. chronic dialysis
patients and that also supplies dialysis products. Therefore,
our ability to sell the System One for chronic home patient
hemodialysis therapy to Fresenius is presently limited.
For the year ended December 31, 2007, 43.8% of our home
hemodialysis patients in the home market belonged to DaVita.
Although we expect that DaVita will continue to be a significant
customer of ours, the agreement imposes no purchase obligations
upon DaVita and we cannot be certain whether DaVita will
continue to purchase
and/or rent
the System One from us in the future. We believe that any future
decision by DaVita to stop or limit the use of the System One
would adversely affect our business, at least in the near term.
We
rely heavily upon DaVita as a key customer for our System One
and Medisystems 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 Medisystems products accounted
for approximately 41% of Medisystems revenues in 2007, and
NxStages direct sales to DaVita accounted for
approximately 27% of our revenues in 2007. Our contract for
Medisystems blood tubing sets and needles with DaVita includes
certain minimum order requirements; however, these can be
reduced significantly under certain circumstances. Further,
DaVitas commitments to purchase Medisystems blood
tubing sets expire in September 2008. We cannot guarantee we
will be able to negotiate an extension of this agreement with
DaVita on favorable terms, if at all, or the extent to which
DaVita will purchase Medisystems products. NxStages
national service provider agreement with DaVita does not impose
minimum purchase requirements, and expires as early as the end
of 2009. The partial or complete loss of DaVita as a customer
for either of these product lines would adversely affect our
business, at least in the near term. Further, given the
significance of DaVita as a customer, any change in
DaVitas ordering or clinical practices can have a
significant impact on our revenues, especially in the near term.
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 the most
recent USRDS data, in 2004, approximately 17,000 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.
33
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 for use in the treatment of acute kidney
failure and fluid overload associated with, among other
conditions, congestive heart failure. Physicians currently treat
most acute kidney failure patients using conventional
hemodialysis systems or dialysis systems designed specifically
for use in the 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. One of our competitors in
the critical care market, Gambro AB, has been subject to an FDA
import hold that was recently lifted. Although it is unclear
what the impact of this import hold has been on our revenues, we
expect competition in this market to increase with the
reintroduction of Gambro products to the U.S. critical care
market.
We
could be subject to costly and damaging product liability claims
and may not be able to maintain sufficient product liability
insurance to cover claims against us.
If any of our 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.
Although NxStage has not been a party to any such claims,
Medisystems and certain of its affiliated entities have been
parties to such claims prior to the Medisystems Acquisition.
While we maintain insurance, including product and excess
liability insurance, 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. Our insurance
policies also have various exclusions, and we may be subject to
a product 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.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates 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, 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.
In addition to our operations in Massachusetts, we operate
manufacturing facilities in Germany, Italy and Mexico. We also
purchase components 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 Thai Baht, Euro and Peso.
The U.S. dollar has weakened materially against the Thai
Baht and Euro over the last five years and may continue to do
so. To the extent we fail to control our exchange rate risk, our
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 associated
with sourcing and shipping goods internationally, difficulty
34
managing operations in multiple locations and local regulations
that may restrict or impair our ability to conduct our
operations.
We
currently rely upon a third-party manufacturer to manufacture a
significant percentage of our blood tubing set products using
our supplied components and all of our needles. Kawasumis
contractual obligation to manufacture blood tubing sets expires
in March 2009 and its obligation to supply needles expires in
February 2011. In the event theses agreements are not renewed or
extended upon favorable terms, if at all, or in the event we are
unable to sufficiently expand our manufacturing capabilities, or
obtain alternative third party supply prior to the expiration of
these agreements, our growth and ability to meet customer demand
would be impaired.
Historically, Medisystems has relied upon a third-party
manufacturer, Kawasumi Laboratories, Inc. which we refer to as
Kawasumi, to manufacture a significant percentage of its blood
tubing set products using Medisystems supplied components.
This third party has a strong history of manufacturing
high-quality product for Medisystems. Kawasumis
contractual obligation to manufacture blood tubing sets for us
expires in March 2009. We are presently negotiating with
Kawasumi to determine if this supply agreement for blood tubing
sets will be extended beyond March 2009. We can not be certain
that this agreement will be renewed or extended on favorable
terms, if at all, that we would be able to manufacture
independently the volume of products currently manufactured by
Kawasumi, and therefore whether we would have sufficient
capacity to meet all of our customer demand, that we would be
able to manufacture products at the same cost at which we
currently purchase products from Kawasumi or that we could find
a third party to supply blood tubing sets on favorable terms, if
at all, the failure of any of which could impair our business.
We also depend solely on Kawasumi for all of our finished goods
needles. Kawasumis obligation to supply needles to us
expires in February 2011. In the event this agreement is not
renewed or extended upon favorable terms, if at all, if we are
unable to manufacture comparable needles for ourselves prior to
the contract expiration, or if we are unable to obtain
comparable needles from another third party on favorable terms,
if at all, the revenues and profitability of our business will
be impaired.
Our
Medisystems business relies heavily upon third-party
distributors.
We sell the majority of our in-center Medisystems products
through three distributors, which collectively accounted for
approximately 82% of in-center revenues in 2007, with our
primary distributor, Schein, accounting for 66% of
Medisystems in-center revenues in 2007. Schein recently
agreed to extend our distribution relationship with Medisystems
through July 2009. The contracts with the other two distributors
of Medisystems products are scheduled to expire in October
2008 and July 2009. Our relationship with Schein, in particular,
is very significant for our business and any failure to continue
this relationship would be harmful to our business, because our
current sales force has limited experience selling blood tubing
sets or needles.
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.
Medisystems 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. Medisystems 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 U.S. dialysis services
industry, with Fresenius and DaVita collectively controlling
approximately 61% of U.S. 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 Medisystems product pricing and more
vulnerable to the loss of our blood tubing set business to
competitors in the dialysis industry.
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The
activities of our business involves 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 Mexico and
Thailand. If we misinterpret or violate these laws, or if laws
governing our exemption from certain duties changes, we could be
subject to significant fines, liabilities or other adverse
consequences.
We import into the United States disposable medical supplies
from Thailand and Mexico. We also import into the United States
disposable medical components from China, Germany and Italy and
export components and assemblies into Mexico, Thailand and
Italy. 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.
The
inability to successfully integrate the operations and personnel
of Medisystems and NxStage, or any significant delay in
achieving integration, could have a material adverse effect on
our business.
Integrating the operations and personnel of Medisystems and
NxStage has required, and continues to require, a significant
investment of managements time and effort as well as the
investment of capital, particularly with respect to information
systems. The continued successful integration of Medisystems and
NxStage will require, among other things, coordination of
certain manufacturing operations and sales and marketing
operations and the integration of Medisystems operations
into our existing organization. The diversion of the attention
of our senior management and any difficulties encountered in the
process of combining the companies could cause the disruption
of, or a loss of momentum in, the activities of our business.
The inability to successfully integrate the operations and
personnel of Medisystems and NxStage, or any significant delay
in achieving integration, could have a material adverse effect
on our business and, as a result, on the market price of our
common stock.
The
success of the 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 device 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 clearances 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 for our products.
We cannot provide assurance that such clearances or approvals
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36
forthcoming, or, if forthcoming, what the timing and expense of
obtaining such 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.
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 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 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,
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. Our
Lawrence, MA U.S. manufacturing facility has previously had
three FDA QSR inspections. The first resulted in one
observation, which was rectified during the inspection and
required no further response from us. Our last two inspections,
including our most recent inspection in March 2006, resulted in
no observations. The FDA has inspected our Lawrence, MA facility
and quality system three times. In our first inspection, one
observation was made, but was rectified during the inspection,
requiring no further response from us. Our last two inspections,
including our most recent inspection in March 2006, resulted in
no observations. Medisystems has been inspected by the FDA on
eight 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 We cannot provide assurance that any 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, 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.
Changes
in reimbursement for acute kidney failure could negatively
affect the adoption of our critical care products and the level
of our future critical care product revenues.
Unlike Medicare reimbursement for ESRD, Medicare only reimburses
healthcare providers for acute kidney failure and fluid overload
treatment if the patient is otherwise eligible for Medicare,
based on age or disability. Medicare and many other third-party
payors and private insurers reimburse these treatments provided
to hospital inpatients under a traditional 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, may increase the amount reimbursed.
For care of these patients to be cost-effective, hospitals
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must manage the longer hospitalization stays and significantly
more nursing time typically necessary for patients with acute
kidney failure and fluid overload. If we are unable to convince
hospitals that our System One provides a cost-effective
treatment alternative under this diagnosis related group
reimbursement system, they may not purchase our product. In
addition, changes in Medicare reimbursement rates for hospitals
could negatively affect demand for our products and the prices
we charge for them.
Legislative
or regulatory reform of the healthcare system may affect our
ability to sell our products profitably.
In both the United States and foreign countries, there have been
legislative and regulatory proposals to change the healthcare
system in ways that could affect our ability to sell our
products profitably. The federal government and some states have
enacted healthcare reform legislation, and further federal and
state proposals are likely. We cannot predict the exact form
this legislation may take, the probability of passage, or the
ultimate effect on us. Our business could be adversely affected
by future healthcare reforms or changes in Medicare.
Failure
to obtain regulatory approval in foreign jurisdictions would
prevent us from marketing our products outside the United
States.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future to market our products in other markets. In order
to market our products in the EU or 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 effect our overall
market penetration.
We
currently 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 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. U.S. 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 and consequently are not directly subject
to HIPAA. However, we have entered into several 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, conduct by
a person that is not a covered entity could potentially be
prosecuted under aiding and abetting or conspiracy laws if there
is an improper disclosure or misuse of patient information.
Many state laws apply to the use and disclosure of health
information, which could affect the manner in which we conduct
our business. Such laws are not necessarily preempted by HIPAA,
in particular those laws
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that afford greater protection to the individual than does
HIPAA. 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 several similar
state laws, prohibit payments that are intended to induce
physicians or others either to refer patients or to acquire or
arrange for or recommend the acquisition of healthcare products
or services. 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. 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 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 one of
our sales representatives were to offer an inappropriate
inducement to purchase our products to a customer, we could be
subject to a claim under the Medicare/ Medicaid anti-kickback
laws.
Other federal and state laws generally prohibit individuals or
entities from knowingly presenting, or causing to be presented,
claims for payments from 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, 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. Anti-kickback and 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.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future 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.
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,
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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
We
obtain some of our raw materials or components 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 on a number of single-source suppliers for some of the
raw materials and components we use in its products. We also
obtain sterilization services from a single supplier. Presently,
B. Braun Medizintechnologie GmbH is our only supplier of
bicarbonate-based dialysate used with the System One; Membrana
GmbH is our only supplier of the fiber used in our filters; PISA
is our primary supplier of lactate-based dialysate, and Kawasumi
is our only supplier of needles. We also obtain certain other
components from other single source suppliers or a limited group
of suppliers. Our dependence on single source suppliers of
components, subassemblies and finished goods 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.
Finding alternative sources for these components and
subassemblies would be difficult in many cases and may entail a
significant amount of time and disruption. In the case of B.
Braun, for bicarbonate, and Membrana, for fiber, we are
contractually prevented from obtaining an alternative source of
supply, except in certain limited instances. In the case of
other suppliers, we would need to change the components or
subassemblies if we sourced them from an alternative supplier.
This, in turn, could require a redesign of our System One or
other products and, potentially, further FDA clearance or
approval of any modification, thereby causing further costs and
delays.
Resin
is a key input material to the manufacture of our products and
System One cartridge. Rising oil prices affect both the pricing
and availability of this material. Continued 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.
Further increases in fuel prices could lead to increases in our
distribution costs, which could impair our ability to achieve
profitability.
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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.
MDS 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 MDS Mexico has
entered into a collective bargaining agreement with a Union
named Mexico Moderno de Trabajadores de la Baja California
C.R.O.C. Medisystems has 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, therefore, 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
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 are transitioning
manufacturing 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. We are also expanding our manufacturing
capacity which requires us to relocate our manufacturing
operations to other locations. As such, we and certain of our
third party manufacturers, have limited manufacturing experience
with certain of our products, including key products such as the
PureFlow SL, related disposables and our Streamline. We are,
therefore, 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 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.
As of December 31, 2007, we had 48 pending patent
applications, including foreign, international and
U.S. applications, and 29 U.S. and international
issued patents. Under our license agreement with DSU Medical
Corporation, we also license 99 pending patent applications,
including foreign, international and U.S. applications, and
29 U.S. and international issued patents. We cannot specify
which of these 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
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 acceptance of our products;
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timing of achieving profitability and positive cash flow 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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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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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;
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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 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 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 shares of common stock, the market price
of our common stock could decline significantly. We have
36,771,893 shares of common stock outstanding as of
December 31, 2007. 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 367,719 shares, or
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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.
At December 31, 2007, subject to certain conditions,
holders of an aggregate of approximately 12,814,221 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
following the expiration of the
lock-up
agreements, they can sell those shares in the public market.
As of December 31, 2007, 7,172,646 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, 2007, 4,094,791 shares
were subject to outstanding options, of which 1,963,169 were
exercisable and which can be freely sold in the public market
upon issuance, subject to the
lock-up
agreements referred to above and the restrictions imposed on our
affiliates under Rule 144.
Our
costs have increased significantly as a result of operating as a
public company, and our management is required to devote
substantial time to comply with public company
regulations
As a public company, we incur significant legal, accounting and
other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, as well as new rules subsequently implemented by the SEC
and the NASDAQ Global Market, have imposed various new
requirements on public companies, including changes in corporate
governance practices. Our management and other personnel now
need to devote a substantial amount of time to these new
requirements. Moreover, these rules and regulations increase our
legal and financial compliance costs and make some activities
more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In
particular, commencing in fiscal 2006, we must perform system
and process evaluation and testing of our internal controls over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our compliance
with Section 404 will require that we incur substantial
accounting expense and expend significant management efforts. If
we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identify deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by the
NASDAQ Global Market, SEC or other regulatory authorities.
We do
not anticipate paying cash dividends, and accordingly
stockholders must rely on stock appreciation for any return on
their investment in us.
We anticipate that we will retain our earnings for future growth
and therefore do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our
common stock will provide a return to investors. Investors
seeking cash dividends should not invest in our common stock.
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 own, in the
aggregate, approximately 48.0% of our outstanding common stock.
David S. Utterberg, one of our directors, holds 23.2% of our
outstanding common stock. As a result, these stockholders, if
acting together, may 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
46
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
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 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.
Purchase
accounting treatment of acquisitions could decrease our net
income in the foreseeable future, which could have a material
and adverse effect on the market value of our common
stock.
Under U.S. generally accepted accounting principals, we
account for acquisitions using the purchase method of
accounting. Under purchase accounting, we record the
consideration issued in connection with the acquisition and the
amount of direct transaction costs as the cost of acquiring the
company or business. We allocate that cost to the individual
assets acquired and liabilities assumed, including various
identifiable intangible assets such as acquired technology,
acquired trade names and acquired customer relationships based
on their respective fair values. Intangible assets generally
will be amortized over a three to fifteen year period. Goodwill
and certain intangible assets with indefinite lives are not
subject to amortization but are subject to at
47
least an annual impairment analysis, which may result in an
impairment charge if the carrying value exceeds their implied
fair value. These potential future amortization and impairment
charges may significantly reduce net income, if any, and
therefore may adversely affect the market value of our common
stock.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not Applicable.
We are headquartered in Lawrence, Massachusetts, where we lease
approximately 45,000 square feet under a lease expiring in
2012. We have manufacturing facilities consisting of a
118,000 square foot facility in Tijuana, Mexico with a
lease expiring in 2011, a 32,000 square foot facility in
Modena, Italy with a lease expiring in 2012, a
35,000 square foot facility through our relationship with
Entrada with a lease expiring in 2012, and a 12,369 square
foot facility in Rosdorf, Germany with a term expiring in 2011.
We also lease approximately 15,000 square feet of
warehousing and manufacturing space in North Andover,
Massachusetts on a month-to-month basis. 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.
In addition to these facilities we lease a number of small
offices for administrative purposes.
|
|
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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We held a Special Meeting of Stockholders on October 1,
2007 and our stockholders voted to:
(i) Approve the issuance of 6,500,000 shares of common
stock, plus any additional shares of common stock issuable
pursuant to a post-closing working capital adjustment, pursuant
to the stock purchase agreement, and any additional shares of
common stock that we may be required to issue in the future to
satisfy any indemnification obligations under the stock purchase
agreement between us and Mr. Utterberg or the consulting
agreement between us, Mr. Utterberg and DSU, which matter
was approved by a vote of 23,415,505 shares voting for,
66,896 shares voting against and 4,213 shares
abstaining.
(ii) Amend our 2005 Stock Incentive Plan to increase the
number of shares of our common stock that may be issued pursuant
to the plan by an additional 3,800,000 shares, of which no
more than 1,500,000 shares may be granted as restricted
stock, restricted stock units and other stock-based awards,
which matter was approved by a vote of 21,431,378 shares
voting for, 1,976,893 shares voting against and
78,343 shares abstaining.
48
EXECUTIVE
OFFICERS OF THE REGISTRANT
Executive
Officers
The following is a list of names, ages and background of our
executive officers as of December 31, 2007:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Jeffrey H. Burbank
|
|
|
45
|
|
|
|
President, Chief Executive Officer
|
|
Agustin (Gus) M. Azel
|
|
|
68
|
|
|
|
Senior Vice President , Manufacturing
|
|
Robert S. Brown
|
|
|
49
|
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
Winifred L. Swan
|
|
|
43
|
|
|
|
Senior Vice President, General Counsel and Secretary
|
|
Joseph E. Turk, Jr.
|
|
|
40
|
|
|
|
Senior Vice President, Commercial Operations
|
|
Michael J. Webb
|
|
|
41
|
|
|
|
Senior Vice President of Quality, Regulatory and Clinical
Affairs
|
|
Jeffrey H. Burbank has been our President and 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.
Mr. Burbank is on the Board of the National Kidney
Foundation. He holds a B.S. from Lehigh University.
Agustin (Gus) M. Azel has been our Senior Vice President,
Manufacturing since October 1, 2007. Prior to joining
NxStages management team, Mr. Azel served as Senior
Vice President of Medisystems Corporation since October 2000.
Mr. Azel holds a B.S. in Mechanical Engineering from the
University of Southwestern Louisiana.
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 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.
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 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
49
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.
PART II
|
|
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 Market
under the symbol NXTM since July 1, 2006 and
prior to that was quoted on 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 intraday sale prices of our
common stock.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
14.16
|
|
|
$
|
8.04
|
|
Second Quarter
|
|
$
|
14.28
|
|
|
$
|
11.53
|
|
Third Quarter
|
|
$
|
14.92
|
|
|
$
|
12.00
|
|
Fourth Quarter
|
|
$
|
15.35
|
|
|
$
|
11.89
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.17
|
|
|
$
|
11.50
|
|
Second Quarter
|
|
$
|
13.33
|
|
|
$
|
8.33
|
|
Third Quarter
|
|
$
|
10.18
|
|
|
$
|
6.86
|
|
Fourth Quarter
|
|
$
|
9.80
|
|
|
$
|
7.29
|
|
Holders
On March 3, 2008, the last reported sale price of our
common stock was $5.91 per share. As of March 3, 2008,
there were approximately 63 holders of record of our common
stock and approximately 5,000 beneficial holders of our common
stock.
Dividends
We have never paid or declared any cash dividends on our common
stock and do not anticipate paying cash dividends in the
foreseeable future. Our credit agreement with Merrill Lynch
restricts our ability to pay dividends.
Issuer
Purchases of Equity Securities
We made no repurchases of our equity securities during the
fourth quarter ended December 31, 2007.
