e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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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, 2006
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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
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01843
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(Address of Principal Executive
Offices)
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(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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act: (Check One):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
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
$138.6 million, as of June 30, 2006, based on the last
reported sale price of the registrants common stock on the
NASDAQ Global Market on June 30, 2006.
There were 29,913,526 shares of the registrants
common stock issued and outstanding as of the close of business
on March 8, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
its 2007 Annual Meeting of Stockholders to be held on
May 30, 2007 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.
2006
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
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Page
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Business
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4
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Risk
Factors
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20
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Unresolved Staff
Comments
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36
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Properties
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36
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Legal
Proceedings
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37
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Submission of
Matters to a Vote of Security Holders
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37
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37
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Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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38
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Selected Financial
Data
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41
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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42
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Quantitative and
Qualitative Disclosures About Market Risk
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57
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Financial
Statements and Supplementary Data
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58
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
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83
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Controls and
Procedures
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83
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Other
Information
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85
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Directors,
Executive Officers and Corporate Governance
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85
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Executive
Compensation
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85
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Security Ownership
of Certain Beneficial Owners and Management and Related
Stockholder Matters
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85
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Certain
Relationships and Related Transactions, and Director
Independence
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85
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Principal
Accounting Fees and Services
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85
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Exhibits, Financial
Statement Schedules
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85
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86
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87
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Exhibits (Attached to this
Annual Report on
Form 10-K)
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EX-10.5 FORM OF RESTRICTED STOCK AGREEMENT |
EX-10.10 EMPLOYMENT AGREEMENT DATED NOVEMBER 27, 2006 |
EX-10.27 SUPPLY AGREEMENT DATED AS OF JANUARY 5, 2007 |
EX-10.28 SUPPLY AGREEMENT DATED AS OF JANUARY 1, 2007 |
EX-10.29 NATIONAL SERVICE PROVIDER AGREEMENT DATED AS OF FEBRUARY 7, 2007 |
EX-10.31 STOCK PURCHASE AGREEMENT DATED AS OF FEBRUARY 7, 2007 |
EX-10.32 REGISTRATION RIGHTS AGREEMENT DATED AS OF FEBRUARY 7, 2007 |
EX-21.1 LIST OF SUBSIDIARIES |
EX-23.1 CONSENT OF ERNST AND YOUNG LLP |
EX-31.1 SECTION 302 CERTIFICATION OF CEO |
EX-31.2 SECTION 302 CERTIFICATION OF CFO |
EX-32.1 SECTION 906 CERTIFICATION OF CEO |
EX-32.2 SECTION 906 CERTIFICATION OF CFO |
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 chronic and critical care dialysis markets in
general and the home hemodialysis market in particular, the
development and commercialization of our products, the adequacy
of our funding and our ability to obtain additional funding, the
timing of when we might achieve profitable operations, 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 recent and
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 systems for the treatment of end-stage renal
disease, or ESRD, and acute kidney failure. Our primary product,
the NxStage System
Onetm,
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. We
believe the largest market opportunity for our product is the
home hemodialysis market for the treatment of ESRD.
ESRD, which affects approximately 472,000 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. Over 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 have rented the System One equipment on a month to
month basis, although early in 2007, two of our dialysis chain
customers have elected to purchase rather than rent 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 of December 31, 2006, 1,022 ESRD
patients were using the System One at 174 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.
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We are not responsible for, and do not provide, patient
training. Training is provided by the patients dialysis
clinic and 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 could 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, 2006, 77 hospitals were using the System One
to deliver acute kidney failure and fluid overload therapy.
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
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market,
and we commercially launched the PureFlow SL module in July
2006. This accessory to the System One allows for the
preparation of high purity dialysate in the patients home
using ordinary tap water and dialysate concentrate.
We closed a follow-on public offering of our common stock on
June 14, 2006, which resulted in the issuance of
6,325,000 shares of common stock at $8.75 per share.
We received net proceeds from the offering of approximately
$51.3 million.
At December 31, 2006, 1,022 ESRD patients were using the
System One at 174 dialysis clinics, compared to 292 ESRD
patients at 70 dialysis clinics at December 31, 2005. In
addition, at December 31, 2006, 77 hospitals were using the
System One for critical care therapy, compared to 50 hospitals
at December 31, 2005.
Medisystems. In January 2007, we entered into
a seven-year agreement with Medisystems Corporation pursuant to
which Medisystems will supply to us no less than 90% of our
North American requirements for disposable cartridges for use
with the System One. The agreement may be terminated upon a
material breach, generally following a
120-day cure
period. Medisystems is a related party to NxStage. David
Utterberg, the president and sole stockholder of Medisystems, is
a director and significant stockholder of the Company.
Membrana. In January 2007, we entered into a
long-term supply agreement with Membrana GmbH 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, 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.
DaVita. On February 7, 2007, we entered
into a National Service Provider Agreement with DaVita, Inc., or
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 ten percent (10%) of the U.S. ESRD
patient population, and limited exclusivity in the majority of
all other
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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.
Under the agreement, DaVita commits 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.
The agreement has an initial term of three years, terminating on
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 common stock, $.001 par value per
share, of NxStage, at a purchase price of $10.00 per share,
for an aggregate purchase price of $20.0 million.
Our
Products and Services
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 and
prescription, but typical weekly volumes are similar to the
amount of dialysate used by a patient on PD. 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 ESRD market, the System One is designed to make home
treatment and more frequent treatment easier and more practical.
Although most are not 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. Other 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
this therapy for patients with acute kidney failure.
Competition
Chronic
Care
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
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dialysis services. We currently face direct competition in the
United States primarily from Fresenius Medical Care AG, Baxter
Healthcare, Gambro AB, B. Braun and others. Fresenius, Baxter
and Gambro each have large and well-established dialysis
products 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.
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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 to 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 in the
chronic care market and have a smaller sales force than most of
our competitors.
Our primary competitors are large, well-established businesses
with significantly more financial and personnel resources than
us. They also have significantly 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 the System One, and any
products we may develop in the future, 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.
Critical
Care
We believe that competition in the critical care market will be
affected by system functionality,
ease-of-use,
reliability, portability and infrastructure requirements. In the
fluid overload market, we believe competition will be further
affected by physicians willingness to adopt
ultrafiltration as a viable treatment alternative to
pharmaceutical therapy. In the critical care market, we face
direct competition from Gambro, Baxter, B. Braun and Fresenius.
In the fluid overload market, drug therapy is currently the most
common and preferred treatment. To date, ultrafiltration has not
been broadly adopted and, if the medical community does not
accept ultrafiltration as clinically useful, cost-effective and
safe, we will not be able to successfully compete against
existing
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pharmaceutical therapies. Our ability to successfully market the
System One for the treatment of fluid overload associated with
multiple diseases, including congestive heart failure, or CHF,
could also be adversely affected by pharmacological and
technological advances in preventing or treating fluid overload.
Sales and
Marketing
We sell our products in two markets: the chronic care market and
the critical care market. We have separate marketing and sales
efforts dedicated to each market. In 2006, sales to DaVita, Inc.
represented 19.4% of our total revenues, and DaVita is expected
to remain a significant customer of ours in 2007. 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.
Chronic
Care
In the chronic care market, our customers are independent
dialysis clinics as well as dialysis clinics that are part of
national chains. Since Medicare regulations require that all
chronic ESRD patients be under the care of a dialysis clinic,
whether they are treated at-home, in-clinic or with a kidney
transplant, we do not, and cannot, sell the System One directly
to chronic care patients.
We have a chronic care direct sales force that calls on dialysis
clinics. In addition to specialized sales representatives, we
also employ nurses on our chronic care 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%
after giving effect to Fresenius acquisition of Renal Care
Group. 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 an 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.
After renting or selling a System One to a clinic, our sales
representatives and 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 sales representatives and 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. As of December 31, 2006,
there were 1,022 patients with chronic ESRD using the
System One.
8
Critical
Care
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 sales representatives and 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 representatives and 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,
2006, we had 77 hospitals as critical care customers.
Customer
Support Services
We primarily use a depot service model for equipment servicing
and repair for the chronic care 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 chronic care
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
clinical 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 our System
One product.
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.
We announced the first enrollment of a patient in our
post-market FREEDOM (Following Rehabilitation, Economics, and
Everyday Dialysis Outcome Measurements) study in 2005 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 over what is expected to be a two-year period.
It 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
9
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.
In addition to the FREEDOM study, we conducted 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 investigational device exemption, or 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. Our development team
has skills across the range of technologies required to develop
and maintain dialysis systems. 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, 2006, 2005 and 2004, we
incurred research and development expenses of $6.4 million,
$6.3 million and $6.0 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.
10
As of December 31, 2006, we had 25 issued U.S. and
international patents and 49 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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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
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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.
11
In addition to our patents and pending patent applications 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
secrets.
Our strategy is to develop patent portfolios for our research
and development projects. We monitor the activities of our
competitors and other third parties with respect to their use of
intellectual property. We intend to aggressively defend the
patents we hold, and we intend to vigorously contest claims
other patent holders may bring against us.
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. While we attempt to ensure
that our products and methods do not infringe other
parties patents and proprietary rights, our competitors
may assert that our products, or the methods that we employ, are
covered by patents held by them. In addition, our competitors
may assert that future products and methods we may market
infringe their patents.
We require our employees, consultants and advisors to execute
confidentiality agreements 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 45,000 square foot
facility in Lawrence, Massachusetts and 24,000 square foot
facility in North Andover, Massachusetts. We also manufacture
our dialyzers internally, within our 5,000 square foot
facility in Rosdorf, Germany. We outsource the manufacture of
our disposable cartridges, premixed dialysate and the System One
cycler.
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. In January 2007, we
entered into a long-term supply agreement with Membrana GmbH
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, 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.
In January 2007 we also entered into a seven-year agreement with
Medisystems Corporation pursuant to which Medisystems will
supply to us no less than 90% of our North American requirements
for disposable cartridges for use with the System One. The
agreement may be terminated upon a material breach, generally
following a 120 day cure period. Medisystems is a related
party to NxStage. David Utterberg, the president and sole
stockholder of Medisystems, is a director and significant
stockholder of NxStage. In accordance with our Audit Committee
Charter, the Medisystems supply agreement was approved by our
audit committee as well as our board of directors.
KMC Systems, Inc. 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
12
to manufacture for ourself an increasing portion of cyclers as
we deem appropriate over the remaining term. The contract may be
terminated upon a material breach, generally following a
30-day cure
period.
We purchase bicarbonate-based premixed dialysate from B. Braun
and our lactate-based premixed dialysate from Laboratorios 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 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 2007. 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.
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.
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
13
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 chronic
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. Most recently, in June 2005, we received
FDA clearance specifically allowing us to promote home
hemodialysis using the System One. We have received a total of
20 product clearances from the FDA since our inception in
December 1998. We continue to seek opportunities for product
improvements and feature enhancements, which will, from time to
time, require FDA clearance before market launch.
FDA
Clearance Procedures
510(k) Clearance Pathway. When we are required
to obtain a 510(k) clearance for a device, which we wish to
market, we must submit a pre-market notification to the FDA
demonstrating that the device is substantially equivalent to 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. The FDA
attempts to respond to a 510(k) pre-market notification within
90 days of submission of the notification (or in some
instances 30 days under what is referred to as
special 510(k) submission), but the response may be
a request for additional information or data, sometimes
including clinical data. As a practical matter, pre-market
clearance can take significantly longer, including up to one
year or more.
After a device receives 510(k) clearance for a specific intended
use, any modification that could significantly affect its safety
or effectiveness, or that constitutes a major change in its
intended use, would require a new 510(k) clearance or could
require pre-market approval. In the first instance, the
manufacturer may determine that a change does not require a new
510(k) clearance. The FDA can review any such decision and can
disagree with a manufacturers determination. If the FDA
disagrees with a manufacturers determination that a new
clearance or approval is not required for a particular
modification, the FDA can require the manufacturer to cease
marketing
and/or
recall the modified device until 510(k) clearance or pre-market
approval is obtained.
Pre-market Approval Pathway. A pre-market
approval application must be submitted if the device cannot be
cleared through the 510(k) process. The pre-market approval
process is much more demanding than the 510(k) pre-market
notification process. A pre-market approval application must be
supported by extensive data and information including, but not
limited to, technical, preclinical, 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
14
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 investigational device exemption, or 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 submitting 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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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. At December 31, 2006, we had submitted 266 MDRs.
Most of these 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 by the FDA, and these
inspections may include the manufacturing facilities of our
subcontractors. Failure to comply
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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;
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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 facility and quality systems 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. We
cannot provide assurance that we can maintain a comparable level
of regulatory compliance in the future at our facility.
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 the commencement of marketing of 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. 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 European Union, or EU, under the Medical
Device Directive. We have received four product licenses from
Canada although these licenses are not up to date to reflect the
product that is currently being marketed in the United States.
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 EU, we would be
required to submit additional regulatory documentation. We are
not currently marketing any products in Canada or in the
European Union.
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,
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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 Law, 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.
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 thereunder 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 associates 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
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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
Chronic
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; 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.
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.
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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 is currently approximately $152 per treatment for
independent clinics and $157 per treatment for
hospital-based dialysis facilities. This is 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 recently passed an
additional 1.6% increase to the composite rate for treatments
received on or after April, 2007. 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 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.
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Employees
As of December 31, 2006, we had 208 full-time
employees, 3 part-time employees and 52 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 through our website (www.nxstage.com) under
the Investor Information caption free of charge as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission, or SEC. In addition, we intend to disclose on our
website any amendments to, or waivers from, our code of business
conduct and ethics that are required to be disclosed pursuant to
the rules of the SEC. We are not including the information
contained on our website as part of, or incorporating it by
reference into, this report. You may read and copy materials
that we have filed with the SEC at the SECs public
reference room located at 100 F. Street, N.E., Room 1580,
Washington, D.C. In addition, our SEC filings are available
to the public on the SECs website (www.sec.gov).
In addition to the factors discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report, the following are
some of the important risk factors that could cause our actual
results to differ materially from those projected in any
forward-looking statements.
Risks
Related to our Business
We
expect to derive substantially all of our future revenues from
the rental or sale of our System One and the sale of our related
disposable products used with the System One.