50
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 the first day that our common stock was publicly traded,
October 27, 2005, through February 29, 2008 with the
cumulative total return on (i) the Total Return Index for
the Nasdaq Stock Market (U.S. Companies), which we refer to
as the Nasdaq Composite Index, and (ii) the Nasdaq Medical
Equipment Index. This graph assumes the investment of $100 on
October 27, 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 years ended December 31, 2007 and 2006,
the quarters ended March 31, 2007 and 2006, June 30,
2007 and 2006 and September 30, 2007and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/27/05
|
|
|
|
12/31/05
|
|
|
|
3/31/06
|
|
|
|
6/30/06
|
|
|
|
9/30/06
|
|
|
|
12/31/06
|
|
|
|
3/31/07
|
|
|
|
6/30/07
|
|
|
|
9/30/07
|
|
|
|
12/31/07
|
|
|
|
2/29/08
|
|
NxStage Medical, Inc
|
|
|
|
100.00
|
|
|
|
|
119.60
|
|
|
|
|
128.30
|
|
|
|
|
87.30
|
|
|
|
|
87.70
|
|
|
|
|
83.80
|
|
|
|
|
133.20
|
|
|
|
|
129.30
|
|
|
|
|
144.90
|
|
|
|
|
151.70
|
|
|
|
|
59.2
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
102.70
|
|
|
|
|
109.63
|
|
|
|
|
102.02
|
|
|
|
|
106.39
|
|
|
|
|
114.42
|
|
|
|
|
114.77
|
|
|
|
|
122.99
|
|
|
|
|
128.14
|
|
|
|
|
125.02
|
|
|
|
|
107.57
|
|
NASDAQ Medical Equipment
|
|
|
|
100.00
|
|
|
|
|
104.20
|
|
|
|
|
113.27
|
|
|
|
|
101.63
|
|
|
|
|
103.55
|
|
|
|
|
107.40
|
|
|
|
|
114.59
|
|
|
|
|
122.28
|
|
|
|
|
133.93
|
|
|
|
|
141.09
|
|
|
|
|
121.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
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, 2007, 2006
and 2005 and balance sheet data as of December 31, 2007 and
2006 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, 2004 and 2003 and balance sheet data as of
December 31, 2005, 2004 and 2003 set forth below have been
derived from the audited consolidated financial statements for
such years not included in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
59,964
|
|
|
$
|
20,812
|
|
|
$
|
5,994
|
|
|
$
|
1,885
|
|
|
$
|
286
|
|
Cost of revenues
|
|
|
65,967
|
|
|
|
26,121
|
|
|
|
9,585
|
|
|
|
3,439
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit
|
|
|
(6,003
|
)
|
|
|
(5,309
|
)
|
|
|
(3,591
|
)
|
|
|
(1,554
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
21,589
|
|
|
|
14,356
|
|
|
|
7,550
|
|
|
|
3,334
|
|
|
|
2,181
|
|
Research and development
|
|
|
6,335
|
|
|
|
6,431
|
|
|
|
6,305
|
|
|
|
5,970
|
|
|
|
4,526
|
|
Distribution
|
|
|
13,111
|
|
|
|
7,093
|
|
|
|
2,059
|
|
|
|
495
|
|
|
|
33
|
|
General and administrative
|
|
|
13,046
|
|
|
|
8,703
|
|
|
|
4,855
|
|
|
|
3,604
|
|
|
|
2,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,081
|
|
|
|
36,583
|
|
|
|
20,769
|
|
|
|
13,403
|
|
|
|
9,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(60,084
|
)
|
|
|
(41,892
|
)
|
|
|
(24,360
|
)
|
|
|
(14,957
|
)
|
|
|
(10,262
|
)
|
Other income (expense), net
|
|
|
1,750
|
|
|
|
2,262
|
|
|
|
(120
|
)
|
|
|
115
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before taxes
|
|
|
(58,334
|
)
|
|
|
(39,630
|
)
|
|
|
(24,480
|
)
|
|
|
(14,842
|
)
|
|
|
(10,208
|
)
|
Provision for foreign income taxes
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,396
|
)
|
|
$
|
(39,630
|
)
|
|
$
|
(24,480
|
)
|
|
$
|
(14,842
|
)
|
|
$
|
(10,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.86
|
)
|
|
$
|
(1.60
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(5.81
|
)
|
|
$
|
(4.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
|
|
31,426
|
|
|
|
24,817
|
|
|
|
5,681
|
|
|
|
2,556
|
|
|
|
2,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term investments and marketable
securities
|
|
$
|
34,345
|
|
|
$
|
61,802
|
|
|
$
|
61,223
|
|
|
$
|
18,134
|
|
|
$
|
8,881
|
|
Working capital
|
|
|
40,655
|
|
|
|
64,716
|
|
|
|
62,100
|
|
|
|
19,205
|
|
|
|
11,115
|
|
Total assets
|
|
|
210,386
|
|
|
|
101,725
|
|
|
|
76,575
|
|
|
|
25,455
|
|
|
|
13,613
|
|
Long-term liabilities
|
|
|
46,134
|
|
|
|
5,495
|
|
|
|
2,106
|
|
|
|
3,006
|
|
|
|
30
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,946
|
|
|
|
55,946
|
|
Accumulated deficit
|
|
|
(182,036
|
)
|
|
|
(123,640
|
)
|
|
|
(84,011
|
)
|
|
|
(59,496
|
)
|
|
|
(44,623
|
)
|
Total stockholders equity (deficit)(1)(2)(3)(4)
|
|
|
129,717
|
|
|
|
83,409
|
|
|
|
67,354
|
|
|
|
(57,400
|
)
|
|
|
(43,478
|
)
|
|
|
|
(1) |
|
We closed our initial public offering on November 1, 2005,
which resulted in the issuance of 6,325,000 shares of
common stock at $10.00 per share. Net proceeds from the offering
were approximately $56.5 million. All shares of all series
of our outstanding preferred stock were converted into common |
52
|
|
|
|
|
stock upon the closing of our initial public offering and
resulted in the issuance of 12,124,840 shares of common
stock. |
|
(2) |
|
We closed our follow-on public offering on June 14, 2006,
which resulted in the issuance of 6,325,000 shares of
common stock at $8.75 per share. Net proceeds from the offering
were approximately $51.3 million. |
|
(3) |
|
On February 7, 2007, we issued and sold to DaVita
2,000,000 shares of common stock, at a purchase price of
$10.00 per share, for an aggregate purchase price of
$19.9 million. The price of our common stock on
February 7, 2007 was $8.50, resulting in a
$3.0 million premium, which was deferred. |
|
(4) |
|
On October 1, 2007, we issued 6,500,000 shares of
common stock at $12.50 per share to David S. Utterberg in
connection with the Medisystems Acquisition. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of end-stage renal
disease, or ESRD, acute kidney failure and fluid overload. Our
primary product, the NxStage System One, is a small, portable,
easy-to-use hemodialysis system designed to provide physicians
and patients improved flexibility in how hemodialysis therapy is
prescribed and delivered. In addition to the System One, since
October 2007, we also sell needles and blood tubing sets
primarily to dialysis clinics for the treatment of ESRD, which
we refer to as the in-center market. These product lines were
obtained in connection with our Medisystems Acquisition.
Although the revenues derived from our Medisystems products are
a significant percentage of our current revenues, 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, which we previously referred to as the
chronic market.
We distribute our products in three markets: the home, in-center
and critical care. We define the home market as the market
devoted to the treatment of ESRD patients in the home, the
in-center market as the market devoted to in-center
hemodialysis, and the critical care market as the market devoted
to the treatment of hospital-based patients with acute kidney
failure or fluid overload. We offer a different configuration of
the System One for each of the home and critical care markets.
The FDA has cleared both configurations for hemodialysis,
hemofiltration and ultrafiltration. We offer primarily needles
and blood tubing sets in the in-center market. Our products are
predominantly used by our customers to treat patients suffering
from ESRD or acute kidney failure and we have separate marketing
and sales efforts dedicated to each market, although in the
in-center market, nearly all sales are made through distributors.
We received clearance from the FDA in July 2003 to market the
System One for treatment of renal failure and fluid overload
using hemodialysis as well as hemofiltration and
ultrafiltration. In the first quarter of 2003, we initiated
sales of the System One in the critical care market to hospitals
and medical centers in the United States. In late 2003, we
initiated sales of the System One for the treatment of patients
with ESRD. At the time of these early marketing efforts, our
System One was cleared by the FDA under a general indication
statement, allowing physicians to prescribe the System One for
hemofiltration, hemodialysis
and/or
ultrafiltration at the location, time and frequency they
considered in the best interests of their patients. Our original
indication did not include a specific home clearance, and we
were not able to promote the System One for home use at that
time. The FDA cleared the System One in June 2005 for
hemodialysis in the home.
Our business expanded significantly in late 2007 in connection
with our Medisystems Acquisition. With that acquisition, we
acquired our needle and blood tubing set product lines for use
predominantly in in-center hemodialysis as well as apheresis.
The Medisystems business is significantly more mature than our
home and critical care businesses. Medisystems has been selling
products to dialysis centers for the treatment of ESRD since
1981, and it has achieved leading positions in the United States
market for both blood tubing sets and needles. Our blood tubing
set products include the ReadySet High Performance Blood Tubing
set, and the Streamline. ReadySet has been on the market since
1993. Streamline is our next generation product designed to
provide improved patient outcomes and lower costs to dialysis
clinics. This product is early in its market launch and adoption
has been limited to date. Our needle products line includes AV
fistula needle sets
53
incorporating safety features including PointGuard Anti-Stick
Needle Protectors, and MasterGuard technology and ButtonHole
needle sets. Our AV Fistula Needle Sets with MasterGuard
Anti-Stick Needle Protector were introduced in 1995 and our
ButtonHole needle sets were introduced in 2002.
Our customers receive reimbursement for the dialysis treatments
provided with our products typically from Medicare, and to a
lesser degree from private insurers. Medicare provides
comprehensive and well-established reimbursement in the United
States for ESRD. Reimbursement claims for dialysis therapy using
the System One or our blood tubing sets and needles are
typically submitted by the dialysis clinic or hospital to
Medicare and other third-party payors using established billing
codes for dialysis treatment or, in the critical care setting,
based on the patients primary diagnosis. Medicare
presently limits reimbursement for chronic hemodialysis to three
treatments per week, absent a finding of medical justification.
Because most of our System One home dialysis patients are
treated more than three times a week, expanding Medicare
reimbursement over time to cover more frequent therapy may be
critical to the market penetration of the System One in the home
market and to our revenue growth in the future.
The manufacture of our products is accomplished through a
complementary combination of outsourcing and internal
production. Specifically, we assemble, package and label our
PureFlow SL disposables within our Fresnillo, Mexico facility.
We manufacture components used in our System One cartridge
assembly in Lawrence, Massachusetts, and assemble the disposable
cartridge, some blood tubing sets, Medics and tranducer
protectors in Mexico. We manufacture our dialyzers internally in
Rosdorf, Germany. We outsource the manufacture of premixed
dialysate and needles. We rely on internal manufacturing and
outsourcing for manufacture of our System One cycler, PureFlow
SL and blood tubing sets
We market the System One in the home and critical care market
through a direct sales force in the United States primarily to
dialysis clinics and hospitals. We market our Medisystems
products primarily through distributors, although we also have a
small dedicated sales force for that business. We have increased
the number of sales representatives in our combined sales force
from 24 at December 31, 2006 to 33 at December 31,
2007. At present, we believe we have an appropriately sized
sales force, although this may change as market conditions
warrant.
At December 31, 2007, 2,223 ESRD patients were prescribed
to receive therapy using the System One at 334 dialysis clinics,
compared to 1,022 ESRD patients at 174 dialysis clinics at
December 31, 2006. In addition, at December 31, 2007,
115 hospitals were using the System One for critical care
therapy, compared to 77 hospitals at December 31, 2006.
The following table sets forth the amount and percentage of
revenues derived from each market for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
2005
|
|
|
|
|
|
Home
|
|
$
|
29,835
|
|
|
|
49.8
|
%
|
|
$
|
12,732
|
|
|
|
61.2
|
%
|
|
$
|
3,164
|
|
|
|
52.8
|
%
|
In-Center
|
|
|
15,728
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Critical Care
|
|
|
14,401
|
|
|
|
24.0
|
%
|
|
|
8,080
|
|
|
|
38.8
|
%
|
|
|
2,830
|
|
|
|
47.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,964
|
|
|
|
|
|
|
$
|
20,812
|
|
|
|
|
|
|
$
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the in-center market reflected above consisted of
MDS Entities revenues for the period from October 1, 2007
(date of Acquisition) through December 31, 2007.
Since inception, we have incurred losses every quarter and at
December 31, 2007, we had an accumulated deficit of
approximately $182.0 million. We expect to incur increasing
operating expenses as we continue to grow our business. We only
recently achieved positive gross margins for our products, in
aggregate, and we can not 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 ability to become profitable
is dependent principally upon implementing design and process
improvements to lower our costs of manufacturing our products,
accessing lower labor cost markets for the manufacture of our
products,
54
increasing our reliability, improving our field equipment
utilization, achieving efficiencies in manufacturing and supply
chain overhead costs, achieving efficient distribution of our
products, achieving a sufficient scale of operations, and
obtaining better purchasing terms and prices.
We will need to sell additional equity or issue debt securities
to fund our capital requirements beyond 2008. Any sale of
additional equity or issuance of debt securities will likely
result in dilution to our stockholders, and we cannot be certain
that additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain this additional financing when needed, we may
be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities, which would
likely harm our business. Additionally, beginning in February
2009, we will need to begin paying down the principal of the
debt we borrowed from Merrill Lynch. To the extent we are unable
to obtain additional financing, this obligation to repay debt
will only further increase the need to further delay, reduce the
scope of, or eliminate one or more aspects of our business,
which would likely harm our business.
Statement
of Operations Components
Revenues
We derive our revenues from the sale and rental of equipment and
the sale of disposable products. In the critical care market, we
generally sell the System One and related disposables to
hospital customers. In the home market, customers generally rent
or purchase the System One equipment, including cycler and
PureFlow SL, and then purchase the related disposable products
based on a specific patient prescription. In the in-center
market, the majority of revenues are derived from supply and
distribution contracts with distributors. We generally recognize
revenues when a product has been delivered to our customer, or,
in the home market, for those customers that rent the System
One, we recognize revenues on a monthly basis in accordance with
a contract under which we supply the use of a cycler and the
amount of disposables needed to perform a set number of dialysis
therapy sessions during a month. For customers that purchase the
System One in the home market, we recognize revenue from the
equipment sale ratably over the expected service obligation
period, while disposable product revenue is recognized upon
delivery.
Our rental contracts with dialysis centers for ESRD home
dialysis patients generally include terms providing for the sale
of disposable products to accommodate up to 26 treatments per
month per patient and the purchase or monthly rental of System
One cyclers and, in some instances, our PureFlow SL module.
These contracts typically have a term of one year, and are
automatically renewed on a
month-to-month
basis thereafter, subject to a 30 days termination notice.
Under these contracts, if home hemodialysis is prescribed,
supplies are shipped directly to patient homes and paid for by
the treating dialysis clinic. We also include vacation delivery
terms, providing for the free shipment of products to a
designated vacation destination. We derive an insignificant
amount of revenues from the sale of ancillary products, such as
extra lengths of tubing. Over time, as more home patients are
treated with the System One and more systems are placed in
patient homes that provide for the purchase or rental of the
machine and the purchase of the related disposables, we expect
this recurring revenue stream to continue to grow.
In early 2007, we entered into long-term home market contracts
for the System One with three larger dialysis chains, including
with DaVita, which was our largest customer in 2007. Each of
these agreements has a term of at least three years, and may be
cancelled upon a material breach, subject to certain curing
rights. These contracts provide the option to purchase as well
as rent the System One equipment, and, in the case of the DaVita
contract, DaVita has agreed to purchase rather than rent a
significant percentage of its future System One equipment needs.
In the first quarter of 2007, two of these dialysis chain
customers elected to purchase, rather than rent, a significant
percentage of their System One equipment currently in use. We
expect, at least in the near term, that the majority of our
customers will continue to rent the System One in the home
market. As of December 31, 2007, we had deferred
approximately $19.5 million of revenues related to the sale
of equipment in the home market.
Our in-center revenues are highly concentrated in several
significant purchasers. Revenues from Schein, our primary
distributor, represented approximately 82% of our in-center
revenues, as measured from October 1, 2007, the closing
date of the Medisystems Acquisition. Revenues from our other two
primary distributors over
55
the same period were 13% of our in-center revenues. Sales to
DaVita, through Schein, represent a significant percentage of
these revenues. DaVita has contractual purchase commitments
under two agreements with Medisystems, one for needles and one
for blood tubing sets. DaVitas purchase obligations with
respect to needles expire in January 2013, and its purchase
obligations with respect to blood tubing sets expire in
September 2008. We have no assurance that we will be able to
negotiate an extension of these obligations, or that
DaVitas purchase obligations under these contracts will
not be reduced, as permitted in certain circumstances under the
contracts.
Our distribution contracts for our in-center market contain
minimum volume commitments with negotiated pricing triggers 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. In addition to contractually
determined volume discounts, we offer rebates based on sales to
specific end customers and discount incentives for early
payment. Our sales revenues are presented net of these rebates,
incentives, discounts and returns.
Our agreement with Schein, our primary distributor, will expire
in July 2009 and our agreements with the other primary two
distributors are scheduled to expire in October 2008 and July
2009.
Our critical care revenues are less concentrated. At
December 31, 2007, the System One was used in critical care
applications in 115 hospitals, none of which accounted for more
than 10% of our critical care revenues. Our critical care
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. As our business matures, we are
starting to derive a small amount of revenue from the sale of
one year service contracts following the expiration of our
standard one year warranty period for System One hardware.
Similar to our home business, as more System Ones are placed
within hospitals, we expect to derive a growing recurring
revenue stream from the sale of disposable cartridges for use
with our placed System Ones as well as, to a much lesser degree,
from the sale of service contracts.
Cost
of Revenues
Cost of revenues consists primarily of direct product costs,
including material and labor required to manufacture our
products, service of System One equipment that we rent and sell
to customers and production 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. 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 the products.
We expect the cost of revenues as a percentage of revenues to
decline over time for four general reasons. First, we expect to
introduce several process and product design changes that have
inherently lower cost than our current products Second, we plan
to continue to move the manufacture and servicing of certain of
our products, including the System One cycler and PureFlow, to
lower labor cost markets. Third, we expect to continue to
improve product reliability, which would reduce service and
distribution costs. Finally, we anticipate that increased sales
volume and realization of economies of scale will lead to better
purchasing terms and prices and broader options, and
efficiencies in manufacturing and supply chain overhead costs,
achieving efficient distribution or process. We can not,
however, guarantee that our expectations will be achieved with
respect to our cost reduction plans.
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 in the operation of our products. We anticipate that
selling and marketing expenses will continue to increase as we
broaden our marketing initiatives to increase public
56
awareness of the System One in the home market and other
products, particularly Streamline in the in-center market, and
as we add additional sales support and marketing 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. We expect research and development expenses will
increase in the foreseeable future as we continue to improve and
enhance our core products and expand our clinical activities.
Distribution. Distribution expenses include
the freight cost of delivering our products to our customers or
our customers patients, depending on the market and the
specific agreement with our customers, and salary, benefits and
stock-based compensation for distribution personnel. We use
common carriers and freight companies to deliver our products
and we do not operate our own delivery service. Also included in
this category are the expenses of shipping products from
customers back to our service center for repair if the product
is under warranty, and the related expense of shipping a
replacement product to our customers. We expect that
distribution expenses will increase at a lower rate than
revenues due to expected efficiencies gained from increased
business volume, better pricing obtained from carriers following
recent price negotiations, the expected customer adoption of our
PureFlow SL module, which significantly reduces the weight and
quantity of monthly disposable shipments, and improved
reliability of System One equipment.
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 from 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. Rent, utilities and depreciation
expense are allocated to operating expenses based on personnel
and square footage usage. We expect that general and
administrative expenses will increase in the near term as we add
additional administrative support for our growing business.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
110
|
%
|
|
|
126
|
%
|
|
|
160
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit
|
|
|
(10
|
)%
|
|
|
(26
|
)%
|
|
|
(60
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
36
|
%
|
|
|
69
|
%
|
|
|
126
|
%
|
Research and development
|
|
|
11
|
%
|
|
|
31
|
%
|
|
|
105
|
%
|
Distribution
|
|
|
22
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
General and administrative
|
|
|
22
|
%
|
|
|
42
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
91
|
%
|
|
|
176
|
%
|
|
|
346
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(101
|
)%
|
|
|
(202
|
)%
|
|
|
(406
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
5
|
%
|
|
|
16
|
%
|
|
|
11
|
%
|
Other expense
|
|
|
(2
|
)%
|
|
|
(5
|
)%
|
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
11
|
%
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(98
|
)%
|
|
|
(191
|
)%
|
|
|
(408
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2007 and 2006 (in thousands,
except percentages)
Revenues
Our revenues for 2007 and 2006 were as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
Revenues
|
|
$
|
59,964
|
|
|
$
|
20,812
|
|
|
$
|
39,152
|
|
|
|
188
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to increased sales and
rentals of the System One and related disposables of
$23.4 million in both the critical care and home markets,
primarily as a result of increased sales and marketing efforts
as we continue to commercialize the System One, and
$15.7 million of in-center sales following the closing of
our Medisystems Acquisition on October 1, 2007. The number
of home patients prescribed to receive therapy was 2,223 at
December 31, 2007 compared to 1,022 at December 31, 2006,
an increase of 118%. In addition, we added 160 dialysis clinics
in 2007 offering the System One. Revenues in the home market
increased to $29.8 million for 2007 compared to
$12.7 million in 2006, an increase of 134%, while revenues
in the critical care market increased 78% to $14.4 million
in 2007, compared to $8.1 million in 2006. Revenues in the
in-center market represented $15.7 million for the three
months ended December 31, 2007. We do not have comparable
results for 2006 because we completed the Medisystems
Acquisition on October 1, 2007.
58
Cost of
Revenues and Gross Profit (Deficit)
Our cost of revenues and gross deficit for 2007 and 2006 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
Cost of revenues
|
|
$
|
65,967
|
|
|
$
|
26,121
|
|
|
$
|
39,846
|
|
|
|
153
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit
|
|
$
|
(6,003
|
)
|
|
$
|
(5,309
|
)
|
|
$
|
(694
|
)
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit percentage
|
|
|
(10.0
|
)%
|
|
|
(25.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenues was attributable primarily to
our increased revenues from the home and critical care markets,
the cost of sales associated with the Medisystems Acquisition a
charge of $2.0 million associated with our home cartridge
recall in August 2007, and $1.6 million for the
write-up of
Medisystems inventory to fair value less a reasonable profit on
remaining efforts to sell. The increase in product cost of
approximately $39.8 million from 2006 to 2007 was due
primarily to the Medisystems Acquisition and the increase in
revenues attributable to the 2,223 patients and 115
hospitals as of December 31, 2007 compared to
1,022 patients and 77 hospitals as of December 31,
2006. We added 1,201 net patients during the twelve months
ended December 31, 2007 to arrive at 2,223 patients
compared to 730 net patients added during the twelve months
ending December 31, 2006 to arrive at 1,022 patients.
In addition, cost of revenues increased during the twelve months
ended December 31, 2007 as compared to the same period in
2006 due to a larger employee base that resulted in additional
salaries, health benefits and payroll taxes of
$2.8 million, increased inbound freight costs of
$2.0 million to support our higher production volume,
increased service costs of $1.3 million, and the
unfavorable impact of the declining dollar $0.4 million. We
continue to see incremental improvement in our direct product
costs; however, this is currently being partially offset
somewhat by an increase in disposable usage per patient and
overhead costs due to product reliability issues. We expect that
over time as our reliability improves and as we implement
further design enhancements, the disposables per patient and
overhead support costs will decline.
Selling
and Marketing
Our selling and marketing for 2007 and 2006 were as follows (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
Selling and marketing
|
|
$
|
21,589
|
|
|
$
|
14,356
|
|
|
$
|
7,233
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a percentage of revenues
|
|
|
36
|
%
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The primary increase in selling and marketing expense was the
result of an increase in headcount and related salary, benefits,
payroll taxes and stock-based compensation for selling and
marketing personnel from 2006 to 2007. Total headcount for sales
and marketing and support personnel increased by
57 employees from December 31, 2006 to
December 31, 2007, and represented an increase of
$5.7 million in expenses. In addition, travel, field
expenses, and supplies increased by $0.5 million, and
professional service fees for our scientific advisory board,
process improvements, and reimbursement efforts increased by
$0.5 million. We anticipate that selling and marketing
expenses will continue to increase in absolute dollars as we
broaden our marketing initiatives to increase public awareness
of the System One in the home market and our other products,
particularly Streamline in the in-center market, and as we add
additional sales support personnel.
59
Research
and Development
Our research and development for 2007 and 2006 were as follows
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Decrease
|
|
|
Decrease
|
|
|
Research and development
|
|
$
|
6,335
|
|
|
$
|
6,431
|
|
|
$
|
(96
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a percentage of revenues
|
|
|
11
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The slight decrease in research and development expenses during
the year ended December 31, 2007 compared to the same
period in 2006 was attributable to a shift in spending from
research and development efforts associated with PureFlow SL
module to an increase in clinical efforts associated with our
Freedom study. We expect research and development expenses will
increase in the foreseeable future as we seek to further enhance
our System One and related products, and their reliability, and
with the increased activity associated with our IDE nocturnal
trial, and Freedom study, but we do not expect that research and
development expenses will increase as rapidly as other expense
categories as we have substantially completed basic development
of the System One. We expect research and development expenses
to continue to decline as a percentage of revenues.
Distribution
Our distribution expenses for 2007 and 2006 were as follows (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
Distribution
|
|
$
|
13,111
|
|
|
$
|
7,093
|
|
|
$
|
6,018
|
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of revenues
|
|
|
22
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses for the twelve months
ended December 31, 2007 compared to the same period in 2006
was due primarily to an increased volume of shipments of
disposable products to a growing number of patients in the home
market, the delivery of additional product, on an expedited
basis due to reliability issues, the delivery of product on an
expedited basis due to periodic inventory shortages, and the
increased equipment deliveries for the PureFlow SL module. We
expect that distribution expenses will increase at a lower rate
than revenues due to expected shipping efficiencies gained from
increased business volume and density of customers within
geographic areas, the reduction of higher cost monthly
deliveries associated with bagged fluid due to the lower monthly
volumes of disposables on our PureFlow SL module, improved
product reliability, and the use of an outsourced logistics
provider located in the central part of the continental United
States.
General
and Administrative
Our general and administrative expenses for 2007 and 2006 were
as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
General and administrative
|
|
$
|
13,046
|
|
|
$
|
8,703
|
|
|
$
|
4,343
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a percentage of revenues
|
|
|
22
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses during the
twelve months ended December 31, 2007 compared to the same
period in 2006 was primarily due to an increase of
$2.2 million of professional fees,
60
$0.7 million for the amortization of intangible assets
acquired in the Medisystems Acquisition, $0.4 million of
headcount related expenses including salary, benefits, payroll
taxes and stock-based compensation, due to increased headcount
to support growth of infrastructure, $0.5 million relating
to the acquired Medisystems business and $0.5 million of
other corporate expenses. The increased professional fees
related to increased legal expenses associated with higher
contract activity in 2007, increased professional fees
associated with acquisition related services for Medisystems,
and increased hiring activity for board and senior level
positions. We expect that general and administrative expenses
will continue to increase in the near term as we add support
structure for our growing business.
Other
Income and Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit, commercial paper and money
market accounts. For the year ended December 31, 2007,
interest income decreased by $0.4 million due to decreased
cash and investments over the comparable period ending
December 31, 2006.
For the year ended December 31, 2007, interest expense
increased by $0.1 million over the comparable period ending
December 31, 2006 due to our new credit facility. We expect
interest expense will increase due to the new credit facility we
entered into in November 2007.
Provision
for Foreign Income Taxes
The provision for foreign income taxes of $0.1 million
relates to our operations of the foreign entities we acquired in
the Medisystems Acquisition on October 1, 2007. We expect
the expense will increase in 2008 as we will own these foreign
entities for a full year.
Comparison
of Years Ended December 31, 2006 and 2005 (in thousands,
except percentages)
Revenues
Our revenues for 2006 and 2005 were as follows (in thousands,
except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
Revenues
|
|
$
|
20,812
|
|
|
$
|
5,994
|
|
|
$
|
14,818
|
|
|
|
247
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to increased sales and
rentals of the System One in both the critical care and home
markets, primarily as a result of an increase in the number of
home patients on therapy resulting from increased sales and
marketing efforts. The number of home patients on therapy was
1,022 at December 31, 2006 compared to 292 at
December 31, 2005. In addition, we added 104 dialysis
clinics in 2006 offering the System One. Revenues in the home
market increased to $12.7 million in 2006 from
$3.2 million in 2005, an increase of 302%, while revenues
in the critical care market increased 186% to $8.1 million
in 2006, compared to $2.8 million in 2005. We added an
additional 27 hospitals in 2006 that offer the System One.
Cost of
Revenues and Gross Deficit
Our cost of revenues and gross deficit for 2006 and 2005 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
Cost of revenues
|
|
$
|
26,121
|
|
|
$
|
9,585
|
|
|
$
|
16,536
|
|
|
|
173
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit
|
|
$
|
(5,309
|
)
|
|
$
|
(3,591
|
)
|
|
$
|
1,718
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit percentage
|
|
|
(25.5
|
)%
|
|
|
(59.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The increase in cost of revenues was attributable primarily to
our increased sales volume. For the chronic care market, we
added 730 net patients during 2006, which contributed to a
$12.9 million increase in cost of revenues. In addition,
cost of revenues increased during 2006 because of an increase in
manufacturing personnel which resulted in additional salaries,
health benefits and payroll taxes of $1.6 million, higher
servicing costs of $0.8 million and increased inbound
freight costs of $1.1 million to support our higher
production volume. The improvement in gross margin during 2006
was attributable to (i) increased sales volume and
realization of economies of scale that led to better purchasing
terms and prices, and efficiencies in indirect manufacturing
overhead costs, (ii) lower labor costs for the manufacture
of certain of our products, and (iii) continued improvement
in product reliability. In 2006 and 2005 we reduced inventory to
net realizable value through charges to cost of revenues.
Selling
and Marketing
Our selling and marketing expenses for 2006 and 2005 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
Selling and marketing
|
|
$
|
14,356
|
|
|
$
|
7,550
|
|
|
$
|
6,806
|
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a percentage of revenues
|
|
|
69
|
%
|
|
|
126
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was the result of
several factors. Approximately $4.6 million of the increase
was due to higher salary and benefits resulting from increased
headcount, $0.6 million related to stock-based compensation
as a result of the adoption in January 2006 of Statement of
Financial Accounting Standards, or SFAS, No. 123R ,
Share-Based Payment. The increase in selling and
marketing expense was also the result of $1.3 million
related to a higher level of sales and marketing activity in
both the home and critical care markets. We increased our
combined sales force from 20 sales representatives at
December 31, 2005 to 24 sales representatives at
December 31, 2006.
Research
and Development
Our research and development expenses for 2006 and 2005 were as
follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
Research and development
|
|
$
|
6,431
|
|
|
$
|
6,305
|
|
|
$
|
126
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a percentage of revenues
|
|
|
31
|
%
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was
attributable to increased salary, benefits and payroll taxes of
$0.3 million as a result of increased headcount,
approximately $0.1 million of stock-based compensation as a
result of the adoption in January 2006 of
SFAS No. 123R, offset by a decrease of
$0.3 million of development costs associated with our
PureFlow SL module which we incurred in 2005 that did not recur
in 2006.
62
Distribution
Our distribution expenses for 2006 and 2005 were as follows (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
Distribution
|
|
$
|
7,093
|
|
|
$
|
2,059
|
|
|
$
|
5,034
|
|
|
|
244
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of revenues
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses in 2006 was due to
increased volume of shipments of disposable products to a
growing number of patients in the home market.
General
and Administrative
Our general and administrative expenses for 2006 and 2005 were
as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
General and administrative
|
|
$
|
8,703
|
|
|
$
|
4,855
|
|
|
$
|
3,848
|
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a percentage of revenues
|
|
|
42
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily due to approximately $2.0 million of stock-based
compensation as a result of the adoption in January 2006 of
SFAS No. 123R, and approximately $1.5 million of
legal and administrative expenses incurred as a result of
operating as a public company.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit, commercial paper and money
market accounts. For the year ended December 31, 2006,
interest income increased by $2.6 million due to increased
cash and investment balances available for investment resulting
from our initial public offering and follow-on public offering
and, to a lesser degree, higher interest rates.
Interest expense increased during the year ended
December 31, 2006 compared to the same period in 2005 due
to the early payoff of a debt agreement, which resulted in the
early recognition of approximately $0.4 million of interest
expense during the second quarter of 2006.
Liquidity
and Capital Resources
We have operated at a loss since our inception in 1998. As of
December 31, 2007, our accumulated deficit was
$182.0 million and we had cash and cash equivalents of
approximately $34.3 million. On November 21, 2007, we
obtained a $50.0 million credit and security agreement from
a group of lenders led by Merrill Lynch Capital, a division of
Merrill Lynch Business Services Inc., for a term of
42 months. The credit facility is secured by nearly all our
assets, other than intellectual property and consists of a
$30.0 million term loan and a $20.0 million revolving
credit facility. We borrowed $25.0 million under the term
loan in November 2007, and have the option to borrow the
remaining $5 million by May 21, 2008. We expect that
we will borrow this amount. We used $4.9 million of the
proceeds from the term loan to repay all amounts owed under a
term loan dated May 15, 2006 with Silicon Valley Bank.
Borrowings under the term loan bear interest equal to LIBOR plus
6% per annum, fixed on November 21 for our first borrowings (at
a rate of 10.77% per year) and at the date of borrowing for the
remaining $5.0 million still available to be borrowed under
the term loan. Interest on the term loan must be paid on a
monthly basis. Beginning on February 1, 2009, we must repay
principal under the term loan in 29 equal monthly installments.
We will also be required to pay a maturity premium of $900,000
at the time of loan payoff. We are accruing the maturity premium
as additional
63
interest over the 42 month term. Our borrowing capacity
under the revolving credit facility is subject to satisfaction
of certain conditions and calculations of the borrowing amount.
There is no guarantee that we will be able to borrow the full
amount, or any funds, under the revolving credit facility. Any
borrowings under the revolving credit facility will bear
interest at LIBOR plus 4.25% per annum There is an unused line
fee of 0.75% per annum and descending deferred revolving credit
facility commitment fees, which are charged in the event the
revolving credit facility is terminated prior to May 21,
2011 of 4% in year one, 2% in year two, and 1% thereafter.
The credit facility includes covenants that (a) require us
to achieve certain minimum net revenue and certain minimum
EBITDA targets relating to the acquired Medisystems business,
(b) place limitations on our and our subsidiaries
ability to incur debt, (c) place limitations on our and our
subsidiaries ability to grant or incur liens, carry out mergers,
and make investments and acquisitions, and (d) place
limitations on our and our subsidiaries ability to pay
dividends, make other restricted payments, enter into
transactions with affiliates, and amend certain contracts. The
credit agreement 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, Merrill Lynch has a
number of remedies, including sale of our assets, control of our
cash and cash equivalents, and acceleration of all outstanding
indebtedness. Any of these remedies would likely have a material
adverse effect on our business.
On February 7, 2007, we entered into a National Service
Provider Agreement with DaVita, our largest customer. Pursuant
to the terms of the agreement, we granted to DaVita certain
market rights for the NxStage System One and related supplies
for home hemodialysis therapy. Under the agreement, DaVita
committed to purchase all of its existing System One equipment
currently being rented from NxStage (for a purchase price of
approximately $5 million) and to buy a significant
percentage of its future System One equipment needs. In
connection with the National Service Provider Agreement, on
February 7, 2007, we issued and sold to DaVita
2,000,000 shares of our common stock at a purchase price of
$10.00 per share, for an aggregate purchase price of
$20.0 million.
On June 14, 2006, we closed a follow-on public offering in
which we received net proceeds, after deducting underwriting
discounts, commissions and expenses, of approximately
$51.3 million from the sale and issuance of
6,325,000 shares of common stock.
On November 1, 2005, we closed our initial public offering
in which we received net proceeds, after deducting underwriting
discounts, commissions and expenses, of approximately
$56.0 million from the sale and issuance of
6,325,000 shares of common stock. Prior to the initial
public offering, we had financed our operations primarily
through private sales of redeemable convertible preferred stock
resulting in aggregate net proceeds of approximately
$91.9 million as of December 31, 2005.
The following table sets forth the components of our cash flows
for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net cash used in operating activities
|
|
$
|
(59,629
|
)
|
|
$
|
(53,913
|
)
|
|
$
|
(27,348
|
)
|
Net cash provided by (used in) investing activities
|
|
|
2,539
|
|
|
|
(14,308
|
)
|
|
|
11,291
|
|
Net cash provided by financing activities
|
|
|
40,204
|
|
|
|
56,778
|
|
|
|
71,782
|
|
Effect of exchange rate changes on cash
|
|
|
172
|
|
|
|
179
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow
|
|
$
|
(16,714
|
)
|
|
$
|
(11,264
|
)
|
|
$
|
55,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities. For
each of the periods above, net cash used in operating activities
was attributable primarily to net losses after adjustment for
non-cash charges, such as depreciation, amortization and
stock-based compensation expense. Significant uses of cash from
operations include increases in accounts receivable and
increased inventory requirements for production and placements
of the System One, offset by increases in accounts payable and
accrued expenses. Non-cash transfers from inventory to field
equipment for the placement of rental units with our customers
represented $32.3 million, $18.6 million and
$4.4 million, respectively, during the years ended
December 31, 2007, 2006 and 2005.
64
Net Cash Provided by (Used) in Investing
Activities. For each of the periods above, net
cash used in investing activities reflected purchases of
property and equipment, primarily for research and development,
information technology, manufacturing operations and capital
improvements to our facilities. Included in these figures is
($2.7) million of cash, net of acquisition costs, acquired
from Medisystems at the close of the transaction on
October 1, 2007.
Net Cash Provided by Financing Activities. Net
cash provided by financing activities during 2007 included
$19.9 million of net proceeds received from the sale to
DaVita of our common stock, $2.7 million of proceeds from
the exercise of stock options and warrants and net borrowings of
$17.6 million. Net cash provided by financing activities
during 2006 included $51.3 million of net proceeds received
from the follow-on public offering that closed in June 2006,
$1.5 million of proceeds from the exercise of stock options
and warrants and net borrowings of $4.0 million. Net cash
provided by financing activities during 2005 included
$56.5 million of net proceeds received from our initial
public offering that closed in November 2005, $16.0 million
of net proceeds received from the issuance of redeemable
convertible preferred stock and $0.8 million of proceeds
from the exercise of stock options and warrants, offset by debt
payments of $1.4 million.
We expect to continue to incur net losses for the foreseeable
future. We believe we have sufficient cash and cash available
through our debt facility to meet our funding requirements
through 2008. We expect that our existing resources will be
insufficient to satisfy our liquidity requirements beyond 2008,
and we will need to sell additional equity, issue debt
securities or otherwise obtain additional capital to fund our
operations and our growth. Additionally, beginning in February
2009, we will need to begin paying down the principal on the
debt we borrowed from Merrill Lynch. Any sale of additional
equity or issuance of debt securities will likely result in
dilution to our stockholders, and we cannot be certain that
additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain this additional financing when needed, we may
be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities, which would
likely harm our business.
The following table summarizes our contractual commitments as of
December 31, 2007 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(1)
|
|
$
|
26,124
|
|
|
$
|
54
|
|
|
$
|
19,949
|
|
|
$
|
6,121
|
|
|
$
|
|
|
Operating leases
|
|
|
7,349
|
|
|
|
1,809
|
|
|
|
3,479
|
|
|
|
2,061
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
61,593
|
|
|
|
42,697
|
|
|
|
10,712
|
|
|
|
2,828
|
|
|
|
5,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,066
|
|
|
$
|
44,560
|
|
|
$
|
34,140
|
|
|
$
|
11,010
|
|
|
$
|
5,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes repayment of 3% maturity premium on term loan of
$900,000 |
|
(2) |
|
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. Certain of these commitments may be extended
and/or canceled at the Companys 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
65
various other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ substantially from
our estimates.
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 revenues from product sales and services when
earned in accordance with Staff Accounting Bulletin, or SAB,
No. 104, Revenue Recognition , and Emerging Issues
Task Force, or EITF,
00-21,
Revenue Arrangements with Multiple Deliverables. 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.
Home
Market
Prior to 2007, we derived revenue in the home market from
short-term rental arrangements with our customers as our
principal business model. These rental arrangements, which
combine the use of the System One with a specified number of
disposable products supplied to customers for a fixed amount per
month, are recognized on a monthly basis in accordance with
agreed upon contract terms and pursuant to a binding customer
purchase order and fixed payment terms. Rental arrangements
continue to represent the majority of the arrangements we have
with our customers in the home market. Equipment utilized under
the rental arrangements is referred to as Field
Equipment.
Beginning in 2007, we entered into long-term customer contracts
to sell System One and PureFlow SL equipment along with the
right to purchase disposable products and service on a monthly
basis. Some of these agreements include other terms such as
development efforts, training, market collaborations, limited
market exclusivity, and volume discounts. The equipment and
related items provided to our customers in these arrangements
are considered a multiple-element sales arrangement pursuant to
EITF 00-21.
When a sales arrangement involves multiple elements, the
deliverables included in the arrangement are evaluated to
determine whether they represent separate units of accounting.
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 are
deferred, and recognized as revenue on a straight line basis
over the expected term of our obligation to supply disposables
and service, which is five to seven years. We have deferred both
the unrecognized revenue and direct costs relating to the
delivered equipment, which costs are being amortized over the
same period as the related revenue.
We entered into a national service provider agreement and a
stock purchase agreement with DaVita on February 7, 2007.
Pursuant to
EITF 00-21,
we consider these agreements a single arrangement. In connection
with the stock purchase agreement, DaVita purchased
2,000,000 shares of our common stock for $10.00 per share,
which represented a premium of $1.50 per share, or
$3.0 million over the current market price. We have
recorded the $3.0 million premium as deferred revenue and
will recognize this revenue ratably over seven years, consistent
with our equipment service obligation to DaVita. During the
twelve months ended December 31, 2007, we recognized
revenue of $0.4 million, associated with the
$3.0 million premium.
In-Center
and Critical Care Market
In the critical care market, sales are structured as direct
product sales or as a disposables-based program in which a
customer acquires the equipment through the purchase of a
specific quantity of disposables over a specific period of time.
In the in-center market, sales are structured primarily through
supply and distribution contracts with distributors. We
recognize revenues at the later of the time of shipment or, if
applicable, delivery in accordance with contract terms. Under a
disposables-based program, the customer is granted the right to
use the equipment for a period of time, during which the
customer commits to purchase a minimum number of disposable
cartridges or fluids at a price that includes a premium above
the otherwise average
66
selling price of the cartridges or fluids to recover the cost of
the equipment and provide for a profit. Upon reaching the
contractual minimum purchases, ownership of the equipment
transfers to the customer. Revenues under these arrangements are
recognized over the term of the arrangement as disposables are
delivered. During the reported periods, the majority of our
in-center and critical care revenues were derived from supply
contracts and direct product sales.
Our contracts 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 revenue is
recognized ratably over the warranty period.
The Company recognizes rebates to customers in its in-center
market in accordance with
EITF 01-09,
Accounting for Consideration given by a Vendor to a Customer
(Including) Reseller of the Vendors Products. Customer
rebates are included as a reduction of sales and trade accounts
receivable and are the Companys best estimate of the
amount of probable future rebates on current sales.
Inventory
Valuation
Inventories are valued at the lower of cost (weighted-average)
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 commitments and other factors in evaluating net
realizable value. The medical device industry is characterized
by rapid development and technological advances 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 deployed by a patient, and assess whether there are any
indicators of impairment for such equipment. During 2007, 2006
and 2005, no such impairment was recognized.
We capitalize field equipment at cost and amortize field
equipment through cost of revenues using the straight-line
method over an estimated useful life of five years. We review
the estimated useful life of five years and the asset carrying
value periodically for reasonableness. Factors considered in
determining the reasonableness of the useful life and the asset
carrying value include industry practice and the typical
amortization periods used for like equipment, the frequency and
scope of service returns, actual equipment disposal rates, our
ability to verify the equipments existence in the field,
and the impact of planned design improvements. We believe the
five-year useful life to be reasonable as of December 31,
2007.
Accounting
for Stock-Based Awards
Until December 31, 2005, we accounted for stock-based
employee compensation awards in accordance with Accounting
Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees ,
and related interpretations. Accordingly, compensation expense
was recorded for stock options awarded to employees and
directors to the extent that the option exercise price was less
than the fair market value of our common stock on the date of
grant, where the number of shares and exercise price were fixed.