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. We
expect that the rental or sale of the System One and the sale of
related products will account for substantially all of our
revenues for the foreseeable future. Most of our related
products cannot be used with any other dialysis systems and,
therefore, we will derive little or no revenues from related
products unless we sell or otherwise place the System One. To
the extent that the System One is not a successful product or is
withdrawn from the market for any reason, we do not have other
products in development that could replace revenues from the
System One.
We
cannot accurately predict the size of the home hemodialysis
market, and it may be smaller or slower to develop than we
expect.
Although home hemodialysis treatment options are available,
adoption 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 USRDS, the number of patients receiving peritoneal
dialysis was approximately 26,000 in 2004, 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; USRDS data
indicates approximately 2,000 patients were receiving
home-based hemodialysis in 2004. 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.
Our long-term growth will depend on the number of patients who
adopt home-based hemodialysis and how quickly they adopt it, and
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. We received our home use
clearance for the System One from the FDA in June
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2005 and we will need 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.
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 chronic care market is the largest market
opportunity for our System One hemodialysis system.
Historically, we have typically billed the dialysis clinic for
the rental of the equipment and the sale of the related
disposable cartridges and treatment fluids. In our recent DaVita
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 what percentage of our future chronic customers will
purchase rather than rent System One equipment. However, it is
possible that a significant percentage of our chronic customers
will continue to rent rather than purchase System One equipment
and that, as a result, we will generate a significant percentage
of our revenues and cash flow from the use of the System One
over time rather than upfront from the sale of the System One
equipment. In this event, we will need significant amounts of
working capital to manufacture System One equipment for rental
to dialysis clinics.
We only recently began marketing our System One to dialysis
clinics for the treatment of ESRD, and we have not achieved
widespread market acceptance of our product. We may not be able
to generate sufficient cash flow to meet our capital needs. If
our existing resources are insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or issue
debt securities. Any sale of additional equity or issuance of
debt securities may 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 could harm the growth of our business.
We
have limited operating experience, a history of net losses and
an accumulated deficit of $(123.6) million at
December 31, 2006. We cannot guarantee if, when and the
extent that we will become profitable, or that we will be able
to maintain profitability if it is achieved.
Since inception, we have incurred losses every quarter, and at
December 31, 2006, we had an accumulated deficit of
approximately $(123.6) million. We expect to incur
increasing operating expenses as we continue to grow our
business. Additionally, in the chronic care market, the cost of
manufacturing the System One and related disposables currently
exceeds the market price. We cannot provide assurance that we
will be able to lower the cost of manufacturing the System One
and related disposables below the current chronic care market
price, 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 in part upon achieving a
sufficient scale of operations, obtaining better purchasing
terms and prices, achieving efficiencies in manufacturing
overhead costs, implementing design and process improvements to
lower our costs of manufacturing our products and improve
reliability and achieving efficient distribution of our products.
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market,
and we commercially launched the PureFlow SL module in July
2006. This accessory to the System One allows for the
preparation of high purity dialysate in the patients home
using ordinary tap water and dialysate concentrate. The
PureFlow SL is designed to help patients with ESRD more
conveniently and effectively manage their home hemodialysis
therapy by eliminating the need for bagged fluids. Since its
launch, PureFlow SL penetration has reached approximately 40% of
all of our chronic patients. The product is still early in its
commercial launch and we continue to work to improve product
reliability and user experience, based upon customer feedback.
Any failure to further improve reliability and user experience,
and thereby gain rapid market acceptance of the PureFlow SL
module, including converting our installed base of patients
currently using bagged fluid, could adversely affect our ability
to achieve profitability.
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We
compete against other dialysis equipment manufacturers with much
greater financial resources and better established products and
customer relationships, which may make it difficult for us to
penetrate the market and achieve significant sales of our
products.
Our System One competes directly against equipment 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.
To date, only one company has had a hemodialysis product
specifically cleared for home use, Aksys Ltd., which recently
announced the withdrawal of its product from the market.
Products sold by our other competitors have also been used in
the home, in particular Fresenius systems. Each of these
competitors offers products that have been in use for a longer
time than our System One and are more widely recognized by
physicians, patients and providers. These competitors have
significantly more financial and human resources, more
established sales, service and customer support infrastructures
and spend more on product development and marketing than we do.
Many of our competitors also have established relationships with
the providers of dialysis therapy and, Fresenius owns and
operates a chain of dialysis clinics. Most of these companies
manufacture additional complementary products enabling them to
offer a 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, is subject to an import hold imposed by the FDA on its acute
and chronic dialysis machines. It is not clear what the chronic
and acute market impact will be when the import hold is lifted.
We believe the overall impact of the import hold has been
positive to us, however, we are not sure of the magnitude of the
impact this 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
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 than our System
One. Our ability to successfully market the System One 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
the System One.
Our
success will depend on our ability to achieve market acceptance
of our System One.
The System One has limited product and brand recognition and has
only been used at a limited number of dialysis clinics and
hospitals. In the chronic care market, we will 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 will 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 inability of customers to continue to obtain satisfactory
reimbursement from healthcare payors, including Medicare.
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Current
Medicare reimbursement rates limit the price at which we can
market the System One, and adverse changes to reimbursement
could affect the adoption of the System One.
Our ability to attain profitability will be driven in part by
our ability to set or maintain adequate pricing for our System
One. 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 and limits the
fee for which we can rent the System One and sell the related
disposable cartridges and treatment fluids. Current CMS rules
limit the number of hemodialysis treatments paid for by Medicare
to three times per 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 may be slowed. Changes in Medicare reimbursement rates could
negatively affect demand for our products and the prices we
charge for them.
As we
continue to commercialize the System One, we may have difficulty
managing our growth and expanding our operations
successfully.
As the commercial launch of the System One 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
operational, quality systems, 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 performance
typically experienced in the early stages of a products
life cycle, 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. As with all newly introduced medical devices, we
continue to experience product reliability issues that are
higher than we expect long-term, which lead 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 our revenues. We continue to work to improve product
reliability, and have achieved significant improvements to date.
If we are unable to continue to improve product reliability, our
ability to achieve our growth objectives as well as
profitability could be impaired.
We
have a significant amount of 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 chronic 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
23
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.
Our
agreement with DaVita confers certain geographic market rights
to DaVita and limits our ability to sell the System One to
Fresenius, both of which may present a barrier to adoption of
the System One.
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
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.
It is not yet clear what impact this agreement may have on the
market acceptance for our product. It is also not yet clear to
what extent DaVita will purchase the System One from us. In
2006, sales to DaVita represented 19.4% of our total revenues.
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.
If
kidney transplantation becomes a viable treatment option for
more patients, the market for our System One 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 System One.
If we
are unable to convince hospitals and healthcare providers of the
benefits of our products for the treatment of acute kidney
failure and fluid overload, we may not be successful in
penetrating the critical care market.
We sell the System One for use in the treatment of acute kidney
failure and fluid overload. Physicians currently treat most
acute kidney failure patients using conventional hemodialysis
systems or dialysis systems designed specifically for use in the
ICU. We will need to convince hospitals and healthcare providers
that
24
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 and ease of operation.
We are
subject to the risk of costly and damaging product liability
claims and may not be able to maintain sufficient product
liability insurance to cover claims against us.
If our System One 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. As is
the case with a number of other medical device companies, it is
likely that product liability claims will be brought against us.
Since their introduction into the market, our products have been
subject to two voluntary recalls and one voluntary product
withdrawal. Our first voluntary recall occurred in February 2001
in Canada and related to a software glitch that we detected in
our predecessor system, which could have increased the
likelihood of a clotted filter during treatment. There were no
patient injuries associated with this recall, and the software
glitch was remedied with a subsequent software release. The
second voluntary recall occurred in April 2004 in the United
States relating to pinhole-sized dialysate leaks in our
cartridge. The leaks were readily observable and required a
cartridge replacement to continue treatment. There were no
patient injuries associated with this recall. We subsequently
switched suppliers and instituted additional testing
requirements to minimize the chance for leaks in our cartridges.
The voluntary market withdrawal occurred in the United States in
May 2002 when we suspended sales of our predecessor system while
we addressed issues involving limited instances of contaminated
hemofiltration fluids compounded by a pharmacy and supplied by a
third party. Six patients exposed to contaminated fluids
reported fevers
and/or
chills, with no lasting clinical effect. We subsequently
modified our cartridge to allow for an additional filter to
remove contaminants from fluids used with our product. Our
products may be subject to further recalls or withdrawals, which
could increase the likelihood of product liability claims. We
have also received several reports of operator error from both
patients in the home hemodialysis setting and nurses in the
critical care setting. We have sought to address many potential
sources of operator error with product design changes to
simplify the operator process. In addition, we made improvements
in our training materials and product labeling. However,
instances of operator error cannot be eliminated and could also
increase the likelihood of product liability claims.
Although we maintain insurance, including product liability
insurance, we cannot provide assurance that any claim that may
be brought against us will not 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.
25
We
have had limited sales, marketing, customer service and
distribution experience. We need to expand our sales and
marketing, customer service and distribution infrastructures to
be successful in penetrating the dialysis market.
We currently market and sell the System One through our own
sales force, and we have had limited experience in sales,
marketing and distribution of dialysis products. As of
December 31, 2006, we had 85 employees in our sales,
marketing and distribution organization, including 24 direct
sales representatives. We plan to expand our sales, marketing,
customer service and distribution infrastructures as we continue
to grow. We cannot provide assurance that we will be able to
retain or attract experienced personnel and build an adequate
sales and marketing, customer service and distribution staff or
that the cost will not be prohibitive.
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 Lawrence, Massachusetts, we
operate a filter manufacturing facility in Rosdorf, Germany and
we 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. These risks include fluctuations in foreign currency
exchange rates that may increase the U.S. dollar cost of
the disposables we purchase from foreign third-party suppliers,
costs associated with sourcing and shipping goods
internationally, difficulty managing operations in multiple
locations and local regulations that may restrict or impair our
ability to conduct our operations.
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 System One and related products, including the disposables
required for its use, are all 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, unless the device is exempt. 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 the System One.
We cannot provide assurance that such clearances or approvals
would be 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
the System One 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
26
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 Medical Device Reporting, or MDR,
regulations that require us to report to the FDA if our products
may have caused or contributed to patient death or serious
injury, or if our device malfunctions and a recurrence of the
malfunction would likely result in a death or serious injury. We
must also file reports of device corrections and removals and
adhere to the FDAs rules on labeling and promotion. Our
failure to comply with these or other applicable regulatory
requirements could result in enforcement action by the FDA,
which may include any of the following:
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untitled letters, warning letters, fines, injunctions and civil
penalties;
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administrative detention, which is the detention by the FDA of
medical devices believed to be adulterated or misbranded;
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customer notification, or orders for repair, replacement or
refund;
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voluntary or mandatory recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusal to review pre-market notification or pre-market approval
submissions;
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rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
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criminal prosecution.
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Our
products are subject to market withdrawals or product recalls
after receiving FDA clearance or approval, and market
withdrawals and product recalls could cause the price of our
stock to decline and expose us to product liability or other
claims or could otherwise harm our reputation and financial
results.
Complex medical devices, such as the System One, 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
27
of our stock to decline and expose us to product liability or
other claims, including contractual claims from parties to whom
we sold products, and harm our reputation with customers. A
recall involving the System One could be particularly harmful to
our business and financial results, because the System One is
our only product.
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
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. 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, the
FDA could take enforcement action, including issuing a public
warning letter, shutting down our manufacturing operations,
embargoing the import of components from outside 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 treatment for ESRD could affect the
adoption of our System One and the level of our future product
revenues.
In the United States, all patients who suffer from ESRD,
regardless of age, are eligible for coverage under Medicare,
after a requisite coordination period if other insurance is
available. As a result, more than 80% of patients with ESRD are
covered by Medicare. Although we rent and sell our products to
hospitals, dialysis centers and other healthcare providers and
not directly to patients, the reimbursement rate for ESRD
treatments is an important factor in a potential customers
decision to purchase the System One. The dialysis centers that
purchase our product rely on adequate third-party payor coverage
and reimbursement to maintain their ESRD facilities. The CMS
provides the composite rate for dialysis services, which is
subject to regional variation and varies depending upon whether
the facility is hospital-based or an independent clinic. The
composite rate is intended to cover most items and services
related to the treatment of ESRD, but does not include payment
for physician services or separately billable laboratory
services or drugs. Changes in Medicare reimbursement rates could
negatively affect demand for our products and the prices we
charge for them.
Most ESRD patients who use our product for dialysis therapy in
the home treat themselves six times per week. CMS rules,
however, limit the number of hemodialysis treatments paid for by
Medicare to three a 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. 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.
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 must
manage the longer hospitalization stays and significantly more
nursing time typically necessary for
28
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 European Union 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 System One operations 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 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
29
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 System One 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 the System One 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,
30
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
depend on the services of our senior executives and certain key
engineering, scientific, manufacturing, clinical and marketing
personnel, the loss of whom could negatively affect our
business.
Our success depends upon the skills, experience and efforts of
our senior executives and other key personnel, including our
chief executive officer, certain members of our engineering
staff, our marketing executives and managers, our manufacturing
executives and managers and our clinical educators. Much of our
corporate expertise is concentrated in relatively few employees,
the loss of which for any reason could negatively affect our
business. Competition for our highly skilled employees is
intense and we cannot prevent the resignation of any employee.
In November 2006, we announced that David N. Gill, our chief
financial officer, resigned from his position as chief financial
officer and that Robert S. Brown joined as our new chief
financial officer. Virtually all of our employees have
agreements which impose obligations that may prevent a former
employee of ours from working for a competitor for a period of
time; however, these clauses may not be enforceable, or
enforceable only in part, or the company may choose not to seek
enforcement. We do not maintain key man life
insurance on any of our senior executives, other than our chief
executive officer.
We
obtain some of the components, subassemblies and completed
products included in the System One from a single source or a
limited group of manufacturers or suppliers, and the partial or
complete loss of one of these manufacturers or suppliers could
cause significant production delays, an inability to meet
customer demand and a substantial loss in
revenues.
We depend on single source suppliers for some of the components
and subassemblies we use in the System One. KMC Systems, Inc. is
our only contract manufacturer of the System One cycler,
although we are considering a plan to develop alternative
manufacturing capabilities for this product; 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
Medisystems Corporation is the only supplier of our disposable
cartridge and several cartridge components. Medisystems is a
related party to NxStage. David Utterberg, the chief executive
officer and sole stockholder of Medisystems, is a member of our
board of directors and, at December 31, 2006, held
approximately 7.2% of our common stock. We also obtain certain
other components included in the System One 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
Medisystems, we are contractually prevented from obtaining an
alternative source of supply for more than 10% of our North
American requirements, 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 and, potentially, further FDA clearance or
approval of any modification, thereby causing further costs and
delays.
31
Certain
of our products are recently developed and we, and certain of
our third party manufacturers, have limited manufacturing
experience with these products.
We continue to develop new products and make improvements to
existing products. As such, we and certain of our third party
manufacturers, have limited manufacturing experience with
certain of our products, including key products such as the
PureFlow SL and related disposables. We are, therefore, more
exposed to risks relating to product quality and reliability
until the manufacturing processes for these new products mature.
We do
not have long-term supply contracts with many of our third-party
suppliers.
We purchase components and subassemblies from third-party
suppliers, including some of our 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 to us 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 components or
subassemblies, our ability to manufacture and commercialize the
System One 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.
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 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, 2006, we had 49 pending patent
applications, including foreign, international and
U.S. applications, and 25 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
U.S. 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
32
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 could
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 or pay contractual claims to certain
parties that have purchased the System One;
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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.
33
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 or the failure of third party suppliers to deliver
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.
34
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
27,806,543 shares of common stock outstanding as of
December 31, 2006. 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 278,065 shares, or the
average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
As of December 31, 2006, subject to certain conditions,
holders of an aggregate of approximately 13,511,174 shares
of common stock have rights with respect to the registration of
these shares of common stock with the SEC. In February 2007, we
granted registration rights to DaVita in connection with their
purchase of 2 million shares of our common stock. If we
register any of these holders shares of common stock, they
can sell those shares in the public market without being subject
to the volume limitations described above.
As of December 31, 2006, 3,213,778 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, 2006, 3,068,430 shares
were subject to outstanding options, of which 1,959,785 were
exercisable and which can be freely sold in the public market
upon issuance, subject to 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
35
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. As part of these obligations, 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 requires that we incur
substantial accounting expense and expend significant management
efforts. 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, the 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% of our outstanding common stock. As
a result, these stockholders, if acting together, will have the
ability to determine the outcome of all matters submitted to our
stockholders for approval, including the election and removal of
directors and any merger, consolidation or sale of all or
substantially all of our assets and other extraordinary
transactions. The interests of this group of stockholders may
not always coincide with our corporate interests or the
interests of other stockholders, and they may act in a manner
with which you may not agree or that may not be in the best
interests of other stockholders. This concentration of ownership
may have the effect of:
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delaying, deferring or preventing a change in control of our
company;
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entrenching our management
and/or board;
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impeding a merger, consolidation, takeover or other business
combination involving our company; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
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Item 1B.
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Unresolved
Staff Comments
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Not Applicable.
We are headquartered in Lawrence, Massachusetts, where we lease
approximately 45,000 square feet under a lease expiring in
2012. We also lease approximately 15,000 square feet of
warehousing and manufacturing space in North Andover,
Massachusetts on a
month-to-month
basis and 5,000 square feet of manufacturing and office
space in Rosdorf, Germany, under a
tenant-at-will
arrangement. 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.
36
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Item 3.
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Legal
Proceedings
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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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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During the quarter ended December 31, 2006, no matters were
submitted to a vote of shareholders.
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, 2006:
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Name
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Age
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Position
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Jeffrey H. Burbank
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President, Chief Executive Officer
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Robert S. Brown
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Senior Vice President, Chief
Financial Officer and Treasurer
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Philip R. Licari
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48
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Senior Vice President and Chief
Operating Officer
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Winifred L. Swan
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42
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Senior Vice President, General
Counsel and Secretary
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Joseph E. Turk, Jr.
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39
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Senior Vice President, Commercial
Operations
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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.
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.
Philip R. Licari has been our Senior Vice President since
January 2005 and our Vice President and Chief Operating Officer
since October 2004. From August 1996 to October 2004,
Mr. Licari was employed at Boston Scientific Corporation, a
worldwide developer, manufacturer and marketer of medical
devices, where he held vice president positions in Global Supply
Chain, Clinical Operations, and Corporate Sales/National
Accounts. Mr. Licari earned a B.S. in Biomedical
Engineering from Tufts University and an M.B.A. in finance from
the University of Chicago Graduate School of Business.
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.
37
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.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
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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.
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High
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Low
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2006
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First Quarter
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$
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15.17
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$
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11.50
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Second Quarter
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$
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13.33
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$
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8.33
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Third Quarter
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$
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10.18
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$
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6.86
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Fourth Quarter
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$
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9.80
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$
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7.29
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2005
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Fourth Quarter
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$
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14.80
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$
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9.00
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Holders
On March 8, 2007, the last reported sale price of our
common stock was $11.73 per share. As of March 5,
2007, there were approximately 85 holders of record of our
common stock and approximately 4,100 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.
Use of
Proceeds
We registered shares of our common stock in connection with our
initial public offering under the Securities Act of 1933, as
amended. The Registration Statement on
Form S-1
(File
No. 333-126711)
filed in connection with our initial public offering was
declared effective by the SEC on October 27, 2005. The
offering commenced on October 27, 2005 and did not
terminate before any securities were sold. We sold
5,500,000 shares of our registered common stock in the
initial public offering and an additional 825,000 shares of
our registered common stock in connection with the
underwriters exercise of their over-allotment option. The
underwriters of the offering were Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Thomas Weisel Partners
LLC, William Blair & Company and JMP Securities LLC.
All 6,325,000 shares of our common stock registered in the
offering were sold at the initial public offering price of
$10 per share. The aggregate purchase price of the offering
was $63,250,000. The net offering proceeds received by us, after
deducting expenses incurred in connection with the offering was
approximately $56.5 million. These expenses consisted of
direct payments of:
i. (a) $4.4 million in underwriters discounts,
fees and commissions,
38
ii. (b) $1.6 million in legal, accounting and
printing fees, and
iii. (c) $0.7 million in miscellaneous expenses.
No payments for such expenses were directly or indirectly to
(i) any of our directors, officers or their associates,
(ii) any person(s) owning 10% or more of any class of our
equity securities or (iii) any of our affiliates.
We closed our initial public offering on November 1, 2005,
and we have invested the aggregate net proceeds in short-term
investment-grade securities and money market accounts.
From the effective date of our Registration Statement on
Form S-1,
October 27, 2005, through December 31, 2006, we have
used approximately $54.5 million of the net proceeds of our
initial public offering to finance working capital needs. The
net unused offering proceeds have been invested into short-term
investment grade securities and money market accounts.
Issuer
Purchases of Equity Securities
We made no repurchases of our equity securities during the
fourth quarter ended December 31, 2006.
39
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 28, 2007 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, 2006 and 2005,
the quarters ended March 31, 2006, June 30, 2006 and
September 30, 2006 and the month ended February 28,
2007.
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10/27/05
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12/31/05
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3/31/06
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6/30/06
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9/30/06
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12/31/06
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2/28/07
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NxStage Medical, Inc
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100.00
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119.60
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128.30
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87.30
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|
87.70
|
|
|
|
|
83.80
|
|
|
|
|
122.50
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
102.89
|
|
|
|
|
109.72
|
|
|
|
|
102.21
|
|
|
|
|
105.93
|
|
|
|
|
113.77
|
|
|
|
|
113.97
|
|
NASDAQ Medical
Equipment
|
|
|
|
100.00
|
|
|
|
|
102.53
|
|
|
|
|
109.91
|
|
|
|
|
99.61
|
|
|
|
|
101.93
|
|
|
|
|
109.42
|
|
|
|
|
113.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
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, 2006, 2005
and 2004 and balance sheet data as of December 31, 2006 and
2005 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, 2003 and 2002 and balance sheet data as of
December 31, 2004, 2003 and 2002 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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,812
|
|
|
$
|
5,994
|
|
|
$
|
1,885
|
|
|
$
|
286
|
|
|
$
|
30
|
|
Cost of revenues
|
|
|
26,121
|
|
|
|
9,585
|
|
|
|
3,439
|
|
|
|
940
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(5,309
|
)
|
|
|
(3,591
|
)
|
|
|
(1,554
|
)
|
|
|
(654
|
)
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
14,356
|
|
|
|
7,550
|
|
|
|
3,334
|
|
|
|
2,181
|
|
|
|
2,286
|
|
Research and development
|
|
|
6,431
|
|
|
|
6,305
|
|
|
|
5,970
|
|
|
|
4,526
|
|
|
|
5,913
|
|
Distribution
|
|
|
7,093
|
|
|
|
2,059
|
|
|
|
495
|
|
|
|
33
|
|
|
|
6
|
|
General and administrative
|
|
|
8,703
|
|
|
|
4,855
|
|
|
|
3,604
|
|
|
|
2,868
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,583
|
|
|
|
20,769
|
|
|
|
13,403
|
|
|
|
9,608
|
|
|
|
10,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(41,892
|
)
|
|
|
(24,360
|
)
|
|
|
(14,957
|
)
|
|
|
(10,262
|
)
|
|
|
(11,133
|
)
|
Interest income (expense), net
|
|
|
2,263
|
|
|
|
(120
|
)
|
|
|
115
|
|
|
|
54
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(39,629
|
)
|
|
$
|
(24,480
|
)
|
|
$
|
(14,842
|
)
|
|
$
|
(10,208
|
)
|
|
$
|
(10,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$
|
(1.60
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(5.81
|
)
|
|
$
|
(4.10
|
)
|
|
$
|
(4.66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding, basic and diluted
|
|
|
24,817
|
|
|
|
5,681
|
|
|
|
2,556
|
|
|
|
2,490
|
|
|
|
2,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Balance Sheet
Data(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term
investments and marketable securities
|
|
$
|
61,802
|
|
|
$
|
61,223
|
|
|
$
|
18,134
|
|
|
$
|
8,881
|
|
|
$
|
4,028
|
|
Working capital
|
|
|
64,367
|
|
|
|
62,100
|
|
|
|
19,205
|
|
|
|
11,115
|
|
|
|
5,235
|
|
Total assets
|
|
|
101,725
|
|
|
|
76,575
|
|
|
|
25,455
|
|
|
|
13,613
|
|
|
|
7,983
|
|
Long-term liabilities
|
|
|
5,006
|
|
|
|
2,106
|
|
|
|
3,006
|
|
|
|
30
|
|
|
|
146
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
75,946
|
|
|
|
55,946
|
|
|
|
40,006
|
|
Accumulated deficit
|
|
|
(123,640
|
)
|
|
|
(84,011
|
)
|
|
|
(59,496
|
)
|
|
|
(44,623
|
)
|
|
|
(34,368
|
)
|
Total stockholders equity
(deficit)
|
|
|
83,408
|
|
|
|
67,354
|
|
|
|
(57,400
|
)
|
|
|
(43,478
|
)
|
|
|
(33,271
|
)
|
|
|
|
(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 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. |
41
|
|
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. We believe the largest market opportunity for our
product is the home hemodialysis market for the treatment of
ESRD.
From our inception in 1998 until 2002, our operations consisted
primarily of
start-up
activities, including designing and developing the System One,
recruiting personnel and raising capital. Historically, research
and development costs have been our single largest operating
expense. However, with the launch of the System One in the home
chronic care market, selling and marketing costs became our
largest operating expense in 2005 and continued to be our
largest operating expense during 2006 as we expanded our
U.S. sales force to increase market share and grow revenues.
Our overall strategy since inception has been to (1) design
and develop new products for the treatment of kidney failure,
(2) establish that the products are safe, effective and
cleared for use in the United States, (3) further enhance
the product design through field experience from a limited
number of customers, (4) establish reliable manufacturing
and sources of supply, (5) execute a market launch in both
the chronic and critical care markets and establish the System
One as a preferred system for the treatment of kidney failure,
(6) obtain the capital necessary to finance our working
capital needs and build our business and (7) achieve
profitability. The evolution of NxStage, and the allocation of
our resources since we were founded, reflects this plan. We
believe we have largely completed steps (1) through (4),
and we plan to continue to pursue the other strategic objectives
described above.
We sell our products in two markets: the chronic care market and
the critical care market. We define the chronic care market as
the market devoted to the treatment of patients with ESRD 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 market. The United States Food and Drug Administration,
or FDA, has cleared both configurations for hemodialysis,
hemofiltration and ultrafiltration. Our products may be 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.
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 in the chronic care market and
commenced full commercial introduction in the chronic market in
September 2004 in the United States. 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.
In March 2006, we received clearance from the FDA to market our
PureFlow SL module as an alternative to the bagged fluid
presently used with our System One in the chronic care market,
and we commercially launched the PureFlow SL module in July
2006. This accessory to the System One allows for the
preparation of high purity dialysate in the patients home
using ordinary tap water and dialysate concentrate. The PureFlow
SL is designed to help patients with ESRD more conveniently and
effectively manage their home hemodialysis therapy by
eliminating the need for bagged fluids. Since its launch,
PureFlow SL penetration has reached approximately 40% of all of
our chronic patients. The product is still early in its
commercial launch and we continue to work to improve product
reliability and user experience, based upon customer feedback.
We expect that over time our chronic care home patients will
predominantly use our PureFlow SL module at home and will use
bagged fluid for travel and use outside of the home. Bagged
fluids will continue to be used in the critical care market.
42
Medicare provides comprehensive and well-established
reimbursement in the United States for ESRD. Reimbursement
claims for therapy using the System One 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. Expanding Medicare
reimbursement over time to cover more frequent therapy may be
critical to our market penetration and revenue growth in the
future.