The difference between the fair value of our common stock and
the exercise price of the stock option, if any, was recorded as
deferred compensation and was amortized to compensation expense
over the vesting period of the underlying stock option. Prior to
becoming a public company on October 27, 2005, there had
been no public market for our common stock. Absent an objective
measure of the fair value of our common stock, the determination
of fair value required judgment. Our board of directors
periodically estimated the fair value of our common stock in
connection with any stock option grants. The fair value of our
common stock was estimated based on
67
factors such as independent valuations, sales of preferred
stock, the liquidation preference, dividends, voting rights of
the various classes of stock, our financial and operating
performance, progress on development goals, the issuance of
patents, the value of other companies involved in dialysis,
general economic and market conditions and other factors that we
believed would reasonably have a significant bearing on the
value of our common stock.
Prior to January 1, 2006, we followed the disclosure
requirements of Statement of Financial Accounting Standard, or
SFAS No. 123, Accounting for Stock-Based
Compensation for stock-based awards granted to
employees. All stock-based awards granted to non-employees were
accounted for at their fair value in accordance with
SFAS No. 123 and related interpretations. For purposes
of the pro forma disclosures required by SFAS No. 123,
stock options granted subsequent to July 19, 2005, the date
of filing our initial registration statement with the SEC, were
valued using the Black-Scholes option-pricing model. Prior to
July 19, 2005, we used the minimum value method permitted
under SFAS No. 123.
We adopted SFAS No. 123R, Share-Based
Payment, on January 1, 2006. SFAS 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the statement of
operations based on their fair values. In addition,
SFAS 123R requires the use of the prospective method for
any outstanding stock options that were previously valued using
the minimum value method. Accordingly, with the adoption of
SFAS 123R, we did not recognize the remaining compensation
cost for any stock option awards which had previously been
valued using the minimum value method. In addition,
SFAS 123R prohibits the use of pro forma disclosures for
stock option awards valued under the minimum value method (i.e.,
our pre-July 19, 2005 stock option awards). Stock option
awards granted prior to July 19, 2005, the date on which we
filed our preliminary prospectus with the SEC, that are
subsequently modified, repurchased or cancelled after
January 1, 2006 shall be subject to the provisions of
SFAS 123R.
We use the modified prospective method under SFAS 123R for
any stock options granted after July 19, 2005. The
aggregate value of the unvested portion of stock options issued
between July 19, 2005 and December 31, 2005 totaled
$4.4 million as of December 31, 2005, net of estimated
forfeitures. Beginning in 2006, we began recognizing this
aggregate value as compensation expense in our consolidated
statement of operations ratably over the remaining vesting
period.
As a result of adopting SFAS 123R on January 1, 2006,
our net loss for the years ended December 31, 2007 and 2006
was $3.2 and $2.4 million, respectively, higher than if we
had continued to account for the share-based awards under APB
No. 25. Basic and diluted loss per share for the years
ended December 31, 2007 and 2006 was $0.09 and $0.10
higher, respectively, than if we had continued to account for
share-based awards under APB No. 25. Management continues
to evaluate the use of stock-based awards and may consider other
forms of equity-based compensation arrangements (such as
restricted stock units) or reduce the volume of stock option
grants in the future.
Pursuant to SFAS 123R, we reclassified $0.3 million of
deferred compensation relating to non-qualified stock options
awarded to an executive and a consultant to additional paid-in
capital on January 1, 2006.
Prospectively, we use the Black-Scholes option-pricing model to
estimate the fair value of stock-based compensation awards on
the dates of grant. In accordance with SAB 107, based upon
our stage of development and the short period of time that our
common stock has been publicly traded on the NASDAQ Global
Market, we have used the following assumptions in the
Black-Scholes option-pricing model to estimate the fair value of
equity-based compensation awards:
Expected Term the expected term has been determined
using the simplified method, as defined in SAB 107, for
estimating expected option life of plain-vanilla
options. Unless otherwise determined by the Board or the
Compensation Committee, stock options granted under the 2005
Stock Incentive Plan have a contractual term of seven years,
resulting in an expected term of 4.75 years calculated
under the simplified method.
Risk-Free Interest Rate 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.
68
Volatility the objective in estimating expected
volatility is to ascertain the assumption about expected
volatility that marketplace participants would likely use in
determining an exchange price for an option. Because we have no
options that are traded publicly and because of our limited
trading history as a public company, our volatility assumption
has been based upon an analysis of the stock volatility
experienced by similar companies in the medical device and
technology industries, consistent with the methodology used in
2005. For the year ended December 31, 2007, we reached our
two year trading anniversary in the fourth quarter and we began
to use our historical trading activity and an analysis of
similar companies in the medical device and technology
industries in order to derive an expected volatility. For the
year ended December 31, 2007 we used a volatility rate
assumption of 65% to 75%. For the year ended December 31,
2006, we used a volatility rate assumption of 85%
The amount of stock based compensation recognized during a
period is based on the value of the portion of the awards that
are ultimately expected to vest. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary in subsequent periods if actual forfeitures differ
from those estimates. The term forfeitures is
distinct from cancellations or
expirations and represents only the unvested portion
of the surrendered stock award. We currently expects, based on
historical experience, employee growth, and limited trading
history, a forfeiture rate of 4% for all awards.
Valuation
of Business Combinations
We record tangible and intangible assets acquired and
liabilities assumed in recent business combination under the
purchase method of accounting. Amounts paid for each acquisition
are allocated to the assets acquired and liabilities assumed
based on their fair values at the dates of acquisition. We then
allocate the purchase price in excess of net tangible assets
acquired to identifiable intangible assets based on detailed
valuations that use information and assumptions provided by
management. We allocate any excess purchase price over the fair
value of the net tangible and intangible assets acquired and
liabilities assumed to goodwill. We have also used the income
approach, as described above, to determine the estimated fair
value of certain other identifiable intangibles assets including
developed technology, customer relationships and tradenames.
Developed technology represents patented and unpatented
technology and know-how. Customer relationships represent
established relationships with customers, which provides a ready
channel for the sale of additional products and services.
Tradenames represent acquired product names that we intend to
continue to utilize.
Intangibles
and Other Long-Lived Assets
Intangible assets resulting from the acquisition of the MDS
Entities 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 three months
to seven years. Furthermore, periodically we assess whether our
long-lived assets including intangible assets, should be 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 projected discounted future operating cash
flows. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs.
Goodwill
We account for goodwill in accordance with
SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill not
be amortized but instead be tested at least annually for
impairment, or more frequently when events or changes in
circumstances indicate that the assets might be impaired.
Management considers our business as a whole to be its reporting
unit for purposes of testing for impairment. This impairment
test is performed annually during the fourth quarter. A two-step
test is used to identify the potential impairment and to measure
the amount of goodwill impairment, if any. The first step is to
compare the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying amount, goodwill is considered not
impaired; otherwise, goodwill is impaired and the loss is
measured by performing step two. Under step two, the impairment
loss is measured by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of goodwill.
69
Accounting
for Income Taxes
We account for federal and state income taxes in accordance with
SFAS No. 109, Accounting for Income
Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured
by the enacted tax rates.
As of December 31, 2007, we had federal and state net
operating loss carryforwards of approximately
$172.9 million and $144.8 million, respectively,
available to reduce future taxable income, if any. Substantially
all net losses are in the United States. The federal net
operating loss carryforwards will expire between 2019 and 2027,
while the state net operating loss carryforwards will expire
between 2008 and 2027. We also had combined federal and state
research and development credit carryforwards of
$4.1 million at December 31, 2007, which begin to
expire in 2019 if not utilized. Utilization of the net operating
loss carryforwards may be subject to an annual limitation 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 net operating loss carryforwards.
We have $1.6 million of net operating losses resulting from
excess tax deductions relating to stock-based compensation. We
will realize the benefit of these losses through increases to
stockholders equity in future periods when the losses are
utilized to reduce future tax payments.
Due to uncertainty surrounding the realization of deferred tax
assets through future taxable income, we have provided a full
valuation allowance and no benefit has been recognized for the
net operating loss and other deferred tax assets. Accordingly, a
valuation allowance for the full amount of the deferred tax
asset has been established as of December 31, 2007 and 2006
to reflect these uncertainties.
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which clarifies the
accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. In addition, FIN 48 provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company adopted FIN 48 on
January 1, 2007. The adoption of FIN 48 did not have a
material impact on the Companys financial position or
results of operations. Upon adoption of FIN 48 and as of
December 30, 2007, the Company had no unrecognized tax
benefits recorded.
The Company files federal, state and foreign tax returns. The
Company has accumulated significant losses since its inception
in 1998. Since the net operating losses may potentially be
utilized in future years to reduce taxable income, all of the
Companys tax years remain open to examination by the major
taxing jurisdictions to which the Company is subject.
The Company recognizes interest and penalties for uncertain tax
positions in income tax expense. Upon adoption and as of
December 31, 2007, the Company had no interest and penalty
accrual or expense.
Related-Party
Transactions
On June 4, 2007, we entered into a stock purchase agreement
with David S. Utterberg under which we agreed to purchase from
Mr. Utterberg the issued and outstanding shares of
Medisystems Corporation and Medisystems Services Corporation,
90% of the issued and outstanding shares of Medisystems Europe
S.p.A. (the remaining equity of which is held by Medisystems
Corporation) and 0.273% of the issued and outstanding equity
participation of Medisystems Mexico s. de R.L. de C.V. (the
remaining equity of which is held by Medisystems Corporation),
which are collectively referred to as the MDS Entities. We refer
to our acquisition of the MDS Entities as the Medisystems
Acquisition. Mr. Utterberg is a director and significant
stockholder of NxStage. The Medisystems Acquisition was
completed on October 1, 2007 and, as a result, each of the
MDS Entities is a direct or indirect wholly-owned subsidiary of
NxStage. In addition, as a result of completion of
70
the Medisystems Acquisition, the supply agreement, dated January
2007, with Medisystems, under which Medisystems agreed to
provide cartridges for use with the System One, was terminated.
In consideration for the Medisystems Acquisition, we issued
Mr. Utterberg 6.5 million shares of our common stock,
which we refer to as the Shares. As a result of the Medisystems
Acquisition and the issuance of the Shares to
Mr. Utterberg, Mr. Utterbergs aggregate
ownership of our outstanding common stock increased to
approximately 23.2%. In addition, we may be required to issue
additional shares of our common stock to Mr. Utterberg.
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. An aggregate of 1.0 million of the
shares issued to Mr. Utterberg were placed into escrow to
cover potential indemnification claims we may have against him.
In connection with the Medisystems Acquisition and as a result
of Medisystems Corporation, one of the MDS Entities, becoming a
direct or indirect wholly-owned subsidiary of ours, we acquired
rights under an existing license agreement between Medisystems
and DSU Medical Corporation, a Nevada corporation, which is
wholly-owned by Mr. Utterberg, or DSU. We refer to this
agreement as the license agreement. Additionally, as a condition
to the parties obligations to consummate the Medisystems
Acquisition, Mr. Utterberg and DSU entered into a
consulting agreement with us dated October 1, 2007, which
we refer to as the consulting agreement.
Under the license agreement, Medisystems received an exclusive,
irrevocable, sublicensable, royalty-free, fully paid license to
certain DSU patents, or the licensed patents, in exchange for a
one-time payment of $2.7 million. The licensed patents fall
into two categories, those patents that are used exclusively by
the MDS Entities, referred to as the Class A patents, and
those patents that are used by the MDS Entities and other
companies owned by Mr. Utterberg, referred to as the
Class B patents. Pursuant to the terms of the license
agreement, MDS has a license to (1) the Class A
patents, to practice in all fields for any purpose and
(2) the Class B patents, solely with respect to
certain defined products for use in the treatment of
extracorporeal fluid treatments
and/or renal
insufficiency treatments. The license agreement further provides
that the rights of Medisystems under the agreement are qualified
by certain sublicenses previously granted to third parties. We
have agreed that Mr. Utterberg retains the right to the
royalty income under one of these sublicenses.
Under the consulting agreement, Mr. Utterberg and DSU will
provide consulting, advisory and related services to us for a
period of two years following the consummation of the
Medisystems Acquisition. In addition, under the terms of the
consulting agreement, Mr. Utterberg and DSU have agreed
during the term of the agreement not to compete with NxStage
during the term of the consulting agreement in the field defined
in the consulting agreement and not to encourage or solicit any
of our employees, customers or suppliers to alter their
relationship with us. The consulting agreement further provides
that (1) Mr. Utterberg and DSU assign to us certain
inventions and proprietary rights received by him/it during the
term of the agreement and (2) we grant Mr. Utterberg
and DSU an exclusive, worldwide, perpetual, royalty-free
irrevocable, sublicensable, fully paid license under such
assigned inventions and proprietary rights for any purpose
outside the inventing field, as defined in the consulting
agreement. Under the terms of the consulting agreement,
Mr. Utterberg and DSU will receive an aggregate of $200,000
per year, plus expenses, in full consideration for the services
and other obligations provided for under the terms of the
consulting agreement. The consulting agreement also requires
Mr. Utterberg and NxStage to indemnify each other in the
event of certain breaches and failures under the agreement and
requires that any such indemnification liability be satisfied
with 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.
We assumed a $2.8 million liability owed to DSU as a result
of the acquisition of the MDS Entities. The amount owed
represents consideration owed to DSU by the MDS Entities for the
termination of a royalty-bearing sublicense agreement and the
establishment of the royalty-free license agreement.
71
As of December 31, 2007 the Company recorded a receivable
for reimbursements of costs related to the acquisition in the
amount of $0.4 million from Mr. Utterberg and DSU.
Consistent with the requirements of our Audit Committee Charter,
this transaction was reviewed and approved by our Audit
Committee, which is comprised solely of independent directors,
as well as our Board.
Off-Balance
Sheet Arrangements
Since inception we have not engaged in any off-balance sheet
financing activities except for leases which are properly
classified as operating leases and disclosed in the
Liquidity and Capital Resources section above.
Recent
Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations (Statement 141(R)), a
replacement of FASB Statement No. 141. Statement 141(R) is
effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations.
Statement 141(R) provides that, upon initially obtaining
control, an acquirer shall recognize 100 percent of the
fair values of acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions, even if the acquirer
has not acquired 100 percent of its target. As a
consequence, the current step acquisition model will be
eliminated. Additionally, Statement 141(R) changes current
practice, in part, as follows: (1) contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration;
(2) transaction costs will be expensed as incurred, rather
than capitalized as part of the purchase price;
(3) pre-acquisition contingencies, such as legal issues,
will generally have to be accounted for in purchase accounting
at fair value; and (4) in order to accrue for a
restructuring plan in purchase accounting, the requirements in
FASB Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, would have to be met at
the acquisition date. While there is no expected impact to our
consolidated financial statements on the accounting for
acquisitions completed prior to December 31, 2008, the
adoption of Statement 141(R) on January 1, 2009 could
materially change the accounting for business combinations
consummated subsequent to that date.
In September 2006, the FASB issued Statement 157, Fair Value
Measurement (Statement 157). Statement 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and
establishes a hierarchy that categorizes and prioritizes the
sources to be used to estimate fair value. Statement 157 also
expands financial statement disclosures about fair value
measurements. On February 6, 2008, the FASB issued FASB
Staff Position (FSP) 157-b which delays the effective date of
Statement 157 for one year for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). Statement 157 and
FSP 157-b are effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are
currently evaluating the impact of SFAS No. 157 and
FSP 157-b on our consolidated financial statements.
In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115 (Statement 159), which permits but
does not require us to measure financial instruments and certain
other items at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
We are currently evaluating the impact of SFAS No. 159
on our consolidated financial statements.
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 110 (SAB 110).
SAB 110 amends and replaces Question 6 of Section D.2
of Topic 14, Share-Based Payment. SAB 110 expresses
the views of the staff regarding the use of the
simplified method in developing an estimate of
expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share Based
Payment. The use of the simplified method was
scheduled to expire on December 31, 2007. SAB 110
extends the use of the simplified method for
plain vanilla awards in certain situations. We
currently use the simplified method to estimate the
expected term for share option grants as we do not have
72
enough historical experience to provide a reasonable estimate
due to the limited period the Companys equity shares have
been publicly traded. We will continue to use the
simplified method until we have enough historical
experience to provide a reasonable estimate of expected term in
accordance with SAB 110. SAB 110 is effective for
options granted after December 31, 2007.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Exposure
Our investment portfolio consists primarily of high-grade
commercial paper, certificates of deposit and debt obligations
of various governmental agencies. 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. Investments are made with a maturity of no more than
180 days. These investments are subject to risk of default,
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 and relatively short
effective maturities of the debt instruments, 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.
As of December 31, 2007, we had outstanding debt
obligations of $25.2 million. We have a $25.0 million
loan with a fixed interest rate equal to 10.77% and a
$0.2 million loan with an interest equal to the EURIBOR for
3 months (plus 1.15%) subject to an interest rate swap
agreement at rates greater than 4%. When EURIBOR (3 months)
plus 1.15% exceeds 4%, interest is calculated on a blended
basis, with 50% of the nominal value of the loan subject to a
fixed rate of 4%, and the remaining 50% subject to the
EURIBOR (3 months) plus 1.15%. As of December 31,
2007, the carrying amount of our debt approximated fair value.
Foreign
Currency Exposure
We operate a manufacturing and research facility in Rosdorf,
Germany as well as manufacturing facilities in Mexico and Italy.
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, Peso and Thai Baht. We
also have contracts with key suppliers that expose us to foreign
currency risks. 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 since the exposure has not been material to our
historical operating results. A 10% movement in the Euro would
have had an overall impact to the statement of operations of
approximately $1.3 million for 2007, which would have been
approximately 1.1% of total annual expenses.
Equity
Security Price Risk
As a matter of policy, we do not invest in marketable equity
securities; therefore, we do not currently have any direct
equity price risk.
73
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
NXSTAGE
MEDICAL, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
74
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, 2007 and 2006, and
the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the
period ended December 31, 2007. 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,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123R,
Share Based Payment.
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, 2007, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 6, 2008 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 6, 2008
75
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,245
|
|
|
$
|
49,959
|
|
Short-term investments
|
|
|
1,100
|
|
|
|
11,843
|
|
Accounts receivable, net
|
|
|
7,990
|
|
|
|
4,302
|
|
Due from affiliate
|
|
|
435
|
|
|
|
|
|
Inventory
|
|
|
29,965
|
|
|
|
10,419
|
|
Prepaid expenses and other current assets
|
|
|
2,455
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
75,190
|
|
|
|
77,537
|
|
Property and equipment, net
|
|
|
12,146
|
|
|
|
3,026
|
|
Field equipment, net
|
|
|
30,885
|
|
|
|
20,616
|
|
Deferred cost of revenues
|
|
|
14,850
|
|
|
|
140
|
|
Intangible assets, net
|
|
|
33,801
|
|
|
|
|
|
Goodwill
|
|
|
41,457
|
|
|
|
|
|
Other assets
|
|
|
2,057
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
210,386
|
|
|
$
|
101,725
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
21,887
|
|
|
$
|
5,917
|
|
Accrued expenses
|
|
|
9,820
|
|
|
|
4,104
|
|
Due to affiliates
|
|
|
2,774
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
54
|
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
34,535
|
|
|
|
12,821
|
|
Deferred revenue
|
|
|
19,530
|
|
|
|
229
|
|
Long-term debt
|
|
|
25,170
|
|
|
|
4,617
|
|
Other long-term liabilities
|
|
|
1,434
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
80,669
|
|
|
|
18,316
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock: par value $0.001,
5,000,000 shares authorized; zero shares issued and
outstanding as of December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock: par value $0.001, 100,000,000 shares
authorized; 36,771,893 and 27,806,543 shares issued and
outstanding as of December 31, 2007 and December 31,
2006, respectively
|
|
|
37
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
311,172
|
|
|
|
206,848
|
|
Accumulated deficit
|
|
|
(182,036
|
)
|
|
|
(123,640
|
)
|
Accumulated other comprehensive income
|
|
|
544
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
129,717
|
|
|
|
83,409
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
210,386
|
|
|
$
|
101,725
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
76
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
59,964
|
|
|
$
|
20,812
|
|
|
$
|
5,994
|
|
Cost of revenues
|
|
|
65,967
|
|
|
|
26,121
|
|
|
|
9,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deficit
|
|
|
(6,003
|
)
|
|
|
(5,309
|
)
|
|
|
(3,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
21,589
|
|
|
|
14,356
|
|
|
|
7,550
|
|
Research and development
|
|
|
6,335
|
|
|
|
6,431
|
|
|
|
6,305
|
|
Distribution
|
|
|
13,111
|
|
|
|
7,093
|
|
|
|
2,059
|
|
General and administrative
|
|
|
13,046
|
|
|
|
8,703
|
|
|
|
4,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,081
|
|
|
|
36,583
|
|
|
|
20,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(60,084
|
)
|
|
|
(41,892
|
)
|
|
|
(24,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,855
|
|
|
|
3,235
|
|
|
|
643
|
|
Other expense
|
|
|
(1,105
|
)
|
|
|
(973
|
)
|
|
|
(763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750
|
|
|
|
2,262
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(58,334
|
)
|
|
|
(39,630
|
)
|
|
|
(24,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for foreign income taxes
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,396
|
)
|
|
$
|
(39,630
|
)
|
|
$
|
(24,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.86
|
)
|
|
$
|
(1.60
|
)
|
|
$
|
(4.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
|
|
31,426
|
|
|
|
24,817
|
|
|
|
5,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
77
NXSTAGE
MEDICAL, INC.
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Reedeemable convertible Preferred Stock
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
Carrying
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Income
|
|
|
Income
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
(Loss)
|
|
|
|
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
13,301,415
|
|
|
$
|
75,946
|
|
|
|
|
2,566,681
|
|
|
$
|
3
|
|
|
$
|
2,391
|
|
|
$
|
(421
|
)
|
|
$
|
(59,495
|
)
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
Series F-1
redeemable convertible preferred stock, net of issuance costs of
$34,990
|
|
|
2,197,801
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
Conversion of redeemable convertible preferred stock to common
stock
|
|
|
(15,499,216
|
)
|
|
|
(91,946
|
)
|
|
|
|
12,124,840
|
|
|
|
12
|
|
|
|
91,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
6,325,000
|
|
|
|
6
|
|
|
|
56,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D warrant extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
128,729
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
31,304
|
|
|
|
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
(24
|
)
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(171
|
)
|
|
|
(171
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,779
|
)
|
|
|
|
|
|
|
(24,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
21,176,554
|
|
|
|
21
|
|
|
|
151,674
|
|
|
|
(260
|
)
|
|
|
(84,010
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
6,325,000
|
|
|
|
7
|
|
|
|
51,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
185,179
|
|
|
|
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
78,522
|
|
|
|
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
28,303
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to Directors in lieu of cash
|
|
|
|
|
|
|
|
|
|
|
|
12,985
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation adjustment for
SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
245
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,630
|
)
|
|
|
|
|
|
|
(39,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(39,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
27,806,543
|
|
|
|
28
|
|
|
|
206,848
|
|
|
|
|
|
|
|
(123,640
|
)
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
16,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
392,028
|
|
|
|
|
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
35,967
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to Directors in lieu of cash
|
|
|
|
|
|
|
|
|
|
|
|
16,355
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for Medisystems acquisition
|
|
|
|
|
|
|
|
|
|
|
|
6,500,000
|
|
|
|
7
|
|
|
|
81,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371
|
|
|
|
371
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58,396
|
)
|
|
|
|
|
|
|
(58,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(58,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
36,771,893
|
|
|
$
|
37
|
|
|
$
|
311,172
|
|
|
$
|
|
|
|
$
|
(182,036
|
)
|
|
$
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
78
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(58,396
|
)
|
|
$
|
(39,630
|
)
|
|
$
|
(24,480
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
Loss on disposal of equipment
|
|
|
126
|
|
|
|
55
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,277
|
|
|
|
3,495
|
|
|
|
1,034
|
|
Amortization of inventory
step-up
|
|
|
1,520
|
|
|
|
|
|
|
|
|
|
Bad debt
|
|
|
122
|
|
|
|
51
|
|
|
|
16
|
|
Amortization/write-off of debt discount
|
|
|
|
|
|
|
282
|
|
|
|
141
|
|
Stock-based compensation
|
|
|
3,449
|
|
|
|
2,765
|
|
|
|
253
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,597
|
)
|
|
|
(2,985
|
)
|
|
|
(1,004
|
)
|
Inventory
|
|
|
(41,344
|
)
|
|
|
(23,160
|
)
|
|
|
(5,930
|
)
|
Prepaid expenses and other current assets
|
|
|
405
|
|
|
|
(487
|
)
|
|
|
(484
|
)
|
Accounts payable
|
|
|
10,202
|
|
|
|
2,846
|
|
|
|
1,614
|
|
Accrued expenses
|
|
|
2,368
|
|
|
|
2,789
|
|
|
|
1,391
|
|
Deferred rent obligation
|
|
|
(63
|
)
|
|
|
(49
|
)
|
|
|
37
|
|
Deferred revenue
|
|
|
16,302
|
|
|
|
115
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(59,629
|
)
|
|
|
(53,913
|
)
|
|
|
(27,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,788
|
)
|
|
|
(1,620
|
)
|
|
|
(1,198
|
)
|
Maturities of short-term investments
|
|
|
30,410
|
|
|
|
68,836
|
|
|
|
12,495
|
|
Purchases of short-term investments
|
|
|
(19,667
|
)
|
|
|
(80,678
|
)
|
|
|
|
|
Acquisition costs, net of cash acquired
|
|
|
(2,749
|
)
|
|
|
|
|
|
|
|
|
Increase in other assets
|
|
|
(1,667
|
)
|
|
|
(846
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,539
|
|
|
|
(14,308
|
)
|
|
|
11,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
15,965
|
|
Net proceeds from issuance of common stock
|
|
|
|
|
|
|
51,332
|
|
|
|
56,508
|
|
Net proceeds from private placement sale of common stock
|
|
|
19,939
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option and purchase plans
|
|
|
2,695
|
|
|
|
955
|
|
|
|
534
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
503
|
|
|
|
223
|
|
Proceeds from loans and lines of credit
|
|
|
25,000
|
|
|
|
8,400
|
|
|
|
|
|
Net repayments on loans and lines of credit
|
|
|
(7,430
|
)
|
|
|
(4,412
|
)
|
|
|
(1,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
40,204
|
|
|
|
56,778
|
|
|
|
71,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and cash equivalents
|
|
|
172
|
|
|
|
179
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(16,714
|
)
|
|
|
(11,264
|
)
|
|
|
55,584
|
|
Cash and cash equivalents, beginning of period
|
|
|
49,959
|
|
|
|
61,223
|
|
|
|
5,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
33,245
|
|
|
$
|
49,959
|
|
|
$
|
61,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
897
|
|
|
$
|
963
|
|
|
$
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
91
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from inventory to field equipment and deferred cost of
revenues
|
|
$
|
32,314
|
|
|
$
|
18,598
|
|
|
$
|
4,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvement allowance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation and paid in capital
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension of Series D warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
79
NXSTAGE
MEDICAL, INC.
NxStage Medical, Inc. (the Company) is 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. The
Companys primary product, the NxStage System One (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. The System One is cleared by the United States Food and
Drug Administration (the FDA) and sold commercially
in the United States for the treatment of acute and chronic
kidney failure and fluid overload. The System One consists of an
electromechanical medical device (cycler), a disposable blood
tubing set and a dialyzer (filter) pre-mounted in a disposable,
single-use cartridge, and fluids used in conjunction with
therapy. Following the recent acquisition of Medisystems
Corporation and certain affiliates (the MDS
Entities), the Company also sells needles and blood tubing
sets primarily to the in-center market for the treatment of
end-stage renal disease (ESRD).
As of December 31, 2007, the Company had approximately
$34.3 million of cash, cash equivalents and short-term
investments. In February 2007, the Company received cash
proceeds of $20.0 million from the sale of 2 million
shares of its common stock to DaVita. In November 2007, the
Company entered into a credit facility with Merrill Lynch
Capital consisting of a $30.0 million term loan and a
$20.0 million revolving credit facility. The Company drew
$25.0 million under the term loan at closing, and may draw
the remainder on or before May 21, 2008. The Company has
experienced negative operating margins and cash flows from
operations and it expects to continue to incur net losses in the
foreseeable future. The Company believes that it has sufficient
cash to meet its funding requirements through 2008. However, the
Company will need to obtain additional financing or capital to
meet its needs beyond 2008. There can be no assurance as to the
availability of additional financing or the terms upon which
additional financing may be available in the future when it is
needed. If the Company is unable to obtain additional financing
when needed, it may be required to delay, reduce the scope of,
or eliminate one or more aspects of its business development
activities, which would likely harm the business.
|
|
2.
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation and Basis of Presentation
|
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
material intercompany transactions and balances have been
eliminated in consolidation.
The preparation of the Companys 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.
The Company recognizes revenue from product sales and services
when earned in accordance with Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition , and
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenues
are recognized when: (a) there is
80
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Home
Market
Prior to 2007, the Company derived revenue in the home market
from short-term rental arrangements with its customers as its
principal business model. These rental arrangements, which
combine the use of the System One with a specified number of
disposable products supplied to customers for a fixed amount per
month, are recognized on a monthly basis in accordance with
agreed upon contract terms and pursuant to a binding customer
purchase order and fixed payment terms. In the home market,
rental arrangements continue to represent the majority of the
arrangements the Company has with its customers. Beginning in
2007, the Company entered into long-term customer contracts to
sell the System One and PureFlow SL equipment along with the
right to purchase disposable products and service on a monthly
basis. Some of these agreements include other terms such as
development efforts, training, market collaborations, limited
market exclusivity and volume discounts. The equipment and
related items provided to the Companys customers in these
arrangements are considered a multiple-element sales arrangement
pursuant to
EITF 00-21.
When a sales arrangement involves multiple elements, the
deliverables included in the arrangement are evaluated to
determine whether they represent separate units of accounting.
The Company has determined that it cannot account for the sale
of equipment as a separate unit of accounting. Therefore, fees
received upon the completion of delivery of equipment are
deferred, and are recognized as revenue on a straight-line basis
over the expected term of the Companys obligation to
supply disposables and service, which is five to seven years.
The Company has deferred both the unrecognized revenue and
direct costs relating to the delivered equipment, which costs
are being amortized over the same period as the related revenue.
As of December 31, 2007, the Company has deferred
approximately $19.5 million of revenue, and
$14.9 million of related costs for equipment sales in the
home market.
The Company entered into a National Service Provider Agreement
and a Stock Purchase Agreement with DaVita, Inc.
(DaVita) on February 7, 2007. Pursuant to
EITF 00-21,
the Company considers these agreements a single arrangement. In
connection with the Stock Purchase Agreement, DaVita purchased
2,000,000 shares of the Companys common stock for
$10.00 per share, which represented a premium over the market
price on that date of $1.50 per share, or $3.0 million. The
Company has recorded the $3.0 million premium as deferred
revenue and will recognize this revenue ratably over seven
years, consistent with its equipment service obligation to
DaVita. During the twelve months ended December 31, 2007,
the Company recognized revenue of $0.4 million associated
with the $3.0 million premium.
In-Center
and Critical Care Market
In the critical care market, the Company structures sales as
direct product sales or as a disposables-based program in which
a customer acquires the equipment through the purchase of a
specific quantity of disposables over a specific period of time.
In the in-center market, sales are structured primarily through
supply and distribution contracts with distributors. The Company
recognizes revenue from direct product sales at the later of the
time of shipment or, if applicable, delivery in accordance with
contract terms. Under a disposables-based program, the customer
is granted the right to use the equipment for a period of time,
during which the customer commits to purchase a minimum number
of disposable cartridges or fluids at a price that includes a
premium above the otherwise average selling price of the
cartridges or fluids to recover the cost of the equipment and
provide for a profit. Upon reaching the contractual minimum
purchases, ownership of the equipment transfers to the customer.
Revenue under these arrangements is recognized over the term of
the arrangement as disposables are delivered. During the
reported periods, the majority of our in-center and critical
care market revenue is derived from supply contracts and direct
product sales.
81
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys contracts provide for training, technical
support and warranty services to its customers. The Company
recognizes training and technical support revenue when the
related services are performed. In the case of extended
warranty, the revenue is recognized ratably over the warranty
period.
The Company recognizes rebates to customers in its in-center
market in accordance with
EITF 01-09,
Accounting for Consideration given by a Vendor to a Customer
(Including) Reseller of the Vendors Products. Customer
rebates are included as a reduction of sales and trade accounts
receivable and are the Companys best estimate of the
amount of probable future rebates on current sales. For the
three month period ended December 31, 2007, the Company
recognized $1.4 million as a reduction of sales in
connection with customer rebates. At December 31, 2007, the
Company has a $1.0 million reserve against trade accounts
receivable for future rebates.
|
|
(d)
|
Foreign
Currency Translation and Transactions
|
Assets and liabilities of the Companys foreign operations
are translated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign
Currency Translation. In accordance with
SFAS No. 52, assets and liabilities of the
Companys 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. The
Companys foreign exchange (losses) gains totaled ,
($0.7) million, ($0.3) million and $16,000 in 2007,
2006 and 2005, respectively.
|
|
(e)
|
Cash,
Cash Equivalents, Marketable Securities and Restricted
Cash
|
The Company considers 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, certificates of deposit, commercial
paper and money market funds. Cash equivalents are stated at
cost plus accrued interest, which approximates market value.
The Company accounts for its investments in marketable
securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. In accordance with SFAS No. 115, the
Company has classified all of its short-term investments in
marketable securities as held-to-maturity for the years ended
December 31, 2007 and 2006. Held-to-maturity securities are
carried at amortized cost because the Company has the intent and
ability to hold investments to maturity.
Held-to-maturity securities consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
U.S. government securities
|
|
$
|
|
|
|
$
|
5,008
|
|
Commercial paper
|
|
|
|
|
|
|
4,896
|
|
Certificates of deposit
|
|
|
1,100
|
|
|
|
1,939
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,100
|
|
|
$
|
11,843
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, maturities of
held-to-maturity securities were less than one year. At
December 31, 2007 and 2006, the estimated fair value of
each investment approximated its amortized cost and, therefore,
there were no significant unrecognized holding gains or losses.
At December 31, 2007 the Company had $1.4 million in
standby letters of credit to guarantee annual VAT refunds in
Italy. These amounts are restricted and classified as other
assets.
82
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(f)
|
Fair
Value of Financial Instruments and Concentration of Credit
Risk
|
Financial instruments consist principally of cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable and long-term debt. The estimated fair value of
these instruments approximates their carrying value due to the
short period of time to their maturities. The fair value of the
Companys debt is estimated based on the current rates
offered to the Company for debt of the same remaining
maturities. The carrying amount of long-term debt approximates
fair value.
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. Management
believes that the financial institutions that hold the
Companys cash are financially sound and, accordingly,
minimal credit risk exists with respect to these balances.
All of the Companys revenues are derived in the United
States 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 recently acquired from Medisystems.
The Company uses and is dependent upon a number of single source
suppliers of components, subassemblies and finished goods. The
Company is dependent on the ability of its 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 could have a
material adverse effect on the Company. The Company believes
that its relationships with its suppliers are satisfactory.
The Company reduces gross trade accounts receivable with an
allowance for doubtful accounts. The allowance for doubtful
accounts is the Companys best estimate of the amount of
probable credit losses in the existing accounts receivable. The
Company reviews its allowance for doubtful accounts on a monthly
basis and all past due balances are reviewed individually for
collectability. Account balances are charged off against the
allowance after significant collection efforts have been made
and potential for recovery is considered remote. 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
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Year Ended
|
|
Beginning of Year
|
|
|
Provision
|
|
|
Other(1)
|
|
|
Write-offs
|
|
|
End of Year
|
|
|
December 31, 2007
|
|
$
|
63
|
|
|
$
|
122
|
|
|
$
|
111
|
|
|
$
|
|
|
|
$
|
296
|
|
December 31, 2006
|
|
$
|
12
|
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
63
|
|
December 31, 2005
|
|
$
|
22
|
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
(26
|
)
|
|
$
|
12
|
|
|
|
|
(1) |
|
Amount represents allowance for doubtful accounts assumed in the
Medisystems acquisition. |
83
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the number of customers who
individually comprise greater than 10% of total revenue:
|
|
|
|
|
|
|
Percent of
|
|
|
|
Total
|
|
Year Ended
|
|
Revenue
|
|
|
December 31, 2007
|
|
|
|
|
Customer A
|
|
|
20
|
%
|
Customer B
|
|
|
22
|
%
|
December 31, 2006
|
|
|
|
|
Customer A
|
|
|
19
|
%
|
December 31, 2005
|
|
|
|
|
Customer C
|
|
|
12
|
%
|
Customer D
|
|
|
11
|
%
|
Customer E
|
|
|
10
|
%
|
For the year ended December 31, 2007, no single customer
represented greater than 10% of the total accounts receivable.
For the year ended December 31, 2006, one customer
(Customer A) represented 17% of total accounts receivable.
Inventory is stated at the lower of cost, determined using the
first-in
first out method (FIFO) or market (net realizable value). The
Company regularly reviews its inventory quantities on hand and
related cost and records a provision for any excess or obsolete
inventory based on its estimated forecast of product demand and
existing product configurations. The Company also reviews its
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 commitments and other factors
in evaluating net realizable value.
|
|
(h)
|
Property
and Equipment and Field Equipment
|
Property and equipment and field equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the
related assets using the straight-line method for financial
statement purposes. The Company uses other depreciation methods
(generally, accelerated depreciation methods) for tax purposes
where appropriate. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the
improvements.
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 the Company that are swapped for cyclers that need
repairs or maintenance by the Company while being rented or
owned by a patient. The Company continually monitors the number
of cyclers in the service pool, as well as cyclers that are
in-transit or otherwise not being deployed by a patient, and
assesses whether there are any indicators of impairment for such
equipment. During 2007, 2006 and 2005, no such impairment was
recognized.
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, 2007 represents machinery and equipment under
installation.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold or
otherwise disposed of, the
84
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets carrying amount and related accumulated
depreciation are removed from the accounts and any gain or loss
is included in operations. The Company periodically reviews its
field equipments useful life and asset carrying value for
reasonableness. Factors considered in determining the
reasonableness of the useful life and the asset carrying value
include industry practice and the typical amortization periods
used for like equipment, the frequency and scope of service
returns, actual equipment disposal rates, our ability to verify
the equipments existence in the field, and the impact of
planned design improvements.
The estimated service 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 years
|
|
|
|
(i)
|
Intangibles
and Other Long Lived Assets
|
Intangible assets resulting from the acquisition of the MDS
Entities 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. Furthermore, periodically the Company assesses
whether long-lived assets including intangible assets, should be
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 projected discounted future operating
cash flows. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less selling costs. The
Company recognized $34.5 million of acquired definite-lived
intangible assets as a result of the acquisition of the MDS
Entities. These definite-lived intangible assets are expected to
be amortized over periods ranging from 8 to 14 years with
an average life of 12.9 years.
At December 31, 2007 the Companys intangible assets
consisted of the following (in thousands), all of which were
part of acquiring the MDS Entities:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Bloodline, Needle and Other Patented & Unpatented
Technology
|
|
$
|
6,200
|
|
Trade Names
|
|
|
2,300
|
|
Customer Relationships
|
|
|
26,000
|
|
|
|
|
|
|
Intangible assets, gross
|
|
|
34,500
|
|
Less: accumulated amortization
|
|
|
(699
|
)
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
33,801
|
|
|
|
|
|
|
The Company recognized $0.7 million of amortization expense
for the three months ended December 31, 2007. There was no
comparable expense in either 2006 or 2005. The Company will
record $2.8 million of amortization expense for each of the
years ended December 31, 2008 through 2012 related to the
above intangible assets
85
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 1, 2007, the Company recorded $41.5 million
of goodwill through purchase accounting for the MDS Entities
acquisition. The Company accounts for goodwill in accordance
with SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill not be
amortized but instead be tested at least annually for
impairment, or more frequently when events or changes in
circumstances indicate that the assets might be impaired. This
impairment test is performed annually during the fourth quarter
at the reporting unit level based on product market. A two-step
test is used to identify the potential impairment and to measure
the amount of goodwill impairment, if any. The first step is to
compare the fair value of the reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying amount, goodwill is considered not
impaired; otherwise, goodwill is impaired and the loss is
measured by performing step two. Under step two, the impairment
loss is measured by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of goodwill.
The Company believes the factors contributing to a purchase
price that results in the recognition of goodwill 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 the MDS Entities and the Company. The goodwill
recognized upon acquiring the MDS Entities is not deductible for
tax purposes.
|
|
(k)
|
Stock-Based
Compensation
|
Until December 31, 2005, the Company accounted for
stock-based employee compensation awards in accordance with
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees ,
and related interpretations. Accordingly, compensation expense
was recorded for stock options awarded to employees and
directors to the extent that the option exercise price was less
than the fair market value of the Companys common stock on
the date of grant, where the number of shares and exercise price
were fixed. The difference between the fair value of the
Companys common stock and the exercise price of the stock
option, if any, was recorded as deferred compensation and was
amortized to compensation expense over the vesting period of the
underlying stock option. All stock-based awards to nonemployees
were accounted for at their fair value in accordance with
SFAS No. 123, Accounting for Stock-Based
Compensation and related interpretations.
On January 1, 2006, the Company adopted
SFAS No. 123R Share-Based Payment, using a
combination of the prospective and the modified prospective
transition methods. Under the prospective method, the Company
will not recognize the remaining compensation cost for any stock
option awards that had previously been valued using the minimum
value method, which was allowed until the Companys initial
filing with the Securities and Exchange Commission, (
SEC), for a public offering of securities (i.e., stock
options granted prior to July 19, 2005). Under the modified
prospective method, the Company has (a) recognized
compensation expense for all share-based payments granted after
January 1, 2006 and (b) recognized compensation
expense for awards granted to employees between July 19,
2005 and December 31, 2005 that were unvested as of
December 31, 2005. The Company recognizes share-based
compensation expense using a straight-line method of
amortization over the vesting period.
The Company filed a registration statement on
Form S-1
for an initial public offering of its common stock on
July 19, 2005 and closed the initial public offering on
November 1, 2005. Stock options granted prior to
July 19, 2005 were valued using the minimum value method,
while stock options granted after July 19, 2005 were valued
using the Black-Scholes option-pricing model. The minimum value
method excludes the impact of stock volatility, whereas the
Black-Scholes option-pricing model includes a stock volatility
assumption in its calculation. The inclusion of a stock
volatility assumption, the principal difference between the two
methods, ordinarily yields a higher fair value.
As a result of adopting SFAS 123R on January 1, 2006,
the Companys net loss for the year ended December 31,
2007 and 2006 was $3.2 million and $2.4 million higher
than if it had continued to account for
86
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
share-based compensation under APB No. 25. Basic and
diluted loss per share for the year ended December 31, 2007
and 2006 was $0.09 and $0.10, respectively, higher than if the
Company had continued to account for share-based compensation
under APB No. 25.