Our System One is produced through internal and outsourced
manufacturing. We purchase many of the components and
subassemblies included in the System One, as well as the
disposable cartridges used in the System One, from third-party
manufacturers, some of which are single source suppliers. In
addition to outsourcing with third-party manufacturers, we
assemble, package and label a small quantity of disposable
products in our leased facilities in Lawrence, Massachusetts and
North Andover, Massachusetts. NxStage GmbH & Co. KG,
our wholly-owned German subsidiary, is the sole manufacturer of
the dialyzing filter that is a component of the disposable
cartridge used in the System One.
We market the System One through a direct sales force in the
United States primarily to dialysis clinics and hospitals and we
expect revenues to continue to increase in the near future. Our
revenues were $20.8 million in 2006, a 247% increase from
revenues of $6.0 million in 2005. We have increased the
number of sales representatives in our combined sales force from
20 at December 31, 2005 to 24 at December 31, 2006. We
expect to add additional sales and marketing personnel as needed
in the future. At December 31, 2006, 1,022 ESRD patients
were using the System One at 174 dialysis clinics, compared to
292 ESRD patients at 70 dialysis clinics at December 31,
2005. In addition, at December 31, 2006, 77 hospitals were
using the System One for critical care therapy, compared to 50
hospitals at December 31, 2005.
The following table sets forth the amount and percentage of
revenues derived from each market for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
Critical care
|
|
$
|
8,079,992
|
|
|
|
38.8
|
%
|
|
$
|
2,829,960
|
|
|
|
47.2
|
%
|
|
$
|
1,332,053
|
|
|
|
70.7
|
%
|
Chronic care
|
|
|
12,732,072
|
|
|
|
61.2
|
%
|
|
|
3,163,779
|
|
|
|
52.8
|
%
|
|
|
552,516
|
|
|
|
29.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,812,064
|
|
|
|
100
|
%
|
|
$
|
5,993,739
|
|
|
|
100
|
%
|
|
$
|
1,884,569
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not been profitable since inception, and we expect to
incur net losses for the foreseeable future as we expand our
sales efforts and operations. Our accumulated deficit at
December 31, 2006 was $(123.6) million. Our goal is to
increase our sales volume and revenues to realize operating
economies of scale and reduced product costs, which we believe,
when combined with product design improvements, will allow us to
reach profitability. We expect our revenues in the chronic care
market to increase faster than those in the critical care market
and believe they will continue to represent the majority of our
revenues.
Statement
of Operations Components
Revenues
Our products consist of the System One, an electromechanical
device used to circulate the patients blood during therapy
(the cycler); a single-use, disposable cartridge, which contains
a preattached dialyzer, and dialysate fluid used in our therapy,
sold either in premixed bags or prepared with our PureFlow SL
module. We distribute our products in two markets: the chronic
care market and the critical care market. We define the chronic
care market as the market devoted to the treatment of ESRD
patients in the home and the critical care market as the market
devoted to the treatment of hospital-based patients with acute
kidney failure or fluid overload. We offer a different
configuration of the System One for each market. The FDA has
cleared both configurations for hemodialysis, hemofiltration and
ultrafiltration. Our products may be used by our customers to
treat patients suffering from either condition and we have
separate marketing and sales efforts dedicated to each market.
43
We derive our revenues from the sale and rental of equipment and
the sale of the related disposable products. In the critical
care market, we generally sell the System One and disposables to
hospital customers. In the chronic care market, customers
generally rent the machine and then purchase the related
disposable products based on a specific patient prescription. We
generally recognize revenues when a product has been delivered
to our customer, or, in the chronic care 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.
Our contracts with dialysis centers for ESRD 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 cancelable at any time by the
dialysis clinic with 30 days 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 chronic patients are
treated with the System One and more systems are placed in
patient homes under monthly agreements that provide for the
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 contracts with three
larger dialysis chains, including with DaVita, which was our
largest customer in 2006. Revenues from DaVita represented
approximately 19% of our revenue in 2006 and we expect revenue
from this customer will continue to account for a significant
portion of our revenues 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. It is not clear
what percentage of our customers, if any, will migrate to this
model, and we expect, at least in the near term, that the
majority of our customers will continue to rent the System One
in the chronic care market.
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 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 are currently operating at negative gross profit as we
continue to build a base of recurring revenues. We expect the
cost of revenues as a percentage of revenues to decline over
time for four general reasons. First, 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 indirect manufacturing overhead
costs. For example, during 2006, we transitioned our purchases
of dialysate to a new, lower-cost vendor. Second, we are
introducing several process and product design changes that have
inherently lower cost than our current products. For example, in
July 2006 we commercially released our PureFlow SL module, which
is expected to reduce our cost of revenues and distribution
costs by reducing the volume of dialysate fluid which we
currently purchase and ship to customers. Third, we plan to move
the manufacture of certain of our products, including the System
One cycler, to lower labor cost markets. Finally, we continue to
improve product reliability.
44
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 the System One. We anticipate that
selling and marketing expenses will continue to increase as we
broaden our marketing initiatives to increase public awareness
of the System One in the chronic care market and as we add
additional sales 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 limited research and development expense
increases in the foreseeable future as we continue to improve
and enhance our core products.
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, 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.
45
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
126
|
|
|
|
160
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(26
|
)
|
|
|
(60
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
69
|
|
|
|
126
|
|
|
|
177
|
|
Research and development
|
|
|
31
|
|
|
|
105
|
|
|
|
317
|
|
Distribution
|
|
|
34
|
|
|
|
34
|
|
|
|
26
|
|
General and administrative
|
|
|
42
|
|
|
|
81
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
176
|
|
|
|
346
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(202
|
)
|
|
|
(406
|
)
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16
|
|
|
|
11
|
|
|
|
7
|
|
Interest expense
|
|
|
(5
|
)
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(191
|
)%
|
|
|
(408
|
)%
|
|
|
(788
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2006 and 2005
Revenues
Our revenues for 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
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 chronic
care markets, primarily as a result of an increase in the number
of chronic care patients on therapy resulting from increased
sales and marketing efforts. The number of chronic care 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 chronic
care 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.
46
Cost of
Revenues and Gross Profit (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Cost of revenues
|
|
$
|
26,121
|
|
|
$
|
9,585
|
|
|
$
|
16,536
|
|
|
|
173
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
$
|
(5,309
|
)
|
|
$
|
(3,591
|
)
|
|
$
|
1,718
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
(25.5
|
)%
|
|
|
(59.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We are currently operating at negative gross
profit as we continue to build our base of recurring revenues.
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. We expect the cost
of revenues as a percentage of revenues to continue to decline
over time for these same reasons. In addition, we expect the new
PureFlow SL to help reduce future costs of our product
offerings. Inventory at December 31, 2006 and
December 31, 2005 has been reduced to net realizable value
through charges to cost of revenues.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
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, $550,000 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 chronic 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. 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 chronic care market and as we add
additional sales and marketing personnel.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and development
|
|
$
|
6,431
|
|
|
$
|
6,305
|
|
|
$
|
126
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a
percentage of revenues
|
|
|
31
|
%
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The increase in research and development expenses was
attributable to increased salary, benefits and payroll taxes of
$306,000 as a result of increased headcount, approximately
$124,000 of stock-based compensation as a result of the adoption
in January 2006 of SFAS No. 123R, offset by a decrease
of $339,000 of development costs associated with our PureFlow SL
module which we incurred in 2005 that did not recur in 2006. We
expect limited research and development expense increases in the
foreseeable future as a substantial portion of the development
effort on the System One and PureFlow SL has been completed and
future expenditures will be limited to enhancements. We expect
research and development expenses to continue to decline as a
percentage of revenues.
Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
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 chronic care market. We expect
that distribution expenses will increase at a lower rate than
revenues during 2007 due to expected shipping efficiencies
gained from increased business volume and density of customers,
and the reduction of higher cost deliveries associated with
bagged fluid due to the commercial launch of our PureFlow SL
module which began in July 2006.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
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. We expect that general and
administrative expenses will continue to increase in absolute
dollars in the near term as we add support structure for our
growing business and as a result of costs related to 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 $434,000 of interest expense
during the second quarter of 2006. We expect interest expense
will continue to increase in the future as a result of our 2006
gross borrowings and continued availability under our equipment
line of credit.
48
Comparison
of Years Ended December 31, 2005 and 2004
Revenues
Our revenues for 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Revenues
|
|
$
|
5,994
|
|
|
$
|
1,885
|
|
|
$
|
4,109
|
|
|
|
218
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to increased sales and
rentals of the System One in both the chronic and critical care
markets, primarily as a result of increased sales and marketing
efforts as we continued our commercial launch of the System One.
Revenues in the chronic care market increased to
$3.2 million in 2005 from $0.6 million in 2004, an
increase of 473%, while revenues in the critical care market
increased 112% to $2.8 million in 2005, compared to
$1.3 million in 2004.
Cost of
Revenues and Gross Profit (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Cost of revenues
|
|
$
|
9,585
|
|
|
$
|
3,439
|
|
|
$
|
6,146
|
|
|
|
179
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
$
|
(3,591
|
)
|
|
$
|
(1,554
|
)
|
|
$
|
2,037
|
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
(59.9
|
)%
|
|
|
(82.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenues was attributable to our
increased sales volume. Contributing to the 2005 negative gross
margin was a lower of cost or market valuation allowance in the
amount of $0.3 million relating to disposable cartridge and
fluid inventory designated for the chronic care market, as well
as service costs of approximately $0.5 million to upgrade
100 older cyclers to meet the specifications of our current
product generation.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Selling and marketing
|
|
$
|
7,550
|
|
|
$
|
3,334
|
|
|
$
|
4,216
|
|
|
|
126
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a
percentage of revenues
|
|
|
126
|
%
|
|
|
177
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was the result of
several factors. Approximately $2.7 million of the increase
was due to higher salary and benefits resulting from increased
headcount, approximately $0.8 million of the increase
related to higher travel expenses and the balance of the
increase was due to a generally higher level of sales and
marketing activity in both the chronic and critical care
markets. We increased our sales force from six sales
representatives as of December 31, 2004, to 20 sales
representatives as of December 31, 2005.
49
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Research and development
|
|
$
|
6,305
|
|
|
$
|
5,970
|
|
|
$
|
335
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a
percentage of revenues
|
|
|
105
|
%
|
|
|
317
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was
attributable to increased salary and benefits of approximately
$840,000 as a result of increased headcount and development
costs associated with our PureFlow SL module, partially offset
by a decrease of approximately $520,000 in clinical trial
expenses due to the completion of the IDE home trial for System
One in 2004.
Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
Distribution
|
|
$
|
2,059
|
|
|
$
|
495
|
|
|
$
|
1,564
|
|
|
|
316
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of
revenues
|
|
|
34
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses was due to increased
volume of shipments of disposable products to a growing number
of patients in the chronic market. We expect that distribution
expenses will increase at a lower rate than revenues due to
expected efficiencies from increased business volume and the use
of an outsourced logistics provider located in the central part
of the continental United States.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except percentages)
|
|
|
General and administrative
|
|
$
|
4,855
|
|
|
$
|
3,604
|
|
|
$
|
1,251
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a
percentage of revenues
|
|
|
81
|
%
|
|
|
191
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily due to an increase in salary and benefits as a result
of the addition of four employees to headcount as well as the
adoption of a management bonus plan in 2005.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit and money market accounts.
For the year ended December 31, 2005, interest income
increased to $0.6 million from $0.1 million in 2004
primarily due to increased cash and investment balances after
our initial public offering and slightly higher interest rates
in 2005.
Interest expense relates to a debt agreement signed in December
2004. Interest expense increased from $15,000 to $763,000, or
approximately $748,000 in 2005 compared to 2004 due to this
indebtedness being outstanding for a full calendar year.
50
Liquidity
and Capital Resources
We have operated at a loss since our inception in 1998. As of
December 31, 2006, our accumulated deficit was
$(123.6) million and we had cash and cash equivalents of
approximately $61.8 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
$56.5 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. On May 15,
2006, we 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. We are 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 of our assets other than intellectual property and are
payable ratably over a three-year period from the date of each
borrowing. As of December 31, 2006, we had outstanding
borrowings of $7.4 million and $1.6 million of
borrowing availability under the equipment line of credit.
The following table sets forth the components of our cash flows
for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net cash used in operating
activities
|
|
$
|
(53,913
|
)
|
|
$
|
(27,348
|
)
|
|
$
|
(15,172
|
)
|
Net cash used in investing
activities
|
|
|
(2,466
|
)
|
|
|
(1,204
|
)
|
|
|
(306
|
)
|
Net cash provided by financing
activities
|
|
|
56,778
|
|
|
|
71,782
|
|
|
|
24,704
|
|
Effect of exchange rate changes on
cash
|
|
|
179
|
|
|
|
(141
|
)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow
|
|
$
|
578
|
|
|
$
|
43,089
|
|
|
$
|
9,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $18.6 million, $4.4 million and
$1.1 million, respectively, during the years ended
December 31, 2006, 2005 and 2004.
Net Cash Used in Investing Activities. For
each of the periods above, net cash used in investing activities
reflected purchases of property and equipment, primarily for
research and development, information technology, manufacturing
operations and capital improvements to our facilities. Excluded
from these figures is the purchase of $11.8 million of
short-term investments during 2006, the sale of marketable
securities in the amount of $12.5 million during 2005, and
the purchase of $12.5 million of marketable securities
during 2004.
Net Cash Provided by Financing Activities. 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
$757,000 of proceeds from the exercise of stock options and
warrants, offset by debt payments of $1.4 million. Net cash
provided by financing activities during
51
2004 included $20.0 million of net proceeds received from
the issuance of redeemable convertible preferred stock and net
borrowings of $4.7 million.
We expect to continue to incur net losses for the foreseeable
future. We believe we have sufficient cash to meet our funding
requirements at least through 2007. We expect to be able to
extend the availability of our cash resources through the sale
rather than rental of our System One cyclers to chronic
customers in the future. In February 2007, we entered into
long-term agreements with three large dialysis chains, who are
existing chronic customers, that provide customers the option,
and in the case of DaVita, the obligation, to purchase, rather
than rent, some portion of their System One equipment. To date,
these customers have purchased nearly $6 million of
equipment. Also in February 2007, we received cash proceeds of
$20.0 million from the sale to DaVita of our common stock.
Cash received from the sale of our common stock and sale of
equipment will be used for working capital purposes. If our
existing resources are insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or issue
debt securities. Any sale of additional equity or issuance of
debt securities may 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 could harm the growth of our business.
The following table summarizes our contractual commitments as of
December 31, 2006 and the effect those commitments are
expected to have on liquidity and cash flow in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Notes payable obligations
|
|
$
|
7,417
|
|
|
$
|
2,800
|
|
|
$
|
4,617
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
3,023
|
|
|
|
506
|
|
|
|
1,073
|
|
|
|
1,115
|
|
|
|
329
|
|
Purchase obligations(1)(2)
|
|
|
32,388
|
|
|
|
29,977
|
|
|
|
2,355
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,828
|
|
|
$
|
33,283
|
|
|
$
|
8,045
|
|
|
$
|
1,171
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations include purchase commitments for System One
components, primarily for equipment 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. |
|
(2) |
|
On January 5, 2007, we entered into a long-term supply
agreement with Membrana GmbH. In connection with this agreement,
we have annual minimum purchase commitments of $1.2 million
through December 31, 2016, which amounts are not included
in the table above. |
Summary
of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States,
or GAAP. The preparation of these consolidated financial
statements requires us to make significant estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. These items are regularly
monitored and analyzed by management for changes in facts and
circumstances, and material changes in these estimates could
occur in the future. Changes in estimates are recorded in the
period in which they become known. We base our estimates on
historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Actual results
may differ substantially from our estimates.
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.
52
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. 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. During the reported periods, the majority of our
critical care revenues were derived from direct product sales.
In the chronic care market, revenues are realized using
short-term rental arrangements. In the critical care market, we
recognize revenues from direct product sales at the later of the
time of shipment or, if applicable, delivery in accordance with
contract terms. For the chronic care market, during the reported
periods, we recognized revenues derived from rental arrangements
on a straight-line basis. 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.
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. Revenues under these
arrangements are recognized over the term of the arrangement as
disposables are delivered.
When we enter into a multiple-element arrangement, we allocate
the total revenue to all elements of the arrangement based on
their respective fair values. Fair value is determined by the
price charged when each element is sold separately. Our most
common multiple-element arrangements are products sold under a
disposables-based program in the critical care market as
described above. We account for the disposables-based program as
a single economic transaction and have determined that we do not
have a basis to separate the transaction into multiple elements
to recognize revenue at the time of shipment of each element.
Rather, we recognize revenue related to all elements over the
term of the arrangement as the disposables are delivered.
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.
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
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 periodically for
reasonableness. Factors considered in determining the
reasonableness of the useful life include industry practice and
the typical amortization periods used for like equipment, the
frequency and scope
53
of service returns, actual equipment disposal rates, and the
impact of planned design improvements. We believe the five-year
useful life to be reasonable as of December 31, 2006.
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 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 year ended December 31, 2006 was
$2.4 million 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 year ended December 31, 2006
was $0.10 higher 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 $259,910 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.
54
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.
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, 2006, we used a
volatility rate assumption of 85% for stock option grants. Our
common stock will reach its two-year trading anniversary during
the fourth quarter of 2007. With two years of historical trading
activity, we expect to have sufficient trading activity of our
common stock on which to base our assumption about expected
volatility.
We also estimated expected forfeitures of stock options upon
adoption of SFAS 123R. In developing a forfeiture rate
estimate, we considered our historical experience, our growing
employee base and the limited trading history of our common
stock. Actual forfeiture activity may differ from our estimated
forfeiture rate.
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, 2006, we had federal and state net
operating loss carryforwards of approximately
$119.1 million and $102.9 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 2026,
while the state net operating loss carryforwards will expire
between 2007 and 2011. We also had combined federal and state
research and development credit carryforwards of
$3.9 million at December 31, 2006, 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 $248,000 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, 2006 and 2005
to reflect these uncertainties.
55
Related-Party
Transactions
Medisystems Corporation is our supplier of completed cartridges,
tubing and certain other components used in the System One
disposable cartridge. The chief executive officer and sole
stockholder of Medisystems is a member of our board of directors
and owns approximately 7.2% of our outstanding common stock as
of December 31, 2006. We purchased approximately
$4.1 million, $896,000 and $232,000 during the years ended
December 31, 2006, 2005 and 2004, respectively, of goods
and services from this related party. As of December 31,
2006, amounts owed to Medisystems totaled $926,000 and we have
commitments to purchase approximately $3.6 million of
products from Medisystems.
On January 4, 2007, we entered into a seven-year Supply
Agreement, which we refer to as the Medisystems Supply
Agreement, with Medisystems that expires on December 31,
2013. Prior to entering into the Medisystems Supply Agreement,
we purchased products from Medisystems through purchase orders.
Pursuant to the terms of the Medisystems Supply Agreement, we
will purchase no less than ninety percent (90%) of our North
American requirements for disposable cartridges, or Medisystems
products, for use with our System One from Medisystems. We will
purchase Medisystems products pursuant to binding purchase
orders at pricing based on volumes of Medisystems products
ordered. If orders are not consistent with our requirements for
Medisystem products, we must pay an amount equal to the unit
shortfall multiplied by a percentage of the Medisystem product
price in force. Either party may terminate the Medisystem Supply
Agreement upon one hundred and twenty days notice as a result of
a breach of a material term of the Medisystem Supply Agreement
that remains uncured during such one hundred and twenty days.
Additionally, either party may terminate the Medisystem Supply
Agreement immediately if any proceeding under the bankruptcy or
insolvency laws is brought against the other party, or a
receiver is appointed for the other party or the other party
makes an assignment for the benefit of creditors. Further, we
may terminate our obligation to purchase our requirements of
Medisystems products from Medisystems if (i) Medisystems is
in material breach of this agreement, and such breach is uncured
within one hundred twenty (120) days after Medisystems
receives written notice adequately documenting such breach,
(ii) should Medisystems be in material breach of the
Medisystems Supply Agreement for more than 120 days,
whether or not consecutive, during any 12 month rolling
period within the term of this agreement, or (iii) if
Medisystems does not completely deliver any delivery order for
Medisystems products within sixty (60) days of the relevant
delivery period for such Medisystems products, other than due to
an event of force majuere.
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 June 2006, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 48, or FIN,
Accounting for Uncertainty in Income Taxes,
which clarifies the accounting for uncertainty in income taxes
recognized in an entitys financial statements in
accordance with SFAS 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. We are
currently in a loss position and do not pay income taxes;
therefore the adoption of FIN 48 is not expected to have a
significant impact on our consolidated financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which addresses the
measurement of fair value where such measure is
required for recognition or disclosure purposes under GAAP.
Among other provisions, SFAS No. 157 includes
(1) a new definition of fair value, (2) a fair value
56
hierarchy used to classify the source of information used in
fair value measurements, (3) new disclosure requirements of
assets and liabilities measured at fair value based on their
level in the hierarchy, and (4) a modification of the
accounting presumption that the transaction price of an asset or
liability equals its initial fair value. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007 (i.e., beginning in 2008 for NxStage). We are currently
evaluating the impact of SFAS No. 157 on our
consolidated financial statements.
|
|
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, 2006, we had outstanding debt
obligations of $7.4 million with a floating interest rate
equal to one-half percentage point (0.50%) above the prime rate
(8.75% at December 31, 2006). Movements in market interest
rates could impact the fair value of our debt. As of
December 31, 2006, the carrying amount of our debt
approximated fair value.
Foreign
Currency Exposure
We operate a manufacturing and research facility in Rosdorf,
Germany. We purchase materials for that facility and pay our
employees at that facility in Euros. 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. 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, 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 $633,000 for 2006, 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.
57
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
NXSTAGE
MEDICAL, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
58
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, 2006 and 2005, 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, 2006. 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 consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of NxStage Medical, Inc. at
December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, 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 have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of NxStage Medical, Inc.s internal control
over financial reporting as of December 31, 2006, 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 14, 2007 expressed an unqualified opinion thereon.
Boston, Massachusetts
March 14, 2007
59
NXSTAGE
MEDICAL, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,958,540
|
|
|
$
|
61,223,377
|
|
Short-term investments
|
|
|
11,843,275
|
|
|
|
|
|
Accounts receivable, net
|
|
|
4,301,557
|
|
|
|
1,511,860
|
|
Inventory
|
|
|
10,558,923
|
|
|
|
5,956,336
|
|
Prepaid expenses and other current
assets
|
|
|
1,014,688
|
|
|
|
523,160
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
77,676,983
|
|
|
|
69,214,733
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,025,560
|
|
|
|
2,070,387
|
|
Field equipment, net
|
|
|
20,615,952
|
|
|
|
4,843,398
|
|
Other assets
|
|
|
406,285
|
|
|
|
446,508
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,724,780
|
|
|
$
|
76,575,026
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,918,437
|
|
|
$
|
3,027,524
|
|
Accrued expenses
|
|
|
4,104,058
|
|
|
|
2,234,621
|
|
Deferred rent obligation
|
|
|
259,036
|
|
|
|
224,694
|
|
Deferred revenue
|
|
|
228,542
|
|
|
|
114,000
|
|
Current portion of long-term debt
|
|
|
2,800,000
|
|
|
|
1,513,480
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,310,073
|
|
|
|
7,114,319
|
|
Deferred rent obligation
|
|
|
389,568
|
|
|
|
473,268
|
|
Long-term debt
|
|
|
4,616,667
|
|
|
|
1,633,070
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,316,308
|
|
|
|
9,220,657
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock: par
value $0.001, 5,000,000 authorized; zero shares issued and
outstanding as of December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock: par value $0.001,
100,000,000 shares authorized; 27,806,543 and
21,176,554 shares issued and outstanding as of
December 31, 2006 and 2005
|
|
|
27,807
|
|
|
|
21,177
|
|
Additional paid-in capital
|
|
|
206,848,097
|
|
|
|
151,675,548
|
|
Deferred compensation
|
|
|
|
|
|
|
(259,910
|
)
|
Accumulated deficit
|
|
|
(123,640,441
|
)
|
|
|
(84,010,669
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
173,009
|
|
|
|
(71,777
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
83,408,472
|
|
|
|
67,354,369
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
101,724,780
|
|
|
$
|
76,575,026
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
60
NXSTAGE
MEDICAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
20,812,064
|
|
|
$
|
5,993,739
|
|
|
$
|
1,884,569
|
|
Cost of revenues
|
|
|
26,121,297
|
|
|
|
9,585,286
|
|
|
|
3,438,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(5,309,233
|
)
|
|
|
(3,591,547
|
)
|
|
|
(1,554,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
14,356,062
|
|
|
|
7,549,830
|
|
|
|
3,334,028
|
|
Research and development
|
|
|
6,431,001
|
|
|
|
6,304,463
|
|
|
|
5,970,442
|
|
Distribution
|
|
|
7,092,865
|
|
|
|
2,059,279
|
|
|
|
494,786
|
|
General and administrative
|
|
|
8,703,404
|
|
|
|
4,854,471
|
|
|
|
3,603,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
36,583,332
|
|
|
|
20,768,043
|
|
|
|
13,403,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(41,892,565
|
)
|
|
|
(24,359,590
|
)
|
|
|
(14,957,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,235,672
|
|
|
|
643,417
|
|
|
|
130,347
|
|
Interest expense
|
|
|
(972,879
|
)
|
|
|
(763,437
|
)
|
|
|
(14,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,262,793
|
|
|
|
(120,020
|
)
|
|
|
115,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(39,629,772
|
)
|
|
$
|
(24,479,610
|
)
|
|
$
|
(14,841,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$
|
(1.60
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(5.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding, basic and diluted
|
|
|
24,817,020
|
|
|
|
5,680,566
|
|
|
|
2,555,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
61
NXSTAGE
MEDICAL, INC.