Pursuant to SFAS 123R, the Company reclassified
$0.3 million of deferred compensation relating to
non-qualified stock options awarded to an executive and a
consultant to additional paid-in capital on January 1, 2006.
The Company recognized the impact of its share-based payment
plans in the consolidated statement of operations for the years
ended December 31, 2007 and 2006 under SFAS 123R. The
following table presents the captions in which share-based
compensation expense is included in the Companys
consolidated statement of operations, including share-based
compensation recorded in accordance with APB No. 25 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of revenues
|
|
$
|
339
|
|
|
$
|
72
|
|
Selling and marketing
|
|
|
1,140
|
|
|
|
550
|
|
Research and development
|
|
|
221
|
|
|
|
124
|
|
General and administrative
|
|
|
1,749
|
|
|
|
2,019
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,449
|
|
|
$
|
2,765
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during the
year ended December 31, 2007 and 2006 was $8.33 and $6.33,
respectively. The fair value of options at date of grant was
estimated using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Expected life
|
|
4.75 years(1)
|
|
4.75 years(1)
|
Risk-free interest rate
|
|
3.42% - 4.94%(2)
|
|
4.35% - 4.88%(2)
|
Expected stock price volatility
|
|
65% to 75%(3)
|
|
85%(3)
|
Expected dividend yield
|
|
|
|
|
|
|
|
(1) |
|
The expected term was determined using the simplified method for
estimating expected life of plain-vanilla options. |
|
(2) |
|
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. |
|
(3) |
|
Because the Company has no options that are traded publicly and
because of its limited trading history as a public company, the
stock volatility assumption is based on an analysis of the
Companys historical volatility and the volatility of the
common stock of comparable companies in the medical device and
technology industries. |
The amount of stock based compensation recognized during a
period is based on the value of the portion of the awards that
are ultimately expected to vest. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if
necessary in subsequent periods if actual forfeitures differ
from those estimates. The term forfeitures is
distinct from cancellations or
expirations and represents only the unvested portion
of the surrendered stock award. The Company currently expects,
based on historical experience, employee growth, and limited
trading history, a forfeiture rate of 4% for all awards.
87
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For a period of one year following the delivery of products to
its critical care customers, the Company provides for product
repair or replacement if it is determined that there is a defect
in material or manufacture of the product. For sales into the
critical care market, the Company accrues estimated warranty
costs at the time of shipment based on contractual rights and
historical experience. Warranty expense is included in cost of
revenues in the consolidated statement of operations. Following
is a rollforward of the Companys warranty accrual:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
Year Ended
|
|
Beginning of Year
|
|
|
Provision
|
|
|
Usage
|
|
|
End of Year
|
|
|
December 31, 2007
|
|
$
|
172
|
|
|
$
|
379
|
|
|
$
|
(331
|
)
|
|
$
|
220
|
|
December 31, 2006
|
|
$
|
62
|
|
|
$
|
309
|
|
|
$
|
(199
|
)
|
|
$
|
172
|
|
December 31, 2005
|
|
$
|
35
|
|
|
$
|
128
|
|
|
$
|
(101
|
)
|
|
$
|
62
|
|
|
|
(m)
|
Distribution
Expenses
|
Distribution expenses consist of the costs incurred in shipping
products to customers and are charged to operations as incurred.
Shipping and handling costs billed to customers are included in
revenues and totaled $56,000, $34,000 and $43,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
|
|
(n)
|
Research
and Development Costs
|
Research and development costs are charged to operations as
incurred.
The Company accounts for federal and state income taxes in
accordance with SFAS No. 109, Accounting for
Income Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured
by the enacted tax rates. The Companys 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. In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
(FIN) No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48),
which clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in
accordance with SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 on January 1, 2007. The adoption of
FIN 48 did not have a material impact on the Companys
financial position or results of operations. Upon adoption of
FIN 48 and as of December 30, 2007, the Company had no
unrecognized tax benefits recorded.
The Company files federal, state and foreign tax returns. The
Company has accumulated significant losses since its inception
in 1998. Since the net operating losses may potentially be
utilized in future years to reduce taxable income, all of the
Companys tax years remain open to examination by the major
taxing jurisdictions to which the Company is subject.
The Company recognizes interest and penalties for uncertain tax
positions in income tax expense. Upon adoption and as of
December 31, 2007, the Company had no interest and penalty
accrual or expense.
88
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 128, Earnings Per Share, requires
two presentations of earnings per share, basic and
diluted. Basic earnings per share is computed by
dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the
denominator) for the period. The computation of diluted earnings
per share is similar to basic earnings 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 Company has excluded 688,490 incremental shares attributable
to outstanding stock options and 2,122 incremental shares
attributable to restricted stock and restricted stock units, for
the year ended December 31, 2007 (all computed using the
treasury stock method) from the computation of diluted earnings
per share as their effect would be anti-dilutive. These stock
options and restricted stock awards could, however, become
dilutive in future periods.
The following potential common stock equivalents were not
included in the computation of diluted net loss per share as
their effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Options to purchase common stock
|
|
|
688
|
|
|
|
262
|
|
|
|
2,683
|
|
Restricted stock units
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
170
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
10,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
690
|
|
|
|
262
|
|
|
|
12,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(q)
|
Comprehensive
Income (Loss)
|
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting comprehensive income (loss)
and its components in the body of the financial statements.
Comprehensive income (loss) consists of net income (loss) and
other comprehensive income (loss). Other comprehensive income
(loss) includes certain changes in equity, such as foreign
currency translation adjustments, that are excluded from results
of operations.
At December 31, 2007 and 2006, accumulated other
comprehensive income (loss) consists of foreign currency
translation adjustments.
|
|
(r)
|
Recent
Accounting Pronouncements
|
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations (Statement 141(R)), a
replacement of FASB Statement No. 141. Statement 141(R) is
effective for fiscal years beginning on or after
December 15, 2008 and applies to all business combinations.
Statement 141(R) provides that, upon initially obtaining
control, an acquirer shall recognize 100 percent of the
fair values of acquired assets, including goodwill, and assumed
liabilities, with only limited exceptions, even if the acquirer
has not acquired 100 percent of its target. As a
consequence, the current step acquisition model will be
eliminated. Additionally, Statement 141(R) changes current
practice, in part, as follows: (1) contingent consideration
arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration;
(2) transaction costs will be expensed as incurred, rather
than capitalized as part of the purchase price;
(3) pre-acquisition contingencies, such as legal issues,
will generally have to be accounted for in purchase accounting
at fair value; and (4) in order to accrue for a
restructuring plan in purchase accounting, the requirements in
FASB Statement No. 146, Accounting for Costs Associated
with Exit or Disposal
89
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activities, would have to be met at the acquisition date.
While there is no expected impact to our consolidated financial
statements on the accounting for acquisitions completed prior to
December 31, 2008, the adoption of Statement 141(R) on
January 1, 2009 could materially change the accounting for
business combinations consummated subsequent to that date.
In September 2006, the FASB issued Statement 157, Fair Value
Measurement (Statement 157). Statement 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and
establishes a hierarchy that categorizes and prioritizes the
sources to be used to estimate fair value. Statement 157 also
expands financial statement disclosures about fair value
measurements. On February 6, 2008, the FASB issued FASB
Staff Position (FSP) 157-b which delays the effective date of
Statement 157 for one year for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). Statement 157 and
FSP 157-b are effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of SFAS No. 157 and
FSP 157-b on its consolidated financial statements.
In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115 (Statement 159), which permits but
does not require the Company to measure financial instruments
and certain other items at fair value. Unrealized gains and
losses on items for which the fair value option has been elected
are reported in earnings. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
impact of SFAS No. 159 on its consolidated financial
statements.
In December 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 110 (SAB 110).
SAB 110 amends and replaces Question 6 of Section D.2
of Topic 14, Share-Based Payment. SAB 110 expresses
the views of the staff regarding the use of the
simplified method in developing an estimate of
expected term of plain vanilla share options in
accordance with FASB Statement No. 123(R), Share Based
Payment. The use of the simplified method was
scheduled to expire on December 31, 2007. SAB 110
extends the use of the simplified method for
plain vanilla awards in certain situations. The
Company currently uses the simplified method to
estimate the expected term for share option grants as it does
not have enough historical experience to provide a reasonable
estimate due to the limited period the Companys equity
shares have been publicly traded. The Company will continue to
use the simplified method until it has enough
historical experience to provide a reasonable estimate of
expected term in accordance with SAB 110. SAB 110 is
effective for options granted after December 31, 2007.
On June 4, 2007, the Company entered into a stock purchase
agreement with David S. Utterberg under which it agreed to
purchase from Mr. Utterberg the issued and outstanding
shares of Medisystems Corporation and Medisystems Services
Corporation, 90% of the issued and outstanding shares of
Medisystems Europe S.p.A. (the remaining equity of which is held
by Medisystems Corporation) and 0.273% of the issued and
outstanding equity participation of Medisystems Mexico s. de
R.L. de C.V. (the remaining equity of which is held by
Medisystems Corporation), which are collectively referred to as
the MDS Entities. Medisystems was a vendor prior to acquisition
and Mr. Utterberg is a director and significant stockholder
of NxStage. The acquisition was completed on October 1,
2007 and, as a result, each of the MDS Entities is a direct or
indirect wholly-owned subsidiary of NxStage.
The MDS Entities design, manufactures, assembles, imports,
exports and distributes disposables used in dialysis and related
blood treatments and procedures. The acquisition is part of the
Companys strategy to expand the business on a commercial,
operational and financial scale as well as enhance the
Companys ability to execute operationally. The assets and
liabilities of the MDS Entity are included in the
December 31,2007 consolidated balance sheet of the Company
and the operating results of the MDS Entity have
90
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
been included in the 2007 consolidated statement of operations
for the period from October 1, 2007 (date of acquisition)
through December 31, 2007. We also entered into consulting
and other agreements with Mr. Utterberg or entities owned
by him as more fully described in Note 15.
Purchase
Price
The Company issued 6.5 million shares of NxStage common
stock valued at $12.50 per share, subject to a post closing
working capital adjustment, which represents the average trading
price of NxStage common stock for five days before and after
June 4, 2007, the date the Company announced the signing of
a definitive agreement to acquire the MDS Entities. The
aggregate purchase price was approximately $85.4 million
which consisted of stock valued at approximately
$81.3 million, transaction costs of $3.6 million, and
a charge of $0.5 million for acquisition-related exit
activities.
Allocation
of Purchase Price
The acquisition of the MDS Entities has been accounted for using
the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. Assets
acquired and liabilities assumed have been recorded in the
accompanying consolidated balance sheet at their estimated fair
values as of October 1, 2007. The excess of the purchase
price over the aggregate fair values is recorded as goodwill.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition (in thousands):
|
|
|
|
|
|
|
October 1,
|
|
|
|
2007
|
|
|
Current assets, excluding inventory
|
|
$
|
6,213
|
|
Inventory
|
|
|
11,922
|
|
Property, plant and equipment
|
|
|
6,485
|
|
Identifiable intangible assets other than goodwill
|
|
|
34,500
|
|
Goodwill
|
|
|
41,457
|
|
Other assets
|
|
|
134
|
|
|
|
|
|
|
Total assets acquired
|
|
|
100,711
|
|
|
|
|
|
|
Current liabilities
|
|
|
14,537
|
|
Long-term liabilities
|
|
|
820
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
15,357
|
|
|
|
|
|
|
Net assets acquired
|
|
|
85,354
|
|
Less cash acquired
|
|
|
778
|
|
|
|
|
|
|
Purchase price, net of acquired cash
|
|
$
|
84,576
|
|
|
|
|
|
|
The above purchase price allocation is preliminary and may
change as additional information becomes available.
91
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details total purchase consideration and
costs of acquiring the MDS Entities (in thousands):
|
|
|
|
|
Net book value of the MDS Entities
|
|
$
|
5,299
|
|
Increase in inventory
|
|
|
1,572
|
|
Increase to property, plant and equipment
|
|
|
2,526
|
|
Identifiable intangible assets
|
|
|
34,500
|
|
Goodwill
|
|
|
41,457
|
|
|
|
|
|
|
Purchase price
|
|
$
|
85,354
|
|
|
|
|
|
|
Purchase Consideration and Costs:
|
|
|
|
|
Fair value of common stock exchanged
|
|
$
|
81,250
|
|
Estimated closing costs, fees and adjustments
|
|
|
3,643
|
|
Estimated severence and relocation costs
|
|
|
461
|
|
|
|
|
|
|
Total purchase consideration and costs
|
|
$
|
85,354
|
|
|
|
|
|
|
Acquisition-Related
Exit Activity Accounted for in Purchase Accounting
As a result of the acquisition, the Company established and
approved a plan to integrate the acquired operations of the MDS
Entities into the operations of the Company, for which the
Company recorded $0.5 million in exit related purchase
accounting adjustments in 2007. These purchase accounting
adjustments consist of severance for certain MDS Entities
employees and relocation benefits for certain MDS Entities
employees. The following table summarizes the reserves related
to exit activities that have been established through purchase
accounting and the related activity that occurred since
October 1, 2007 (date of acquisition) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severence
|
|
|
Relocation
|
|
|
Total
|
|
|
Balance at 12/31/06
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring expense
|
|
|
301
|
|
|
|
160
|
|
|
|
461
|
|
Cash payments
|
|
|
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Non-cash utilization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 12/31/07
|
|
$
|
301
|
|
|
$
|
139
|
|
|
$
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro-Forma Results
The following unaudited pro forma financial information gives
effect to the acquisition as if it had been completed on
January 1, 2006 The pro forma information presented below
does not purport what the actual results would have been had the
acquisition occurred on January 1, 2006 (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Proforma net revenue
|
|
$
|
102,088
|
|
|
$
|
78,886
|
|
Proforma operating loss
|
|
|
(53,625
|
)
|
|
|
(41,238
|
)
|
Proforma net loss
|
|
|
(52,269
|
)
|
|
|
(39,143
|
)
|
Pro forma net loss per share, basic and diluted
|
|
$
|
(1.43
|
)
|
|
$
|
(1.24
|
)
|
92
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories at December 31, 2007 and 2006 consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Purchased components
|
|
$
|
12,211
|
|
|
$
|
2,865
|
|
Work in process
|
|
|
1,718
|
|
|
|
|
|
Finished goods
|
|
|
16,036
|
|
|
|
7,554
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,965
|
|
|
$
|
10,419
|
|
|
|
|
|
|
|
|
|
|
Inventory is shown net of a valuation reserve of approximately
$1.8 million and $0.5 million at December 31,
2007 and 2006, respectively. During 2007, the Company recorded a
$2.3 million charge for the recall of cartridges in the
home market, of which $1.5 million was for the write off of
inventory, and $0.8 million for other costs related to the
replacement of cartridges and rework of inventory. The
$1.5 million provision represents the total value of
inventory that was affected by the home market cartridge recall.
As of December 31, 2007, the Company had approximately
$1.1 million of affected inventory remaining on-hand. The
Company recorded a $1.6 million purchase accounting
adjustment to
step-up the
acquired MDS Entities inventory to fair value less a reasonable
profit on remaining sales efforts. During the three months ended
December 31, 2007, the Company recognized $1.5 million
of the inventory
step-up
adjustment through cost of sales.
|
|
5.
|
Property
and Equipment and Field Equipment
|
Property and equipment are carried at cost less accumulated
depreciation. A summary of the components of property and
equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Manufacturing equipment and tooling
|
|
$
|
7,090
|
|
|
$
|
2,572
|
|
Leasehold improvements
|
|
|
4,341
|
|
|
|
987
|
|
Computer and office equipment
|
|
|
1,651
|
|
|
|
959
|
|
Molds
|
|
|
883
|
|
|
|
|
|
Furniture
|
|
|
716
|
|
|
|
409
|
|
Construction-in-process
|
|
|
1,177
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,858
|
|
|
|
5,365
|
|
Less accumulated depreciation and amortization
|
|
|
(3,712
|
)
|
|
|
(2,339
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
12,146
|
|
|
$
|
3,026
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for property and equipment was
$1.3 million, $0.7 million and $0.5 million in
for the years ended December 31, 2007, 2006 and 2005,
respectively. Property and equipment includes a
$2.5 million purchase accounting adjustment to record the
property and equipment acquired as part of the MDS Entities at
their fair value. For the three months ended December 31,
2007, the Company recorded $0.1 million of depreciation
expense associated with this fair value adjustment.
93
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Field equipment is carried at cost less accumulated depreciation
at December 31 2007 and 2006 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Field equipment
|
|
$
|
39,470
|
|
|
$
|
24,102
|
|
Less accumulated depreciation and amortization
|
|
|
(8,585
|
)
|
|
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
|
Field equipment, net
|
|
$
|
30,885
|
|
|
$
|
20,616
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for field equipment was $6.1 million,
$2.8 million and $0.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Accrued expenses at December 31, 2007 and 2006 consist of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Payroll and related benefits
|
|
$
|
3,024
|
|
|
$
|
1,475
|
|
Audit, legal and consulting fees
|
|
|
491
|
|
|
|
372
|
|
Inventory purchases
|
|
|
2,533
|
|
|
|
707
|
|
Distribution expenses
|
|
|
1,147
|
|
|
|
947
|
|
Manufacturing related expenses
|
|
|
563
|
|
|
|
|
|
General and administrative expenses
|
|
|
496
|
|
|
|
68
|
|
Other
|
|
|
1,566
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,820
|
|
|
$
|
4,104
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Financing
Arrangements
|
Debt
On May 15, 2006, the Company entered into an equipment line
of credit agreement for the purpose of financing field equipment
purchases and placements. The line of credit agreement provides
for the availability of up to $20.0 million through
December 31, 2007, and borrowings bear interest at the
prime rate plus 0.5% (8.75% as of December 31, 2006). Under
the line of credit agreement, $10.0 million was available
through December 31, 2006 and an additional
$10.0 million is available from January 1, 2007
through December 31, 2007. The availability of the line of
credit is subject to a number of covenants, including
maintaining certain levels of liquidity, adding specified
numbers of patients and operating within certain net loss
parameters. The Company is also required to maintain operating
and/or
investment accounts with the lender in an amount at least equal
to the outstanding debt obligation. Borrowings are secured by
all assets of the Company other than intellectual property and
are payable ratably over a three-year period from the date of
each borrowing. As of December 31, 2006, the Company had
outstanding borrowings of $7.4 million and
$1.6 million of borrowing availability under the equipment
line of credit. Concurrent with entering into a new credit
facility in November 2007, the Company repaid all outstanding
borrowings in the aggregate amount of $4.9 million, which
included principal and accrued interest and the final interest
payment of $30,000. This extinguishment of debt gave rise to
early recognition of approximately of $53,000 of interest
expense for the year ended December 31, 2007.
On November 21, 2007, the Company obtained a
$50.0 million credit and security agreement from a group of
lenders led by Merrill Lynch Capital, a division of Merrill
Lynch Business Services Inc., for a term of 42 months. The
credit facility is secured by nearly all assets of the Company,
other than intellectual
94
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
property and consists of a $30.0 million term loan and a
$20.0 million revolving credit facility. The Company
borrowed $25.0 million under the term loan in November
2007, and has the option to borrow the remaining
$5.0 million by May 21, 2008. The Company expects that
it will borrow this amount. The Company used $4.9 million
of the proceeds from the term loan to repay all amounts owed
under a term loan dated May 15, 2006 with Silicon Valley
Bank. Borrowings under the term loan bear interest equal to
LIBOR plus 6% per annum, fixed on November 21 for our first
borrowings (at a rate of 10.77% per year) and at the date of
borrowing for the remaining $5.0 million still available to
be borrowed under the term loan. Interest on the term loan must
be paid on a monthly basis. Beginning on February 1, 2009,
the Company must repay principal under the term loan in 29 equal
monthly installments. The Company will also be required to pay a
maturity premium of $900,000 at the time of loan payoff. The
Company is accruing the maturity premium as additional interest
over the 42 month term. The Companys borrowing
capacity under the revolving credit facility is subject to
satisfaction of certain conditions and calculations of the
borrowing amount. There is no guarantee that the Company will be
able to borrow the full amount, or any funds, under the
revolving credit facility. Any borrowings under the revolving
credit facility will bear interest at LIBOR plus 4.25% per
annum. There is an unused line fee of 0.75% per annum and
descending deferred revolving credit facility commitment fees,
which are charged in the event the revolving credit facility is
terminated prior to May 21, 2011 of 4% in year one, 2% in
year two, and 1% thereafter.
The credit facility includes covenants that (a) require the
Company to achieve certain minimum net revenue and certain
minimum EBITDA targets relating to the acquired Medisystems
business, (b) place limitations on the Companys
ability to incur debt, (c) place limitations on the
Companys ability to grant or incur liens, carry out
mergers, and make investments and acquisitions, and
(d) place limitations on the Companys ability to pay
dividends, make other restricted payments, enter into
transactions with affiliates, and amend certain contracts. The
credit agreement contains customary events of default, including
nonpayment, misrepresentation, breach of covenants, material
adverse effects, and bankruptcy. In the event the Company fails
to satisfy the covenants, or otherwise go into default, Merrill
Lynch has a number of remedies, including sale of the
Companys assets, control of ash and cash equivalents, and
acceleration of all outstanding indebtedness. Any of these
remedies would likely have a material adverse effect on the
Companys business.
In addition to the Merrill Lynch debt, the Company had one loan
outstanding as of December 31, 2007 totaling 155,000
($226,000) which expires in September, 2011 and is included in
current and long-term debt. The interest on outstanding
borrowings is equal to EURIBOR for 3 months (plus 1.15%)
subject to an interest rate swap agreement at rates greater than
4%. When EURIBOR (3 months) plus 1.15% exceeds 4%, interest
is calculated on a blended basis, with 50% of the nominal value
of the loan subject to a fixed rate of 4%, and the remaining
50% subject to the EURIBOR (3 months) plus 1.15%.