CONSOLIDATED
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
|
|
Carrying
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
From
|
|
|
Accumulated
|
|
|
Income
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Income (Loss)
|
|
Balance at December 31,
2003
|
|
|
10,554,162
|
|
|
$
|
55,945,612
|
|
|
|
|
2,565,226
|
|
|
$
|
2,566
|
|
|
$
|
1,518,555
|
|
|
$
|
(65,939
|
)
|
|
$
|
(289,615
|
)
|
|
$
|
(44,622,908
|
)
|
|
$
|
(21,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Series F redeemable
convertible preferred stock, net of issuance costs of $31,480
|
|
|
2,747,253
|
|
|
|
20,000,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,480
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
|
|
1
|
|
|
|
5,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,124
|
|
|
|
(159,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,780
|
|
|
|
(285,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
debt agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,000
|
|
|
$
|
24,000
|
|
Forgiveness of note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,909
|
|
|
|
119,909
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,841,681
|
)
|
|
|
|
|
|
|
(14,841,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,697,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
13,301,415
|
|
|
$
|
75,945,614
|
|
|
|
|
2,566,681
|
|
|
$
|
2,567
|
|
|
$
|
2,391,223
|
|
|
$
|
(420,509
|
)
|
|
$
|
|
|
|
$
|
(59,496,069
|
)
|
|
$
|
122,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
Series F-1
redeemable convertible preferred stock, net of issuance costs of
$34,990
|
|
|
2,197,801
|
|
|
|
15,999,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,990
|
)
|
|
|
|
|
|
|
|
|
Conversion of redeemable
convertible preferred stock to common stock
|
|
|
(15,499,216
|
)
|
|
|
(91,945,607
|
)
|
|
|
|
12,124,840
|
|
|
|
12,125
|
|
|
|
91,933,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
6,325,000
|
|
|
|
6,325
|
|
|
|
56,023,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D warrant extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
128,729
|
|
|
|
129
|
|
|
|
533,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
31,304
|
|
|
|
31
|
|
|
|
223,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,400
|
|
|
|
(34,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,066
|
|
|
|
(58,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,000
|
)
|
|
$
|
(24,000
|
)
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,588
|
)
|
|
|
(170,588
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,479,610
|
)
|
|
|
|
|
|
|
(24,479,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,674,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
$
|
|
|
|
|
|
21,176,554
|
|
|
$
|
21,177
|
|
|
$
|
151,675,548
|
|
|
$
|
(259,910
|
)
|
|
$
|
|
|
|
$
|
(84,010,669
|
)
|
|
$
|
(71,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
6,325,000
|
|
|
|
6,325
|
|
|
|
51,325,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
185,179
|
|
|
|
185
|
|
|
|
813,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
78,522
|
|
|
|
79
|
|
|
|
502,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under employee stock
purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
28,303
|
|
|
|
28
|
|
|
|
228,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to Directors in lieu
of cash
|
|
|
|
|
|
|
|
|
|
|
|
12,985
|
|
|
|
13
|
|
|
|
110,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,450,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation
adjustment for SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,910
|
)
|
|
|
259,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,786
|
|
|
$
|
244,786
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,629,772
|
)
|
|
|
|
|
|
|
(39,629,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(39,384,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
|
|
27,806,543
|
|
|
$
|
27,807
|
|
|
$
|
206,848,097
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(123,640,441
|
)
|
|
$
|
173,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
62
NXSTAGE
MEDICAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(39,629,772
|
)
|
|
$
|
(24,479,610
|
)
|
|
$
|
(14,841,681
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of marketable
securities
|
|
|
|
|
|
|
(24,000
|
)
|
|
|
|
|
Loss on disposal of equipment
|
|
|
55,170
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,495,365
|
|
|
|
1,033,688
|
|
|
|
452,925
|
|
Amortization/write-off of debt
discount
|
|
|
281,666
|
|
|
|
140,833
|
|
|
|
|
|
Forgiveness of related party loans
|
|
|
|
|
|
|
|
|
|
|
289,615
|
|
Stock-based compensation
|
|
|
2,765,348
|
|
|
|
253,065
|
|
|
|
90,334
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,933,697
|
)
|
|
|
(987,595
|
)
|
|
|
(375,579
|
)
|
Inventory
|
|
|
(23,160,238
|
)
|
|
|
(5,929,697
|
)
|
|
|
(2,346,311
|
)
|
Prepaid expenses and other current
assets
|
|
|
(487,277
|
)
|
|
|
(483,598
|
)
|
|
|
11,002
|
|
Accounts payable
|
|
|
2,846,394
|
|
|
|
1,613,878
|
|
|
|
1,215,678
|
|
Accrued expenses
|
|
|
2,789,007
|
|
|
|
1,389,913
|
|
|
|
378,658
|
|
Deferred rent obligation
|
|
|
(49,358
|
)
|
|
|
36,718
|
|
|
|
(27,879
|
)
|
Deferred revenue
|
|
|
114,542
|
|
|
|
88,280
|
|
|
|
(19,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(53,912,850
|
)
|
|
|
(27,348,125
|
)
|
|
|
(15,172,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,620,483
|
)
|
|
|
(1,198,222
|
)
|
|
|
(195,071
|
)
|
Purchases of short-term investments
|
|
|
(11,843,275
|
)
|
|
|
|
|
|
|
|
|
Sale of marketable securities
|
|
|
|
|
|
|
12,495,000
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(12,471,000
|
)
|
Increase in other assets
|
|
|
(845,479
|
)
|
|
|
(5,869
|
)
|
|
|
(135,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(14,309,237
|
)
|
|
|
11,290,909
|
|
|
|
(12,801,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
redeemable convertible preferred stock
|
|
|
|
|
|
|
15,965,003
|
|
|
|
19,968,522
|
|
Net proceeds from issuance of
common stock
|
|
|
51,331,690
|
|
|
|
56,507,896
|
|
|
|
|
|
Proceeds from stock option and
purchase plans
|
|
|
954,900
|
|
|
|
533,906
|
|
|
|
5,265
|
|
Proceeds from exercise of warrants
|
|
|
502,901
|
|
|
|
223,060
|
|
|
|
|
|
Proceeds from loans and lines of
credit
|
|
|
8,400,000
|
|
|
|
|
|
|
|
5,000,000
|
|
Repayment of loans and lines of
credit
|
|
|
(4,411,550
|
)
|
|
|
(1,448,164
|
)
|
|
|
(269,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
56,777,941
|
|
|
|
71,781,701
|
|
|
|
24,704,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and
cash equivalents
|
|
|
179,309
|
|
|
|
(140,607
|
)
|
|
|
28,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(11,264,837
|
)
|
|
|
55,583,878
|
|
|
|
(3,241,119
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
61,223,377
|
|
|
|
5,639,499
|
|
|
|
8,880,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
49,958,540
|
|
|
$
|
61,223,377
|
|
|
$
|
5,639,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
963,062
|
|
|
$
|
270,098
|
|
|
$
|
14,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from inventory to field
equipment
|
|
$
|
18,598,426
|
|
|
$
|
4,366,981
|
|
|
$
|
1,091,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvement allowance
|
|
$
|
|
|
|
$
|
614,798
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
financing activity
|
|
$
|
|
|
|
$
|
|
|
|
$
|
422,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation and paid-in
capital
|
|
$
|
|
|
|
$
|
92,466
|
|
|
$
|
444,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to
common stock
|
|
$
|
|
|
|
$
|
91,945,607
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension of Series D warrants
|
|
$
|
|
|
|
$
|
478,094
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
63
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NxStage Medical, Inc. (the Company) is a medical
device company that develops, manufactures and markets products
for the treatment of kidney failure and fluid overload. 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.
As of December 31, 2006, the Company had approximately
$61.8 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. The Company has
experienced and continues to experience 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 at least through 2007. The Company expects to be
able to extend the availability of its cash resources through
the sale rather than rental of its System One cyclers to chronic
customers in the future. 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 if, and
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 could harm the growth of
its 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 accounting principles generally
accepted 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)
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. 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
64
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
specific period of time. During the reported periods, the
majority of the Companys critical care revenues were
derived from direct product sales.
In the chronic care market, revenues are realized using
short-term rental arrangements. In the critical care market, 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. For the chronic care market, the
Company recognizes revenue derived from rental arrangements
ratably over the rental period. These rental arrangements
combine the use of the System One with a specified number of
disposable products supplied to customers for a fixed amount per
month. Revenue is recognized on a monthly basis in accordance
with agreed upon contract terms and pursuant to customer
purchase orders with fixed payment terms. Customer contracts in
the chronic care market are generally cancelable on
30-days
notice and there are no purchase requirements from customers
under the Companys chronic agreements.
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. Revenues under these
arrangements are recognized over the term of the arrangement as
disposables are delivered. The Company records the cost of the
equipment in inventory and amortizes the cost of the equipment
through charges to cost of revenues consistent with the
customers minimum purchase requirement.
When the Company enters into a multiple-element arrangement, it
allocates the total revenue to all elements of the arrangement
based on their respective fair values. Fair value is determined
by the price charged when each element is sold separately. The
Companys most common multiple-element arrangements are
products sold under a disposables-based program in the critical
care market as described above. The Company accounts for the
disposables-based program as a single economic transaction and
has determined that it does not have a basis to separate the
transaction into multiple elements to recognize revenue at the
time of shipment of each element. Rather, the Company recognizes
revenue related to all elements over the term of the arrangement
as the disposables are delivered.
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.
|
|
(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
($314,000), $16,000 and ($24,000) in 2006, 2005 and 2004,
respectively.
|
|
(e)
|
Cash,
Cash Equivalents and Marketable Securities
|
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.
65
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 year ended December 31, 2006; there were no
marketable securities at December 31, 2005.
Held-to-maturity
securities are carried at amortized cost because the Company has
the intent and ability to hold investments to maturity.
At December 31, 2006,
held-to-maturity
securities consisted of the following:
|
|
|
|
|
U.S. government securities
|
|
$
|
5,008,312
|
|
Commercial paper
|
|
|
4,896,000
|
|
Certificates of deposit
|
|
|
1,938,963
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
11,843,275
|
|
|
|
|
|
|
At December 31, 2006, maturities of
held-to-maturity
securities were less than one year. At December 31, 2006,
the estimated fair value of each investment approximated its
amortized cost and, therefore, there were no significant
unrecognized holding gains or losses.
|
|
(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. If the
System One is not a successful product or is withdrawn from the
market for any reason, the Company does not have other products
in development.
The Company uses and is dependent upon four 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
allowance for doubtful accounts are recorded in general and
administrative expenses in
66
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the accompanying consolidated statements of operations. Activity
related to allowance for doubtful accounts consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of Year
|
|
|
Provision
|
|
|
Write-Offs
|
|
|
End of Year
|
|
|
Year ended December 31, 2006
|
|
$
|
12,266
|
|
|
$
|
50,603
|
|
|
$
|
|
|
|
$
|
62,869
|
|
Year ended December 31, 2005
|
|
$
|
21,933
|
|
|
$
|
15,750
|
|
|
$
|
(25,417
|
)
|
|
$
|
12,266
|
|
Year ended December 31, 2004
|
|
$
|
9,599
|
|
|
$
|
24,750
|
|
|
$
|
(12,416
|
)
|
|
$
|
21,933
|
|
The following table summarizes the number of customers who
individually comprise greater than 10% of total revenue and
total accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Number of
|
|
|
Total
|
|
|
Number of
|
|
|
Total Accounts
|
|
Year Ended
|
|
Customers
|
|
|
Revenue
|
|
|
Customers
|
|
|
Receivable
|
|
|
December 31, 2006
|
|
|
1
|
|
|
|
19
|
%
|
|
|
1
|
|
|
|
17
|
%
|
December 31, 2005
|
|
|
3
|
|
|
|
33
|
%
|
|
|
2
|
|
|
|
25
|
%
|
December 31, 2004
|
|
|
3
|
|
|
|
37
|
%
|
|
|
3
|
|
|
|
35
|
%
|
Inventory is stated at the lower of cost (weighted-average) 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.
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, 2006 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 assets carrying amount and
related accumulated depreciation are removed from the accounts
and any gain or loss is included in operations.
67
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated service lives of property and equipment and field
equipment are as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Life
|
|
|
Machinery, equipment and tooling
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
Lesser of 5 years or lease term
|
|
Computer and office equipment
|
|
|
3 years
|
|
Furniture
|
|
|
7 years
|
|
Field equipment
|
|
|
5 years
|
|
|
|
(i)
|
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 which had previously been valued
using the minimum value method, which was allowed until the
Companys initial filing with the Securities and Exchange
Commission, or 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,
2006 was $2.4 million higher than if it had continued to
account for share-based compensation under APB No. 25.
Basic and diluted loss per share for the year ended
December 31, 2006 was $0.10 higher than if the Company had
continued to account for share-based compensation under APB
No. 25.
Pursuant to SFAS 123R, the Company reclassified $259,910 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.
68
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recognized the impact of its share-based payment
plans in the consolidated statement of operations for the year
ended December 31, 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:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of revenues
|
|
$
|
64,189
|
|
Selling and marketing
|
|
|
549,972
|
|
Research and development
|
|
|
123,655
|
|
Distribution
|
|
|
7,867
|
|
General and administrative
|
|
|
2,019,665
|
|
|
|
|
|
|
Total
|
|
$
|
2,765,348
|
|
|
|
|
|
|
The weighted-average fair value of options granted during the
year ended December 31, 2006 was $6.33. The fair value of
options at date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions:
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2006
|
|
Expected life
|
|
4.75 years(1)
|
Risk-free interest rate
|
|
4.35% - 4.88%(2)
|
Expected stock price volatility
|
|
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
volatility of the common stock of comparable companies in the
medical device and technology industries. |
The Company has estimated expected forfeitures of stock options
with the adoption of SFAS 123R and records stock-based
compensation net of estimated forfeitures. In developing a
forfeiture rate estimate, the Company considered its historical
experience, its growing employee base and the limited trading
history of its common stock.
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
69
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
Beginning of Year
|
|
|
Provision
|
|
|
Usage
|
|
|
End of Year
|
|
|
Year ended December 31, 2006
|
|
$
|
62,071
|
|
|
$
|
308,610
|
|
|
$
|
(198,437
|
)
|
|
$
|
172,244
|
|
Year ended December 31, 2005
|
|
$
|
35,401
|
|
|
$
|
127,635
|
|
|
$
|
(100,965
|
)
|
|
$
|
62,071
|
|
Year ended December 31, 2004
|
|
$
|
9,525
|
|
|
$
|
37,941
|
|
|
$
|
(12,065
|
)
|
|
$
|
35,401
|
|
|
|
(k)
|
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 $34,110, $42,801 and $25,754 for the years
ended December 31, 2006, 2005 and 2004, respectively.
|
|
(l)
|
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.
Until the closing of the Companys initial public offering
on November 1, 2005, the Company calculated net loss per
share in accordance with SFAS No. 128,
Earnings per Share, and Emerging Issues Task
Force (EITF)
03-6,
Participating Securities and the Two Class Method
under FASB Statement No. 128, Earnings per Share.
EITF 03-6
clarifies the use of the two-class method of
calculating earnings per share as originally prescribed in
SFAS No. 128. Effective for periods beginning after
March 31, 2004, EITF
03-6
provides guidance on how to determine whether a security should
be considered a participating security for purposes
of computing earnings per share and how earnings should be
allocated to a participating security when using the two-class
method for computing earnings per share. The Company determined
that its redeemable preferred stock represented a participating
security because it may have participated in dividends with
common stock. Therefore, the Company calculated net loss per
share consistent with the provisions of EITF
03-6 for all
periods in which its redeemable preferred stock was outstanding.
All of the Companys redeemable preferred stock converted
to common stock on November 1, 2005, the date of the
Companys initial public offering.
Accordingly, subsequent to November 1, 2005, the Company no
longer uses the two-class method and calculates net loss per
share based on the weighted average number of shares of common
stock outstanding, excluding unvested shares of restricted
common stock. The following potential common stock equivalents
70
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
were not included in the computation of diluted net loss per
share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Options to purchase common stock
|
|
|
261,635
|
|
|
|
2,683,286
|
|
|
|
1,690,561
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
169,736
|
|
|
|
203,625
|
|
Unvested shares of common stock
subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
402
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
10,098,497
|
|
|
|
10,165,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
261,635
|
|
|
|
12,951,519
|
|
|
|
12,060,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(o)
|
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, 2006 and 2005, accumulated other
comprehensive income (loss) consists of foreign currency
translation adjustments.
|
|
(p)
|
Recent
Accounting Pronouncements
|
In June 2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes, which clarifies the
accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with
SFAS 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 is currently in a loss
position and does not pay income taxes; therefore the adoption
of FIN 48 is not expected to have a significant impact on
the Companys consolidated financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which addresses the
measurement of fair value where such measure is
required for recognition or disclosure purposes under GAAP.
Among other provisions, SFAS No. 157 includes
(1) a new definition of fair value, (2) a fair value
hierarchy used to classify the source of information used in
fair value measurements, (3) new disclosure requirements of
assets and liabilities measured at fair value based on their
level in the hierarchy, and (4) a modification of the
accounting presumption that the transaction price of an asset or
liability equals its initial fair value. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007 (i.e., beginning in 2008 for NxStage). The Company is
currently evaluating the impact of SFAS No. 157 on its
consolidated financial statements.
71
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories at December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Purchased components
|
|
$
|
2,864,892
|
|
|
$
|
2,026,986
|
|
Finished goods
|
|
|
7,694,031
|
|
|
|
3,929,350
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,558,923
|
|
|
$
|
5,956,336
|
|
|
|
|
|
|
|
|
|
|
Inventory is shown net of a valuation reserve of approximately
$492,000 and $646,000 at December 31, 2006 and 2005,
respectively.
|
|
4.
|
Property
and Equipment and Field Equipment
|
Property and equipment is carried at cost less accumulated
depreciation. A summary of the components of property and
equipment is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Machinery, equipment and tooling
|
|
$
|
2,572,332
|
|
|
$
|
1,613,359
|
|
Leasehold improvements
|
|
|
987,307
|
|
|
|
930,213
|
|
Computer and office equipment
|
|
|
958,916
|
|
|
|
829,298
|
|
Furniture
|
|
|
408,694
|
|
|
|
279,815
|
|
Construction-in-process
|
|
|
436,902
|
|
|
|
246,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,364,151
|
|
|
|
3,899,324
|
|
Less accumulated depreciation and
amortization
|
|
|
(2,338,591
|
)
|
|
|
(1,828,937
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,025,560
|
|
|
$
|
2,070,387
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for property and equipment was $679,000,
$469,000 and $342,000 in 2006, 2005 and 2004, respectively.
Field equipment is carried at cost less accumulated depreciation
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Field equipment
|
|
$
|
24,101,844
|
|
|
$
|
5,521,359
|
|
Less accumulated depreciation and
amortization
|
|
|
(3,485,892
|
)
|
|
|
(677,961
|
)
|
|
|
|
|
|
|
|
|
|
Field equipment, net
|
|
$
|
20,615,952
|
|
|
$
|
4,843,398
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for field equipment was $2.8 million,
$565,000 and $111,000 in 2006, 2005 and 2004, respectively.
72
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Payroll and related benefits
|
|
$
|
1,474,698
|
|
|
$
|
769,364
|
|
Warranty costs
|
|
|
172,244
|
|
|
|
62,071
|
|
Interest on debt
|
|
|
55,883
|
|
|
|
351,869
|
|
Audit, legal and consulting fees
|
|
|
371,647
|
|
|
|
311,700
|
|
Inventory purchases
|
|
|
707,382
|
|
|
|
|
|
Clinical trial costs
|
|
|
34,964
|
|
|
|
25,894
|
|
Costs relating to initial public
offering
|
|
|
|
|
|
|
225,434
|
|
Distribution expenses
|
|
|
946,970
|
|
|
|
144,561
|
|
Research and development expenses
|
|
|
139,569
|
|
|
|
101,828
|
|
General and administrative expenses
|
|
|
68,175
|
|
|
|
201,824
|
|
Selling and marketing expenses
|
|
|
132,526
|
|
|
|
40,076
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
4,104,058
|
|
|
$
|
2,234,621
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Financing
Arrangements
|
Debt
In December 2004, the Company entered into a debt agreement in
the principal amount of $5.0 million, which was payable
monthly over a three-year term and was secured by all the assets
of the Company. Interest accrued at a rate of 7.0% annually and
monthly principal and interest payments were made in advance. In
addition, a final interest payment of $650,000 was due at the
scheduled maturity date of December 2007, or earlier if the loan
was prepaid in advance. This additional interest payment was
accrued on a monthly basis using the interest method over the
36-month
life of the loan and was included in accrued expenses in the
accompanying consolidated balance sheets. Concurrent with
entering into a new equipment line of credit in May 2006, the
Company repaid all outstanding borrowings in the aggregate
amount of $3.4 million, which included principal and
accrued interest and the final interest payment of $650,000.
This extinguishment of debt gave rise to the early recognition
of approximately $434,000 of interest expense for the year ended
December 31, 2006.
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.
73
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Annual maturities of principal under the Companys debt
obligations outstanding at December 31, 2006 are as follows:
|
|
|
|
|
2007
|
|
$
|
2,800,000
|
|
2008
|
|
|
2,800,000
|
|
2009
|
|
|
1,816,667
|
|
|
|
|
|
|
|
|
$
|
7,416,667
|
|
|
|
|
|
|
|
|
7.
|
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.
All revenues were generated in the United States and
substantially all assets are located in the United States.
The Company sells products into two markets, critical care and
chronic care. The critical care market consists of hospitals or
facilities that treat patients that have suddenly, and possibly
temporarily, lost kidney function. The chronic care market
consists of dialysis centers and hospitals that provide
treatment options for patients that have end stage renal disease
(ESRD). Revenues recognized in these markets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Critical care market
|
|
$
|
8,079,992
|
|
|
$
|
2,829,960
|
|
|
$
|
1,332,053
|
|
Chronic care market
|
|
|
12,732,072
|
|
|
|
3,163,779
|
|
|
|
552,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
20,812,064
|
|
|
$
|
5,993,739
|
|
|
$
|
1,884,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue recognized relating to extended service
contracts in the critical care market totaled approximately
$35,000 and zero for the years ended December 31, 2006 and
2005, respectively.
|
|
8.
|
Commitments
and Contingencies
|
The Company maintains its corporate headquarters and principal
operating activities in a leased building located in Lawrence,
Massachusetts. During 2005, the Company renewed its lease
agreement 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
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 was $490,000, $461,000 and
$510,000 for the years ended December 31, 2006, 2005 and
2004, respectively. The lease agreement included a tenant
improvement allowance paid by the landlord of $614,798, which
has been recorded as both a leasehold improvement and a deferred
rent obligation.
74
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The future minimum rental payments as of December 31, 2006
under the Companys operating leases are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
2007
|
|
$
|
505,967
|
|
2008
|
|
|
531,437
|
|
2009
|
|
|
541,242
|
|
2010
|
|
|
552,005
|
|
2011
|
|
|
562,767
|
|
Thereafter
|
|
|
329,056
|
|
|
|
|
|
|
Total
|
|
$
|
3,022,474
|
|
|
|
|
|
|
The Company enters into arrangements to purchase inventory
requiring minimum purchase commitments in the ordinary course of
business.
At December 31, 2006 and 2005, 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
noncurrent, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
46,077,000
|
|
|
$
|
30,600,000
|
|
Capitalized
start-up
costs
|
|
|
|
|
|
|
457,000
|
|
Research and development credits
|
|
|
3,932,000
|
|
|
|
3,329,000
|
|
Other
|
|
|
587,000
|
|
|
|
491,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
50,596,000
|
|
|
|
34,877,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,036,000
|
)
|
|
|
(141,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets before
valuation allowance
|
|
|
49,560,000
|
|
|
|
34,736,000
|
|
Less: Valuation allowance
|
|
|
(49,560,000
|
)
|
|
|
(34,736,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had federal and state
net operating loss carryforwards of approximately
$119.1 million and $102.9 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 2026
if not utilized, while the state net operating loss
carryforwards will expire between 2007 and 2011 if not utilized.
The Company also had combined federal and state research and
development credit carryforwards of approximately
$3.9 million, at December 31, 2006, 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 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
75
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $248,000 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.
A reconciliation of the U.S. federal statutory tax rate to
the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Research and development credits
|
|
|
1.0
|
|
|
|
1.7
|
|
|
|
2.5
|
|
Valuation allowance
|
|
|
(32.3
|
)
|
|
|
(34.8
|
)
|
|
|
(35.1
|
)
|
Other, net
|
|
|
(2.7
|
)
|
|
|
(0.9
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has reserved
3,192,081 shares of common stock for issuance upon exercise
of stock options, 21,697 shares for issuance under the 2005
Purchase Plan and 73,460 shares for issuance upon exercise
of warrants.
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. 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 45,755 shares
remain outstanding at December 31, 2006.
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.
The number of shares available for grant under the 2005 Plan
will be increased annually beginning in 2007 by the lesser of
(a) 600,000 shares, or (b) 3% of the then
outstanding shares of the Companys common stock, or
(c) a number determined by the Board. Unless otherwise
specified by the Board or Compensation Committee, 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, 2006, options for the purchase of
123,651 shares of common
76
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock are available for future grant under the 2005 Plan.
Effective January 1, 2007, the number of shares available
for grant under the 2005 Plan was increased by
600,000 shares.
During 2006, 2005 and 2004, the Company granted a consultant
options to purchase 7,500, 5,849 and 14,624 shares of
common stock at an exercise price of $8.15 per share,
$6.84 per share and $5.47 per share, respectively. The
fair value of the 2006, 2005 and 2004 option grants was $6.35,
$5.88 and $4.69 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 2006, 2005 and 2004: dividend yield
of zero percent for each year; expected volatility of 85% for
each year; risk free interest rates ranging from 4.63 to
4.68 percent; and expected life ranging from 7 to
10 years. Stock-based compensation expense related to stock
options granted to consultants was $57,409, $181,620 and $78,426
for 2006, 2005 and 2004, respectively, and is included in
general and administrative expenses in the accompanying
consolidated statements of operations.
With the exception of one stock option award, all stock option
awards granted to employees during 2006, 2005 and 2004 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 $115,750 in cash paid in
January 2007 and 13,027 shares of restricted stock that
began vesting on January 1, 2007. The modification resulted
in additional compensation expense of $115,750 in 2006 and will
result in stock-based compensation expense of approximately
$110,000 and $60,000 in 2007 and 2008, respectively.
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, 2006, stock-based compensation relating to
these shares charged to operations was $89,482. At
December 31, 2006, the weighted-average grant date fair
value and weighted-average remaining contractual life for
outstanding shares of restricted stock was $11.40 and
4.1 years, respectively.
For stock option grants between July 1, 2004 and the
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.
77
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock option activity under all
plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Fixed Options
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of year
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
|
|
1,690,556
|
|
|
$
|
3.97
|
|
|
|
1,290,814
|
|
|
$
|
3.63
|
|
Granted
|
|
|
754,642
|
|
|
$
|
9.25
|
|
|
|
1,217,970
|
|
|
$
|
9.02
|
|
|
|
487,879
|
|
|
$
|
4.90
|
|
Exercised
|
|
|
(177,757
|
)
|
|
$
|
4.08
|
|
|
|
(128,729
|
)
|
|
$
|
4.14
|
|
|
|
(1,455
|
)
|
|
$
|
3.62
|
|
Forfeited or expired
|
|
|
(191,741
|
)
|
|
$
|
8.96
|
|
|
|
(96,511
|
)
|
|
$
|
5.03
|
|
|
|
(86,682
|
)
|
|
$
|
4.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
3,068,430
|
|
|
$
|
7.00
|
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
|
|
1,690,556
|
|
|
$
|
3.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at end of year
|
|
|
1,705,007
|
|
|
$
|
5.77
|
|
|
|
1,249,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,959,785
|
|
|
$
|
5.80
|
|
|
|
1,448,571
|
|
|
|
|
|
|
|
865,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at December 31, 2006 was
$2.6 million for stock options outstanding,
$3.3 million for stock options vested and $3.9 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,
2006, excluding
out-of-the-money
awards. The total intrinsic value of options exercised during
the year ended December 31, 2006 was $764,000. The total
fair value of shares vested during the year ended
December 31, 2006 was $4.9 million.
The following table summarizes information about stock options
outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
96,551
|
|
|
|
2.3 years
|
|
|
$
|
0.36
|
|
|
|
96,551
|
|
|
$
|
0.36
|
|
$ 1.37
|
|
|
2,924
|
|
|
|
3.4 years
|
|
|
$
|
1.37
|
|
|
|
2,924
|
|
|
$
|
1.37
|
|
$ 2.74 to $ 4.10
|
|
|
817,074
|
|
|
|
5.1 years
|
|
|
$
|
3.88
|
|
|
|
817,074
|
|
|
$
|
3.88
|
|
$ 5.47 to $ 6.84
|
|
|
592,685
|
|
|
|
7.8 years
|
|
|
$
|
6.03
|
|
|
|
588,823
|
|
|
$
|
6.03
|
|
$ 7.90 to $ 9.27
|
|
|
1,163,696
|
|
|
|
7.0 years
|
|
|
$
|
8.51
|
|
|
|
237,240
|
|
|
$
|
8.54
|
|
$ 9.63 to $11.19
|
|
|
107,900
|
|
|
|
4.9 years
|
|
|
$
|
10.69
|
|
|
|
84,000
|
|
|
$
|
10.83
|
|
$12.28 to $13.65
|
|
|
287,600
|
|
|
|
5.4 years
|
|
|
$
|
12.68
|
|
|
|
133,173
|
|
|
$
|
12.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.34 to $13.65
|
|
|
3,068,430
|
|
|
|
6.2 years
|
|
|
$
|
7.00
|
|
|
|
1,959,785
|
|
|
$
|
5.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the status of the Companys
nonvested stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
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
|
|
|
|
|
|
|
|
|
|
|
78
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2006, approximately $4.2 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 3.5 years.