EURIBOR for 3 months at December 31, 2007 was 4.684%,
according to published sources. Interest expense reflects the
applied blended interest rate calculation.
Annual maturities of principal under the Companys debt
obligations outstanding at December 31, 2007 are as follows
(in thousands):
|
|
|
|
|
2008
|
|
$
|
54
|
|
2009
|
|
|
9,542
|
|
2010
|
|
|
10,407
|
|
2011
|
|
|
5,221
|
|
|
|
|
|
|
|
|
$
|
25,224
|
|
|
|
|
|
|
95
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other long-term liabilities consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Future severence payment under Italian law
|
|
$
|
830
|
|
|
$
|
|
|
Deferred rent
|
|
|
586
|
|
|
|
649
|
|
Lease deposits
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,434
|
|
|
$
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Business
Segment and Enterprise Wide Disclosures
|
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information regarding operating segments in annual
financial statements. Operating segments are identified as
components of an enterprise about which separate discrete
financial information is available for evaluation by the chief
operating decision-maker in making decisions on how to allocate
resources and assess performance. The Company views its
operations and manages its business as one operating segment.
The Company sells products into three markets, home, critical
care, and in-center. The critical care market consists of
hospitals or facilities that treat patients that have suddenly,
and possibly temporarily, lost kidney function. The home market
consists of dialysis centers and hospitals that provide
treatment options for patients that have end stage renal disease
(ESRD), and the in-center market consists of the
product market for blood tubing sets and needles for
hemodialysis and apheresis. Revenues recognized in these markets
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Home
|
|
$
|
29,835
|
|
|
$
|
12,732
|
|
|
$
|
3,164
|
|
In-center
|
|
|
15,728
|
|
|
|
|
|
|
|
|
|
Critical care
|
|
|
14,401
|
|
|
|
8,080
|
|
|
|
2,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,964
|
|
|
$
|
20,812
|
|
|
$
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the in-center market reflected consist of MDS
Entities sales for the period from October 1, 2007 (date of
acquisition) to December 31, 2007. All the Companys
revenues are generated in the U.S.
Service revenue relating to extended service contracts in the
critical care market totaled approximately $0.2 million and
$35,000 for the years ended December 31, 2007 and 2006,
respectively.
Long lived tangible assets consist of property and equipment and
field equipment. The following table presents total long-lived
tangible assets by geographic areas as of December 31, 2007
and 2006, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
36,754
|
|
|
$
|
22,777
|
|
Europe
|
|
|
3,551
|
|
|
|
865
|
|
Mexico
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tangible long-lived assets, net
|
|
$
|
43,031
|
|
|
$
|
23,642
|
|
|
|
|
|
|
|
|
|
|
96
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Commitments
and Contingencies
|
The Company maintains its corporate headquarters in a leased
building located in Lawrence, Massachusetts and maintains its
manufacturing operations in Mexico, Germany, and Italy. During
2005, the Company renewed its lease agreement at its
headquarters through 2012. The lease agreement contains a
provision for future rent increases, requires the Company to pay
executory costs (real estate taxes, operating expenses and
common utilities) and provides for a renewal option of five
years. The Companys leased manufacturing facilities are
subject to lease agreements with termination dates beginning in
2011. 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 $1.0 million, $0.5 million and
$0.5 million for the years ended December 31, 2007,
2006 and 2005, respectively. The lease agreement for the
Companys 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 the Companys leases are accounted
for as operating leases.
The future minimum rental payments as of December 31, 2007
under the Companys operating leases are as follows (in
thousands):
|
|
|
|
|
|
|
Amount
|
|
|
2008
|
|
$
|
1,809
|
|
2009
|
|
|
1,720
|
|
2010
|
|
|
1,759
|
|
2011
|
|
|
1,598
|
|
2012
|
|
|
463
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,349
|
|
|
|
|
|
|
The Company enters into arrangements to purchase inventory
requiring minimum purchase commitments in the ordinary course of
business.
In January 2007, the Company 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 the System One for ten years. In exchange,
for Membranas agreement to pricing reductions based on
volumes ordered, the Company has agreed to purchase a base
amount of membranes per year. The agreement may be terminated
upon a material breach, generally following a
60-day cure
period.
On March 1, 2007, the Company entered into a long-term
agreement with the Entrada Group (Entrada), to
establish manufacturing and service operations in Mexico,
initially for its cycler and PureFlow SL disposables and later
for its PureFlow SL hardware. The agreement obligates Entrada to
provide the Company with manufacturing space, support services
and a labor force through 2012. Subject to certain exceptions,
the Company is obligated for facility fees through the term of
the agreement which approximate $0.2 million annually. The
agreement may be terminated upon material breach, generally
following a
30-day cure
period.
As of October 1, 2007 (the acquisition date), the Company
has a contract with Kawasumi Laboratories, Inc., a Japanese
contract manufacturer. This purchase arrangement is covered by
formal contracts expiring in March 2009 for bloodlines and
February 2011 for needle sets. Under the terms of the
manufacturing agreement, the Company agrees to purchase from
this supplier an annual quantity at least equal to 80% of the
goals established by both parties for each 12 month period
commencing February 1. There have been no losses as a
result of this commitment historically. and the Company does not
expect any losses over the remaining term of this annual
agreement. If the parties cannot agree on new goals for the
upcoming year at
97
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
least 4 months prior to the start of the contract year, the
agreement will be terminated at the conclusion of such contract
year.
At December 31, 2007 and 2006, deferred income tax assets
and liabilities resulted from 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
66,631
|
|
|
$
|
46,077
|
|
Research and development credits
|
|
|
4,107
|
|
|
|
3,932
|
|
Other
|
|
|
1,965
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
72,703
|
|
|
|
50,596
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(3,179
|
)
|
|
|
(1,036
|
)
|
Deferred tax liability recorded on basis difference of
intangible assets acquired as part of Medisystems acquisition
|
|
|
(13,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(16,504
|
)
|
|
|
(1,036
|
)
|
Net deferred tax assets before valuation allowance
|
|
|
56,199
|
|
|
|
49,560
|
|
Less: Valuation allowance
|
|
|
(56,199
|
)
|
|
|
(49,560
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company had federal and state
net operating loss carryforwards of approximately
$172.9 million and $144.8 million, respectively,
available to offset future taxable income, if any. Substantially
all net losses are in the United States. The federal net
operating loss carryforwards will expire between 2019 and 2027
if not utilized, while the state net operating loss
carryforwards will expire between 2008 and 2027 if not utilized.
The Company also had combined federal and state research and
development credit carryforwards of approximately
$4.1 million, at December 31, 2007, which begin to
expire in 2019 if not utilized. A full valuation allowance has
been recorded in the accompanying consolidated financial
statements to offset the Companys 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 Company has $1.6 million of net operating losses
resulting from excess tax deductions relating to stock-based
compensation. The Company 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 Companys operating divisions in Mexico (MediMexico)
and Italy (Medisystems Europe) that were acquired as part of the
Medisystems acquisition are subject to taxation on income in
their respective countries. For the year ended December 31,
2007, which covers the period October 1, 2007 through
December 31, 2007,
98
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the provision for foreign income taxes for MediMexico was
$15,000 and for Medisystems Europe was $47,000.
A reconciliation of the U.S. federal statutory tax rate to
the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Research and development credits
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
|
|
1.7
|
%
|
Foreign tax
|
|
|
(0.1
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Valuation allowance
|
|
|
(33.2
|
)%
|
|
|
(32.3
|
)%
|
|
|
(34.8
|
)%
|
Other, net
|
|
|
(1.6
|
)%
|
|
|
(2.7
|
)%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(0.1
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company has reserved
4,094,791 shares of common stock for issuance upon exercise
of stock options and 35,730 shares for issuance under the
2005 Purchase Plan.
Stock
Options
The Company maintains the 1999 Stock Option and Grant Plan (the
1999 Plan) under which 4,085,009 shares of
common stock were authorized for the granting of incentive stock
options (ISOs) and nonqualified stock options to
employees, officers, directors, advisors, and consultants of the
Company. Effective upon the closing of the Companys
initial public offering, no further grants have been or will be
made under the 1999 Plan. ISOs under the 1999 Plan were granted
only to employees, while nonqualified stock options under the
1999 Plan were granted to officers, employees, consultants and
advisors of the Company. The Companys board of directors
(the Board) determined the option exercise price for
incentive and nonqualified stock options and grants, and in no
event were the option exercise prices of an incentive stock
option less than 100% of the fair market value of common stock
at the time of grant, or less than 110% of the fair market value
of the common stock in the event that the employee owned 10% or
more of the Companys capital stock. In general, all stock
options issued under the 1999 Plan expire 10 years from the
date of grant and the majority of these grants were exercisable
upon the date of grant into restricted common stock, which vests
over a period of four years. Prior to the adoption of the 1999
Plan, the Company issued non-qualified options to purchase
55,252 shares of common stock, of which 40,622 shares
remain outstanding at December 31, 2007.
In October 2005, the Company adopted the 2005 Stock Incentive
Plan (the 2005 Plan), which became effective upon
the closing of the initial public offering. Concurrently, the
Company ceased granting stock options and other equity incentive
awards under the 1999 Plan and 971,495 shares, which were
then still available for grant under the 1999 Plan, were
transferred and became available for grant under the 2005 Plan.
In January 2007, the number of shares available for grant under
the 2005 Plan was increased by 600,000 shares, pursuant to
an evergreen provision under the Plan. This evergreen provision
of the 2005 Plan was eliminated by the Board in July 2007. In
October 2007, the Company amended the 2005 Stock Incentive Plan
to increase the number of shares of common stock which may be
issued pursuant to the plan by an additional
3,800,000 shares, of which no more than
1,500,000 shares may be granted as restricted stock units.
Unless otherwise specified by the Board 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. Stock option grants
to directors expire five years from the date of grant and vest
100% on date of grant. At December 31, 2007, options for
the purchase of 3,042,125 shares of common stock, of which
only
99
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1,477,009 shall be granted as restricted stock units, are
available for future grant under the 2005 Plan. The Company
settles stock option exercises with newly issued common shares.
During 2007, 2006 and 2005, the Company granted a consultant
options to purchase 7,500, 7,500 and 5,849 shares of common
stock at an exercise prices of $14.44, $8.15 and $6.84 per
share, respectively. The fair value of the 2007, 2006 and 2005
option grants was $8.09, $6.35 and $5.88 per share,
respectively, which has been recorded as stock-based
compensation and is being recognized ratably over the
awards vesting period. Further, these stock options will
be marked to market over their vesting period based upon changes
in fair value of the award. During 2005, 47,579 shares were
exercised by the consultant at a weighted average exercise price
of $4.24 per share.
The fair value of options granted to consultants is estimated on
the date of grant and at each remeasurement date using the
Black-Scholes option-pricing model. The following assumptions
were used for grants made in 2007, 2006 and 2005: dividend yield
of zero percent for each year; expected volatility of 65%, 85%,
and 85% ; risk free interest rates ranging from 3.42 to
4.68 percent; and expected life ranging from 5 to
10 years. Stock-based compensation expense related to stock
options granted to consultants was $21,000, $0.1 million
and $0.2 million for 2007, 2006 and 2005, respectively, and
is included in general and administrative expenses in the
accompanying consolidated statements of operations.
With the exception of one stock option award, which was granted
in 2006, all stock option awards granted to employees during
2007, 2006 and 2005 were made at exercise prices equal to or
greater than the then fair value of the Companys common
stock. The Company granted 208,962 stock options to a newly
hired executive officer (the Executive) on
October 25, 2004 with an exercise price of $4.10 per share,
which was lower than the fair value at the date of grant of
$5.47 per share. The intrinsic value of $1.37 per option is
being recognized as compensation expense over the four-year
vesting period. The Executives stock option award was
modified in March 2006 as a result of Internal Revenue Code
Section 409A. In connection with the modification, the
Executives exercise price was changed to its fair market
value on date of grant, $5.47 per share, in exchange for
$0.1 million in cash paid in January 2007 and
13,027 shares of restricted stock that began vesting on
January 1, 2007. The modification resulted in
$0.1 million in stock-based compensation expense in 2007
and additional compensation expense of $0.1 million in
2006, respectively.
During 2007, the Company entered into a restricted stock
agreement with one executive pursuant to which
22,991 shares were granted with a restriction period of
four years at a market price of $14.98. The fair market value of
the shares was measured on the date of grant and is being
amortized to expense over the respective vesting periods. During
the year ended December 31, 2007, stock-based compensation
relating to these shares charged to operations was $14,350.
During 2006, the Company entered into restricted stock
agreements with three executives pursuant to which
30,449 shares were granted with restriction periods of
three months to four years at market prices ranging from $8.92
to $13.05. The fair market value of the shares was measured on
the date of grant and is being amortized to expense over the
respective vesting periods. During the year ended
December 31, 2007 and 2006, stock-based compensation
relating to these shares charged to operations was
$0.1 million and $0.1 million, respectively. At
December 31, 2007 and 2006, the weighted-average grant date
fair value and weighted-average remaining contractual life for
outstanding shares of restricted stock was $13.14 and $11.40 and
4.3 years and 4.1 years, respectively.
For stock option grants between July 1, 2004 and the
Companys initial public offering that closed on
November 1, 2005, the Company determined the fair value of
its common stock based on a number of factors including
independent valuation analyses as well as the prices for recent
issuances of preferred stock. The Company believes that the
methodologies and approaches used were consistent with the
recommendations in the Technical Practice Aid of American
Institute of Certified Public Accountants, or AICPA,
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation.
100
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock option activity under all
plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Fixed Options
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
3,068,430
|
|
|
$
|
7.00
|
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
|
|
1,690,556
|
|
|
$
|
3.97
|
|
Granted
|
|
|
1,526,916
|
|
|
$
|
14.16
|
|
|
|
754,642
|
|
|
$
|
9.25
|
|
|
|
1,217,970
|
|
|
$
|
9.02
|
|
Exercised
|
|
|
(390,278
|
)
|
|
$
|
6.03
|
|
|
|
(177,757
|
)
|
|
$
|
4.08
|
|
|
|
(128,729
|
)
|
|
$
|
4.14
|
|
Forfeited or expired
|
|
|
(110,277
|
)
|
|
$
|
8.06
|
|
|
|
(191,741
|
)
|
|
$
|
8.96
|
|
|
|
(96,511
|
)
|
|
$
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
4,094,791
|
|
|
$
|
9.65
|
|
|
|
3,068,430
|
|
|
$
|
7.00
|
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
1,873,734
|
|
|
$
|
6.67
|
|
|
|
1,705,007
|
|
|
|
|
|
|
|
1,249,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,963,169
|
|
|
$
|
6.69
|
|
|
|
1,959,785
|
|
|
|
|
|
|
|
1,448,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at December 31, 2007 was
$22.3 million for stock options outstanding,
$15.9 million for stock options vested and
$16.7 million for stock options exercisable. The intrinsic
value for stock options outstanding, vested and exercisable is
calculated based on the exercise price of the underlying awards
and the market price of the Companys common stock as of
December 31, 2007, excluding out-of-the-money awards. The
total intrinsic value of options exercised during the year ended
December 31, 2007 and 2006 was $3.6 million and
$0.8 million, respectively. The total fair value of shares
vested during the year ended December 31, 2007 and 2006 was
$3.1 million and $4.9 million, respectively.
The following table summarizes information about stock options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.34 to $0.55
|
|
|
91,417
|
|
|
|
1.4 years
|
|
|
$
|
0.36
|
|
|
|
91,417
|
|
|
$
|
0.36
|
|
$1.37
|
|
|
2,924
|
|
|
|
2.4 years
|
|
|
$
|
1.37
|
|
|
|
2,924
|
|
|
$
|
1.37
|
|
$2.74 to $4.10
|
|
|
726,079
|
|
|
|
4.1 years
|
|
|
$
|
3.89
|
|
|
|
726,079
|
|
|
$
|
3.89
|
|
$5.47 to $6.84
|
|
|
354,133
|
|
|
|
6.8 years
|
|
|
$
|
6.37
|
|
|
|
354,133
|
|
|
$
|
6.37
|
|
$7.90 to $9.27
|
|
|
1,095,321
|
|
|
|
5.5 years
|
|
|
$
|
8.51
|
|
|
|
431,258
|
|
|
$
|
8.51
|
|
$9.63 to $11.19
|
|
|
106,267
|
|
|
|
5.4 years
|
|
|
$
|
10.70
|
|
|
|
92,095
|
|
|
$
|
10.78
|
|
$11.78 to $13.65
|
|
|
695,641
|
|
|
|
6.0 years
|
|
|
$
|
12.91
|
|
|
|
252,467
|
|
|
$
|
12.52
|
|
$14.20 to $15.22
|
|
|
1,023,009
|
|
|
|
6.9 years
|
|
|
$
|
14.63
|
|
|
|
12,796
|
|
|
$
|
14.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.34 to $15.22
|
|
|
4,094,791
|
|
|
|
5.7 years
|
|
|
$
|
9.65
|
|
|
|
1,963,169
|
|
|
$
|
6.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the status of the Companys
non-vested stock options:
|
|
|
|
|
|
|
|
|
Fixed Options
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2005
|
|
|
1,434,256
|
|
|
$
|
7.89
|
|
Granted
|
|
|
754,642
|
|
|
$
|
9.25
|
|
Vested
|
|
|
(633,734
|
)
|
|
$
|
7.76
|
|
Forfeited
|
|
|
(191,741
|
)
|
|
$
|
8.96
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
1,363,423
|
|
|
$
|
8.54
|
|
Granted
|
|
|
1,526,916
|
|
|
$
|
14.16
|
|
Vested
|
|
|
(559,005
|
)
|
|
$
|
9.58
|
|
Forfeited
|
|
|
(110,277
|
)
|
|
$
|
8.06
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
2,221,057
|
|
|
$
|
12.17
|
|
|
|
|
|
|
|
|
|
|
Certain outstanding stock option awards are subject to an early
exercise provision. Upon exercise, the award was initially
subject to a repurchase right in favor of the Company. The
repurchase right terminated upon the closing of the
Companys initial public offering.
As of December 31, 2007, approximately $14.5 million
of unrecognized stock compensation cost related to nonvested
awards (net of estimated forfeitures) is expected to be
recognized over a weighted-average period of 3.2 years.
Employee
Stock Purchase Plan
The Companys 2005 Employee Stock Purchase Plan (the
2005 Purchase Plan) authorizes the issuance of up to
100,000 shares of common stock to participating employees
through a series of periodic offerings. Each six-month offering
period begins in January or 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
the Companys common stock on the NASDAQ Global Market on
the day the offering terminates, unless otherwise determined by
the Board or Compensation Committee.
The weighted-average fair value of stock purchase rights granted
as part of the Companys 2005 Purchase Plan during the year
ended December 31, 2007 and 2006 was $2.60 and $2.30 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:
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Expected life
|
|
6 months
|
|
6 months
|
Risk-free interest rate
|
|
4.90% - 4.94%
|
|
4.42% - 5.11%
|
Expected stock price volatility
|
|
61.7% - 75%
|
|
50.9% - 67.0%
|
Expected dividend yield
|
|
|
|
|
There were 35,967, 28,303, and 0 shares issued under the
ESPP Plan for the years ended December 31, 2007, 2006, and
2005, respectively. As of December 31, 2007, the maximum
number of shares available for future issuance under the 2005
Purchase Plan is 35,730.
The Company recognized share-based compensation expense relating
to the 2005 Purchase Plan of $0.1 million for the year
ended December 31, 2007 and 2006, respectively.
102
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Employee
Benefit Plan
|
The Company has a 401(k) retirement plan (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.
The Company contributes 100% of the first 3% of the
employees contribution and 50% of the next 2% of the
employees contribution. The Company contributed
$0.8 million, $0.6 million and $0.4 million to
the 401(k) Plan during the years ended December 31, 2007,
2006 and 2005, respectively.
Common
and Preferred Stock
On October 1, 2007, the Company issued 6.5 million
shares of its common stock at a price of $12.50 per share in
connection with the MDS Entities acquisition as discussed in
Note 3.
On February 7, 2007, the Company issued and sold to DaVita
2,000,000 shares of common stock at a purchase price of
$10.00 per share, for an aggregate purchase price of
$19.9 million, net of issuance costs. The price of the
Companys common stock on February 7, 2007 was $8.50
per share, resulting in a $3.0 million premium, which was
deferred and will be recognized ratably to revenue over a term
of 7 years as discussed in Note 2.
On June 14, 2006, the Company completed a follow-on public
offering of 6,325,000 shares of its common stock at a price
of $8.75 per share and with aggregate net proceeds of
approximately $51.3 million.
On November 1, 2005, the Company completed its initial
public offering of 6,325,000 shares of its common stock at
a price of $10.00 per share and with aggregate net proceeds of
approximately $56.0 million. In connection with the initial
public offering, all shares of all series of the Companys
outstanding preferred stock were automatically converted into an
aggregate of 12,124,840 shares of common stock.
Warrants
During 2007, 73,460 of outstanding warrants to purchase shares
of common stock were exercised, resulting in the issuance of
21,000 shares of common stock. There are no warrants to
purchase shares of common stock outstanding at December 31,
2007.
At December 31, 2006, warrants to purchase a total of
73,460 shares of common stock were outstanding. These
warrants have a weighted average exercise price of $8.17 per
share and expire in December 2011. During the year ended
December 31, 2006, certain warrant holders exercised
warrants to purchase 78,522 shares of the Companys
common stock for aggregate proceeds of approximately
$0.5 million. During the year ended December 31, 2005,
certain warrant holders exercised warrants to purchase
31,304 shares of the Companys common stock for
aggregate proceeds of approximately $0.2 million.
Four of the Companys significant shareholders invested in
the Companys initial public offering. Three of these
shareholders held warrants to purchase Series D Preferred
Stock, which were due to expire on November 22, 2005,
during the six month
lock-up
period required by the underwriting agreement entered into in
connection with the initial public offering. In November 2005,
the Company offered to extend the exercise period of the
warrants held by these three investors through May 31,
2006. Two of these investors with warrants for a total of
80,968 shares accepted the Companys offer to extend
the exercise period. The extension of the warrants had no net
effect on the financial position or results of operations of the
Company. The fair value on date of modification was calculated
at $0.5 million and has been accounted for within the
additional paid-in capital account, as both an increase to the
cost of the initial public offering, offset by a corresponding
credit to reflect the value of the warrant extension.
103
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Related-Party
Transactions
|
As discussed in Note 3, on June 4, 2007, the Company
entered into a stock purchase agreement with David S. Utterberg
under which the Company agreed to purchase from
Mr. Utterberg the issued and outstanding shares of
Medisystems Corporation and Medisystems Services Corporation,
90% of the issued and outstanding shares of Medisystems Europe
S.p.A. (the remaining equity of which is held by Medisystems
Corporation) and 0.273% of the issued and outstanding equity
participation of Medisystems Mexico s. de R.L. de C.V. (the
remaining equity of which is held by Medisystems Corporation),
which are collectively referred to as the MDS Entities. The
Company refers to its acquisition of the MDS Entities as the
Medisystems Acquisition. Mr. Utterberg is a director and
significant stockholder of NxStage. The Medisystems Acquisition
was completed on October 1, 2007 and, as a result, each of
the MDS Entities is a direct or indirect wholly-owned subsidiary
of NxStage. In addition, as a result of completion of the
Medisystems Acquisition, the supply agreement, dated January
2007, with Medisystems, under which Medisystems agreed to
provide cartridges for use with the System One, was terminated
with no resultant gain or loss recognized. In consideration for
the Medisystems Acquisition, the Company issued
Mr. Utterberg 6.5 million shares of our common stock,
which the Company refers to as the Shares. As a result of the
Medisystems Acquisition and the issuance of the Shares to
Mr. Utterberg, Mr. Utterbergs aggregate
ownership of outstanding common stock increased to approximately
23.2%. In addition, the Company may be required to issue
additional shares of common stock to Mr. Utterberg since,
pursuant to the terms of the stock purchase agreement,
Mr. Utterberg and the Company 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 the
Companys common stock, valued at the time of payment.
However, the Company will not be required to issue shares for
indemnification purposes that in the aggregate would exceed 20%
of the then outstanding shares of the Companys common
stock without first obtaining stockholder approval, and any such
shares will not be registered under the Securities Act of 1933,
as amended. An aggregate of 1.0 million of the shares
issued to Mr. Utterberg were placed into escrow to cover
potential indemnification claims the Company may have against
Mr. Utterberg. In connection with the Medisystems
Acquisition and as a result of Medisystems Corporation, one of
the MDS Entities, becoming a direct or indirect wholly-owned
subsidiary of the Company, acquired rights under an existing
license agreement between Medisystems and DSU Medical
Corporation, a Nevada corporation, which is wholly-owned by
Mr. Utterberg, or DSU. The Company refers to this agreement
as the license agreement. Additionally, as a condition to the
parties obligations to consummate the Medisystems
Acquisition, Mr. Utterberg and DSU entered into a
consulting agreement with us dated October 1, 2007, which
the Company refers to as the consulting agreement.
Under the license agreement, Medisystems received an exclusive,
irrevocable, sublicensable, royalty-free, fully paid license to
certain DSU patents, or the licensed patents, in exchange for a
one-time payment of $2.7 million. The licensed patents fall
into two categories, those patents that are used exclusively by
the MDS Entities, referred to as the Class A patents, and
those patents that are used by the MDS Entities and other
companies owned by Mr. Utterberg, referred to as the
Class B patents. Pursuant to the terms of the license
agreement, MDS has a license to (1) the Class A
patents, to practice in all fields for any purpose and
(2) the Class B patents, solely with respect to
certain defined products for use in the treatment of
extracorporeal fluid treatments
and/or renal
insufficiency treatments. The license agreement further provides
that the rights of Medisystems under the agreement are qualified
by certain sublicenses previously granted to third parties. The
Company has agreed that Mr. Utterberg retains the right to
the royalty income under one of these sublicenses.
Under the consulting agreement, Mr. Utterberg and DSU will
provide consulting, advisory and related services to us for a
period of two years following the consummation of the
Medisystems Acquisition. In addition, under the terms of the
consulting agreement, Mr. Utterberg and DSU have agreed
during the term of the agreement not to compete with NxStage
during the term of the consulting agreement in the field defined
in the consulting agreement and not to encourage or solicit any
of our employees, customers or suppliers to alter their
relationship with us. The consulting agreement further provides
that (1) Mr. Utterberg and DSU
104
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assign to us certain inventions and proprietary rights received
by him/it during the term of the agreement and (2) the
Company grants Mr. Utterberg and DSU an exclusive,
worldwide, perpetual, royalty-free irrevocable, sublicensable,
fully paid license under such assigned inventions and
proprietary rights for any purpose outside the inventing field,
as defined in the consulting agreement. Under the terms of the
consulting agreement, Mr. Utterberg and DSU will receive an
aggregate of $200,000 per year, plus expenses, in full
consideration for the services and other obligations provided
for under the terms of the consulting agreement. The consulting
agreement also requires Mr. Utterberg and NxStage to
indemnify each other in the event of certain breaches and
failures under the agreement and requires that any such
indemnification liability be satisfied with shares of our common
stock, valued at the time of payment. However, the Company 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.
The Company assumed a $2.8 million liability owed to DSU as
a result of the acquisition of the MDS Entities. The amount owed
represents consideration owed to DSU by the MDS Entities for the
termination of a royalty-bearing sublicense agreement and the
establishment of the royalty-free license agreement.
As of December 31, 2007 the Company recorded a receivable
for reimbursements of costs related to the acquisition in the
amount of $0.4 million from Mr. Utterberg and DSU.
On January 6, 2008, the Company entered into a needle
purchase agreement (the Agreement) with DaVita,
pursuant to which DaVita has agreed to purchase the majority of
its safety needle requirements from the Company for five years,
subject to certain terms and conditions. The term of the
Agreement expires on January 5, 2013. Either party may
terminate the Agreement upon a substantial breach of the terms
thereof that remains uncured. Additionally, either party may
terminate the Agreement if any proceeding under the bankruptcy
or insolvency laws is brought against the other party, a
receiver is appointed for the other party, the other party makes
an assignment for the benefit of creditors, or the other party
dissolves. DaVita may also terminate the Agreement (i) upon
our continued failure to supply safety needles, or (ii) if
we deliver defective safety needles to DaVita for a continued
period of time. DaVita has the right to reduce or eliminate its
purchase requirements under the Agreement following the
introduction of a materially improved product (as defined in the
Agreement) from a third party. If DaVita exercises this right,
we may terminate the Agreement. The Agreement provides for
liquidated damages in the event DaVita fails to satisfy its
purchase requirements or the Company fails to meet its supply
obligations to DaVita.
105
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Quarterly
Financial Data (Unaudited)
|
The following table sets forth selected quarterly information
(unaudited, in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
Revenues
|
|
$
|
8,374
|
|
|
$
|
10,031
|
|
|
$
|
11,625
|
|
|
$
|
29,934
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(1,544
|
)
|
|
|
(1,480
|
)
|
|
|
(3,536
|
)
|
|
|
557
|
|
|
|
|
|
Net loss
|
|
|
(11,993
|
)
|
|
|
(12,882
|
)
|
|
|
(16,124
|
)
|
|
|
(17,397
|
)
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
Revenues
|
|
$
|
3,401
|
|
|
$
|
4,546
|
|
|
$
|
5,512
|
|
|
$
|
7,353
|
|
|
|
|
|
Gross deficit
|
|
|
(1,457
|
)
|
|
|
(1,457
|
)
|
|
|
(1,108
|
)
|
|
|
(1,287
|
)
|
|
|
|
|
Net loss
|
|
|
(9,255
|
)
|
|
|
(10,388
|
)
|
|
|
(9,576
|
)
|
|
|
(10,411
|
)
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
106
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
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, 2007. 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, 2007,
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.
Managements report on NxStages internal control over
financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) and the independent registered public
accounting firms related audit report are included in
Item 8 of this
Form 10-K
and are incorporated herein by reference.
No change in NxStages internal control over financial
reporting occurred during the fiscal year ended
December 31, 2007 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 the financial
statements.
|
Management has evaluated the effectiveness of its internal
control over financial reporting as of December 31, 2007,
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.
107
Our evaluation of and conclusion on the effectiveness of
internal control over financial reporting did not include the
internal controls of the MDS Entities, a business we acquired
during the year ended December 31, 2007 and which is
included in our 2007 consolidated financial statements and
constituted approximately $21.2 million and
$7.3 million of total and net assets, respectively, as of
December 31, 2007 and $15.7 million and
$2.0 million of revenues and net income, respectively, for
the period from the date of acquisition through
December 31, 2007.
Based on such evaluation, we have concluded that NxStages
internal control over financial reporting is effective as of
December 31, 2007.
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.
108
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of NxStage Medical, Inc.
We have audited NxStage Medical, Inc.s internal control
over financial reporting as of December 31, 2007, 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.
As indicated in the accompanying Managements Report on
Internal Control over Financial Reporting, managements
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of the MDS Entities, a business acquired by NxStage
Medical, Inc. during the year-ended December 31, 2007,
which is included in the 2007 consolidated financial statements
of NxStage Medical, Inc. and constituted approximately
$21,233,0000 and $7,345,000 of total and net assets,
respectively, as of December 31, 2007 and $15,728,000 and
$2,025,000 of revenues and net income, respectively, for the
year then ended. Our audit of internal control over financial
reporting of NxStage Medical, Inc. also did not include an
evaluation of the internal control over financial reporting of
the MDS Entities.
In our opinion, NxStage Medical, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, 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, 2007 and 2006, and the related consolidated
statements of operations, redeemable convertible preferred stock
and stockholders equity (deficit), and cash flows for each
of the three years in the period ended December 31, 2007 of
NxStage Medical, Inc. and our report dated March 6, 2008
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 6, 2008
109
|
|
Item 9B.
|
Other
Information
|
None.
PART III
We have included information about our executive officers in
Part I of the report under the caption Executive
Officers of the Registrant.
The information required by Part III,
Items 10-14
of this report is incorporated by reference from our definitive
proxy statement for our 2008 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, and Director Independence, 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.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
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
|
|
|
75
|
|
Consolidated Balance Sheets
|
|
|
76
|
|
Consolidated Statements of Operations
|
|
|
77
|
|
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders Equity (Deficit)
|
|
|
78
|
|
Consolidated Statements of Cash Flows
|
|
|
79
|
|
Notes to Consolidated Financial Statements
|
|
|
80
|
|
(b) Exhibits
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are incorporated herein by referenced 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.
110
SIGNATURES
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
March 7, 2008
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
|
|
March 7, 2008
|
|
|
|
|
|
/s/ Robert
S. Brown
Robert
S. Brown
|
|
Chief Financial Officer and Senior Vice President (Principal
Financial and Accounting Officer)
|
|
March 7, 2008
|
|
|
|
|
|
/s/ Philippe
O. Chambon
Philippe
O. Chambon, M.D., Ph.D.
|
|
Chairman of the Board of Directors
|
|
March 5, 2008
|
|
|
|
|
|
/s/ Daniel
A. Giannini
Daniel
A. Giannini
|
|
Director
|
|
March 5, 2008
|
|
|
|
|
|
/s/ Craig
W. Moore
Craig
W. Moore
|
|
Director
|
|
March 5, 2008
|
|
|
|
|
|
/s/ Reid
S. Perper
Reid
S. Perper
|
|
Director
|
|
March 7, 2008
|
|
|
|
|
|
/s/ Peter
P. Phildius
Peter
P. Phildius
|
|
Director
|
|
March 5, 2008
|
|
|
|
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|
/s/ David
S. Utterberg
David
S. Utterberg
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Director
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March 5, 2008
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111
EXHIBIT INDEX
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Incorporated by Reference to
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Exhibit
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Form or
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Filing Date
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SEC File
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Number
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Description
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Schedule
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Exhibit No.
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with SEC
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Number
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3
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.1
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Restated Certificate of Incorporation
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S-1/A
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3.4
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10/7/2005
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333-126711
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3
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.2
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Amended and Restated By-Laws
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S-1/A
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3.5
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10/7/2005
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333-126711
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4
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.1
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Specimen Certificate evidencing shares of common stock
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S-1/A
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4.1
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10/7/2005
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333-126711
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10
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.1#
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1999 Stock Option and Grant Plan, as amended
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S-1/A
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10.1
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10/7/2005
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333-126711
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10
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.2#
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Form of Incentive Stock Option Agreement under the 1999 Stock
Option and Grant Plan, as amended
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S-1/A
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10.2
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10/7/2005
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333-126711
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10
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.3#
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Form of Nonstatutory Stock Option Agreement under the 1999 Stock
Option and Grant Plan, as amended
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S-1/A
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10.3
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10/7/2005
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333-126711
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10
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.4#
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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
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10-Q
S-1/A
10-K
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10.3
10.22
10.5
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11/7/2007
10/20/2005
3/16/2007
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000-51567
333-126711
000-51567
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*10
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.5#
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2005 Employee Stock Purchase Plan, as amended by Amendment
No. 1
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10
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.6#
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Employment Agreement dated October 19, 2005 between the
Registrant and Jeffrey H. Burbank
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S-1/A
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10.12
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10/20/2005
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333-126711
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10
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.7#
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Employment Agreement dated October 17, 2005 between the
Registrant and Philip R. Licari
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S-1/A
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10.13
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10/20/2005
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333-126711
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10
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.8#
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Employment Agreement dated October 18, 2005 between the
Registrant and Joseph E. Turk, Jr.
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S-1/A
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10.15
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10/20/2005
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333-126711
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10
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.9#
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Employment Agreement dated October 18, 2005 between the
Registrant and Winifred L. Swan
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S-1/A
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10.16
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10/20/2005
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333-126711
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10
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.10#
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Employment Agreement dated November 27, 2006 between
Registrant and Robert S. Brown
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10-K
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10.10
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3/16/2007
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000-51567
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10
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.11#
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Restricted Stock Agreement Granted Under 2005 Stock Incentive
Plan dated March 24, 2006 between the Registrant and Philip
R. Licari
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10-Q
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10.4
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5/5/2006
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000-51567
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10
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.12#
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Amendment to Non-Qualified Stock Option Agreement dated
March 24, 2006 between the Registrant and Philip R. Licari
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10-Q
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10.5
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5/5/2006
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000-51567
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10
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.13#
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Form of Indemnification Agreement entered into between the
Registrant and each of its Directors and Executive Officers
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S-1/A
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10.21
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9/21/2005
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333-126711
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10
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.14#
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Summary of 2006 Executive Compensation and 2006 Corporate Bonus
Plan
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S-1
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10.25
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5/17/2006
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333-134187
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10
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.15#
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Director Compensation Policy
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10-Q
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10.2
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5/5/2006
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000-51567
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112
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Incorporated by Reference to
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Exhibit
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Form or
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Filing Date
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SEC File
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Number
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Description
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Schedule
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Exhibit No.
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with SEC
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Number
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10
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.16
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Loan and Security Agreement dated December 23, 2004 by and
between the Registrant and Lighthouse Capital Partners V,
L.P.
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S-1
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10.4
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7/19/2005
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333-126711
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10
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.17
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Second Promissory Note made December 29, 2004 by Registrant
in favor of Lighthouse Capital Partners V, L.P.
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S-1
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10.5
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7/19/2005
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333-126711
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10
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.18
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Warrant to Purchase Series F Preferred Stock dated
December 23, 2004 issued to Lighthouse Capital Partners IV,
L.P.
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S-1
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10.6
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7/19/2005
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333-126711
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10
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.19
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Warrant to Purchase Series F Preferred Stock dated
December 23, 2004 issued to Lighthouse Capital
Partners V, L.P.
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S-1
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10.7
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7/19/2005
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333-126711
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10
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.20
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Warrant to Purchase Series E Preferred Stock dated
September 26, 2002 issued to Comerica Bank
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S-1
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10.8
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7/19/2005
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333-126711
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10
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.21
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Credit and Security Agreement, dated as of November 21,
2007, by and among the Registrant, EIR Medical, Inc.,
Medisystems Services Corporation, and Medisystems Corporation,
as Borrowers, and Merrill Lynch Capital, a division of Merrill
Lynch Business Financial Services Inc., as Lender,
Administrative Agent, Sole Lead Arranger and Sole Bookrunner
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8-K
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10.1
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11/28/2007
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000-51567
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10
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.22
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Loan and Security Agreement dated as of May 15, 2006
between the Silicon Valley Bank and the Registrant
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S-1
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10.24
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5/17/2006
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333-126711
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10
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.23
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Standard Form Commercial Lease dated October 17, 2000
between the Registrant and Heritage Place, LLC, as amended by
Modification to Standard Form Commercial Lease
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S-1
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10.10
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7/19/2005
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333-126711
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10
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.24
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Commercial
Tenancy-At-Will
Agreement dated March 14, 2005 between the Registrant and
Osgood St., LLC, as amended by Modification to
Tenancy-At-Will
Agreement
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S-1
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10.11
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7/19/2005
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333-126711
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10
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.25
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Supply Agreement dated as of October 26, 2004 between the
Registrant and B. Braun Medizintechnologie GmbH
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S-1
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10.17
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7/19/2005
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333-126711
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10
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.26
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Supply Agreement dated October 1, 2004 between the
Registrant, EIR Medical, Inc. and Membrana GmbH
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S-1
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10.18
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7/19/2005
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333-126711
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10
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.27
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Production Agreement dated as of June 27, 2005 between the
Registrant and KMC Systems, Inc.
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S-1
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10.19
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7/19/2005
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333-126711
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10
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.28
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Supply Agreement dated as of January 5, 2007 between the
Registrant and Membrana GmbH
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10-K
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10.27
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3/16/2007
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000-51567
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10
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.29
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National Service Provider Agreement dated as of February 7,
2007 between the Registrant and DaVita Inc.
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10-K
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10.29
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3/16/2007
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000-51567
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113
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Incorporated by Reference to
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Exhibit
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Form or
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Filing Date
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SEC File
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Number
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Description
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Schedule
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Exhibit No.
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with SEC
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Number
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10
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.30
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Supply Agreement dated March 27, 2006 between the
Registrant and Laboratorios PISA S.A. de C.V.
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10-Q
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10.01
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5/5/2006
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000-51567
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10
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.31
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Extracorporeal Disposables Distribution Agreement, dated
July 25, 2007, by and between Medisystems Corporation and
Henry Schein
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10-Q
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10.4
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11/7/2007
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000-51567
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10
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.32
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Supply and Distribution Agreement, dated February 1, 2001.
by and between Medisystems Corporation and Kawasumi
Laboratories, Inc.
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10-Q
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10.6
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11/7/2007
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000-51567
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10
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.33
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Stock Purchase Agreement dated as of February 7, 2007
between the Registrant and DaVita Inc.
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10-K
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10.31
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3/16/2007
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000-51567
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10
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.34
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Registration Rights Agreement dated as of February 7, 2007
between the Registrant and DaVita Inc.
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10-K
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10.32
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3/16/2007
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000-51567
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10
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.35
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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
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S-1
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10.9
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7/19/2005
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333-126711
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10
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.36
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Agreement, dated December 22, 2003, by and between
Medisystems Corporation and DaVita, Inc.
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10-Q
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10.5
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11/7/2007
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000-51567
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*10
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.37
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Needle Purchase Agreement, dated January 6, 2008, by and
between the Registrant and DaVita, Inc.
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10
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.38
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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.
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10-Q
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10.6
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5/9/2007
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000-51567
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10
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.39
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License Agreement, dated June 1, 2007, by and between
Medisystems Corporation and DSU Medical Corporation
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10-Q
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10.2
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11/7/2007
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000-51567
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10
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.40
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Stock Purchase Agreement, dated June 4, 2007, by and
between the Registrant and David S. Utterberg.
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10-Q
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10.1
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8/9/2007
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000-51567
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10
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.41
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Escrow Agreement, dated October 1, 2007, by and between the
Registrant, David S. Utterberg and Computershare
Trust Company
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8-K
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10.1
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10/4/2007
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000-51567
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10
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.42
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Consulting Agreement, dated October 1, 2007, by and between
the Registrant, DSU Medical Corporation and David S. Utterberg
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10-Q
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10.1
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11/7/2007
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000-51567
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*21
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.1
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List of Subsidiaries
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*23
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.1
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Consent of Ernst & Young LLP
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*31
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.1
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Certification of Chief Executive Officer pursuant to Exchange
Act
Rules 13a-14
or 15d-14, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
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*31
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.2
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Certification of Chief Financial Officer pursuant to Exchange
Act
Rules 13a-14
or 15d-14, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
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114
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Incorporated by Reference to
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Exhibit
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Form or
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Filing Date
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SEC File
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Number
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Description
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Schedule
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Exhibit No.
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with SEC
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Number
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*32
|
.1
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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
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*32
|
.2
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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
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* |
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Filed herewith. |
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Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Securities
and Exchange Commission. |
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# |
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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. |
115