Employee
Stock Purchase Plan
The Companys 2005 Employee Stock Purchase Plan (the
2005 Purchase Plan) authorizes the issuance of up to
50,000 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, 2006 was $2.30 per share. The fair
value of the employees stock purchase rights was estimated
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2006
|
|
Expected life
|
|
6 months
|
Risk-free interest rate
|
|
4.42% - 5.11%
|
Expected stock price volatility
|
|
50.9% - 67.0%
|
Expected dividend yield
|
|
|
On June 30, 2006, the Companys first offering under
the 2005 Purchase Plan closed, resulting in the purchase of
10,748 shares of common stock on behalf of employee
participants. On December 29, 2006, the Companys
second offering under the 2005 Purchase Plan closed, resulting
in the purchase of 17,555 shares of common stock on behalf
of employee participants. As of December 31, 2006, the
maximum number of shares available for future issuance under the
2005 Purchase Plan is 21,697.
The Company recognized share-based compensation expense of
$57,000 for the year ended December 31, 2006 relating to
the 2005 Purchase Plan.
|
|
11.
|
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 $563,000,
$363,000 and $214,000 to the 401(k) Plan in 2006, 2005 and 2004,
respectively.
Common
and Preferred Stock
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.
79
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $56.5 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.
On September 15, 2005, the Board declared a
one-for-1.3676
reverse stock split of the outstanding shares of common stock.
All references in the consolidated financial statements to the
number of shares outstanding, per share amounts and stock option
data of the Companys common stock have been retroactively
adjusted to reflect the effect of the reverse stock split for
all periods presented.
On July 8, 2005, the Company amended its certificate of
incorporation, as amended to (a) increase the number of
authorized shares of preferred stock to 15,759,660 shares
and (b) designate 2,197,801 shares of
Series F-1
Preferred Stock. On September 19, 2005, the Company further
amended its certificate of incorporation, as amended to
authorize 30,000,000 shares of common stock. On
October 14, 2005, the Company authorized
5,000,000 shares of undesignated preferred stock. In
connection with its initial public offering, the Company further
amended and restated its certificate of incorporation to
authorize 100,000,000 shares of common stock, par value
$0.001 per share.
Prior to the initial public offering, the Company had authorized
several series of preferred stock, $0.001 par value, of
which 1,875,000 shares were designated as Series B,
1,155,169 shares were designated as Series C,
5,011,173 shares were designated as Series D,
2,690,846 shares were designated as Series E,
2,829,671 shares were designated as Series F and
2,197,801 shares were designated as
Series F-1.
During 1999, the Company sold 1,875,000 shares of
Series B Preferred Stock at $2.67 per share, resulting
in net proceeds of $4,968,250. Upon the closing of the
Series B Preferred Stock financing, all shares of the
Companys Series A Preferred Stock converted into an
equal number of shares of the Companys common stock. On
January 22, 2000, the Company sold 1,151,632 shares of
Series C Preferred Stock at $5.21 per share, resulting
in net proceeds of $5,957,891. On May 21, 2001, the Company
sold 4,857,622 shares of Series D Preferred Stock at
$5.97 per share, resulting in net proceeds of $24,218,379.
On April 15, 2003, the Company sold 2,669,908 shares
of Series E Preferred Stock at $5.97 per share, resulting
in net proceeds of $15,892,537. On August 18, 2004, the
Company sold 2,747,253 shares of Series F Preferred
Stock at $7.28 per share, resulting in net proceeds of
$19,968,522. On July 8, 2005 and July 15, 2005, the
Company sold an aggregate of 2,197,801 shares of
Series F-1
Preferred Stock at $7.28 per share, resulting in net
proceeds of approximately $15,965,003.
Warrants
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 $503,000. 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 $223,000.
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 $478,094 and has been accounted for within the
80
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Notes Receivable
from Stockholders
During 1999 and 2000, the Company entered into note agreements
with four officers of the Company totaling $289,615. These full
recourse notes were issued in connection with the exercise of
stock options by the officers and accrued interest at a range of
5.2% to 5.5%. The notes contained a 25% recourse provision and
were secured by 476,776 shares of the Companys common
stock held by the officers upon exercise of the stock options.
In 2004, these notes were cancelled by the Company and the
amount of the notes was charged to compensation expense.
|
|
13.
|
Related-Party
Transactions
|
The Company purchases completed cartridges, tubing and certain
other components used in the System One disposable cartridge
from Medisystems Corporation, an entity owned by a stockholder
of the Company and member of the Companys Board of
Directors. The Company purchased approximately
$4.1 million, $896,000 and $232,000 during 2006, 2005 and
2004, respectively, of goods and services from this related
party. Amounts owed to Medisystems Corporation totaled $926,000
and $81,000 at December 31, 2006 and 2005, respectively,
and are included in accounts payable in the accompanying
consolidated balance sheets.
On January 4, 2007, the Company entered into a seven-year
Supply Agreement (the Supply Agreement) with
Medisystems that expires on December 31, 2013. Prior to
this Supply Agreement, the Company purchased products from
Medisystems through purchase orders. Pursuant to the terms of
the Supply Agreement, the Company will purchase no less than
ninety percent (90%) of its North American requirements
(Requirements) for disposable cartridges (the
Products) for use with its System One from
Medisystems.
On January 5, 2007, the Company entered into a long-term
supply agreement with Membrana GmbH 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 sixty
day cure period.
On February 7, 2007, the Company entered into a National
Service Provider Agreement (the Agreement) with
DaVita Inc. (DaVita), its largest customer. Pursuant
to the terms of the Agreement, the Company granted DaVita
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 ten percent (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, the Company 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 limits, but
does not prohibit, the sale by the Company of the System One for
chronic patient 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.
The Agreement has an initial term of three years, terminating on
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.
81
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the Agreement, DaVita committed to purchase all of its
existing System One equipment currently being rented from the
Company (for a purchase price of approximately
$5.0 million) and to buy a significant percentage of its
future System One equipment needs. DaVita is granted most
favored nations pricing for the products purchased under the
Agreement provided that DaVita achieves certain requirements,
including certain patient volume targets. Further, the Agreement
contemplates certain collaborations between the parties,
including efforts dedicated towards advancing market awareness
of the Companys therapies and home and more frequent
hemodialysis.
Either party may terminate the Agreement if the other party
becomes the subject of bankruptcy or similar proceedings or
loses its eligibility to bill for services under the Medicare or
Medicaid programs.
In connection with the Agreement, the Company issued and sold to
DaVita 2,000,000 shares (the Shares) of its
common stock, $0.001 par value per share, at a purchase
price of $10.00 per share, for an aggregate purchase price
of $20.0 million pursuant to the terms of the Stock
Purchase Agreement dated as of February 7, 2007 by and
between the Company and DaVita (the Stock Purchase
Agreement). The Shares represent approximately seven
percent (7%) of the Companys issued and outstanding shares
of common stock.
In connection with the issuance of the Shares, the Company and
DaVita entered into a Registration Rights Agreement. Pursuant to
the Registration Rights Agreement, the Company agreed to file a
registration statement on
Form S-3
with respect to the resale by DaVita of the Shares, and for the
registration statement to be declared effective by the SEC. In
addition, the Company shall use commercially reasonable efforts
to keep the Registration Statement continuously effective until
the date which is the earliest of (i) two years after the
Registration Statement is declared effective by the SEC,
(ii) such time as all the securities covered by the
Registration Statement have been publicly sold or
(iii) such time as all securities may be sold pursuant to
Rule 144(k) without volume restrictions. If the Company is
unable to meet the above registration requirements, the Company
must (a) transfer cash consideration to DaVita equal to one
percent (1.0%) of the aggregate purchase price paid for the
Shares (i.e., $200,000) and (b) make a monthly pro rata
cash payment equal to 1.0% of the aggregate purchase price until
cured. The Registration Rights Agreement provides for no
limitation to the maximum potential consideration that may be
paid by the Company. The Company believes the likelihood is
remote that it will owe an obligation resulting from the
Registration Rights Agreement.
|
|
15.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenues
|
|
$
|
3,400,722
|
|
|
$
|
4,546,273
|
|
|
$
|
5,511,774
|
|
|
$
|
7,353,295
|
|
Gross profit (deficit)
|
|
|
(1,456,532
|
)
|
|
|
(1,457,356
|
)
|
|
|
(1,108,494
|
)
|
|
|
(1,286,851
|
)
|
Net loss
|
|
|
(9,254,970
|
)
|
|
|
(10,387,831
|
)
|
|
|
(9,575,636
|
)
|
|
|
(10,411,335
|
)
|
Net loss per common share, basic
and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Revenues
|
|
$
|
1,033,792
|
|
|
$
|
1,403,383
|
|
|
$
|
1,496,785
|
|
|
$
|
2,059,779
|
|
Gross profit (deficit)
|
|
|
(748,373
|
)
|
|
|
(657,996
|
)
|
|
|
(774,079
|
)
|
|
|
(1,411,099
|
)
|
Net loss
|
|
|
(4,909,131
|
)
|
|
|
(5,606,652
|
)
|
|
|
(6,589,913
|
)
|
|
|
(7,373,914
|
)
|
Net loss per common share, basic
and diluted
|
|
$
|
(1.91
|
)
|
|
$
|
(2.18
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(0.49
|
)
|
82
|
|
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, 2006. 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, 2006,
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 quarter ended
December 31, 2006 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, 2006,
based on the control criteria established in a report entitled
Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on such evaluation, we have concluded that
NxStages internal control over financial reporting is
effective as of December 31, 2006.
The independent registered public accounting firm of
Ernst & Young LLP, as auditors of NxStages
consolidated financial statements, has issued an attestation
report on managements assessment of NxStages
internal control over financial reporting.
83
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of NxStage Medical, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that NxStage Medical, Inc. maintained
effective internal control over financial reporting as of
December 31, 2006, 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. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that NxStage
Medical, Inc. maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, NxStage Medical, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, 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 as of
December 31, 2006 and 2005, 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, 2006 of
NxStage Medical, Inc. and our report dated March 14, 2007
expressed an unqualified opinion thereon.
Boston, Massachusetts
March 14, 2007
84
|
|
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 2007 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 and Ethics, which is
applicable to the registrants directors, officers and
employees and the charters of the Audit Committee, Compensation
Committee and Corporate Governance and Nominating 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
|
(a) Financial Statements
The following consolidated financial statements are filed as
part of this Annual Report under Item 8
Financial Statements and Supplementary Data:
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
59
|
|
Consolidated Balance Sheets
|
|
|
60
|
|
Consolidated Statements of
Operations
|
|
|
61
|
|
Consolidated Statements of
Redeemable Convertible Preferred Stock and
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
|
62
|
|
Consolidated Statements of Cash
Flows
|
|
|
63
|
|
Notes to Consolidated Financial
Statements
|
|
|
64
|
|
(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.
85
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 15, 2007
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 15, 2007
|
|
|
|
|
|
/s/ Robert
S. Brown
Robert
S. Brown
|
|
Chief Financial Officer and Senior
Vice President (Principal Financial and Accounting Officer)
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Philippe
O. Chambon
Philippe
O. Chambon, M.D., Ph.D.
|
|
Chairman of the Board of Directors
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Daniel
A. Giannini
Daniel
A. Giannini
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Craig
W. Moore
Craig
W. Moore
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Reid
S. Perper
Reid
S. Perper
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Peter
P. Phildius
Peter
P. Phildius
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ David
S. Utterberg
David
S. Utterberg
|
|
Director
|
|
March 15, 2007
|
86
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
|
Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
|
|
|
Articles of Incorporation and
By-Laws
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation
|
|
S-1/A
|
|
|
3.4
|
|
|
10/7/2005
|
|
333-126711
|
|
3
|
.2
|
|
Amended and Restated By-Laws
|
|
S-1/A
|
|
|
3.5
|
|
|
10/7/2005
|
|
333-126711
|
|
|
|
|
Instruments Defining the Rights
of Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.1
|
|
Specimen Certificate evidencing
shares of common stock
|
|
S-1/A
|
|
|
4.1
|
|
|
10/7/2005
|
|
333-126711
|
|
|
|
|
Material Contracts
Management Contracts and Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.1#
|
|
1999 Stock Option and Grant Plan,
as amended
|
|
S-1/A
|
|
|
10.1
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.2#
|
|
Form of Incentive Stock Option
Agreement under the 1999 Stock Option and Grant Plan, as amended
|
|
S-1/A
|
|
|
10.2
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.3#
|
|
Form of Nonstatutory Stock Option
Agreement under the 1999 Stock Option and Grant Plan, as amended
|
|
S-1/A
|
|
|
10.3
|
|
|
10/7/2005
|
|
333-126711
|
|
10
|
.4#
|
|
2005 Stock Incentive Plan,
together with Form of Incentive Stock Option Agreement and Form
of Nonstatutory Stock Option Agreement
|
|
S-1/A
|
|
|
10.22
|
|
|
10/20/2005
|
|
333-126711
|
|
*10
|
.5#
|
|
Form of Restricted Stock Agreement
under the 2005 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.6#
|
|
Employment Agreement dated
October 19, 2005 between the Registrant and Jeffrey H.
Burbank
|
|
S-1/A
|
|
|
10.12
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.7#
|
|
Employment Agreement dated
October 17, 2005 between the Registrant and Philip R. Licari
|
|
S-1/A
|
|
|
10.13
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.8#
|
|
Employment Agreement dated
October 18, 2005 between the Registrant and Joseph E.
Turk, Jr.
|
|
S-1/A
|
|
|
10.15
|
|
|
10/20/2005
|
|
333-126711
|
|
10
|
.9#
|
|
Employment Agreement dated
October 18, 2005 between the Registrant and Winifred L. Swan
|
|
S-1/A
|
|
|
10.16
|
|
|
10/20/2005
|
|
333-126711
|
|
*10
|
.10#
|
|
Employment Agreement dated
November 27, 2006 between Registrant and Robert S. Brown
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.11#
|
|
Restricted Stock Agreement Granted
Under 2005 Stock Incentive Plan dated March 24, 2006
between the Registrant and Philip R. Licari
|
|
10-Q
|
|
|
10.4
|
|
|
5/5/2006
|
|
000-51567
|
|
10
|
.12#
|
|
Amendment to Non-Qualified Stock
Option Agreement dated March 24, 2006 between the
Registrant and Philip R. Licari
|
|
10-Q
|
|
|
10.5
|
|
|
5/5/2006
|
|
000-51567
|
|
10
|
.13#
|
|
Form of Indemnification Agreement
entered into between the Registrant and each of its Directors
and Executive Officers
|
|
S-1/A
|
|
|
10.21
|
|
|
9/21/2005
|
|
333-126711
|
|
10
|
.14#
|
|
Summary of 2006 Executive
Compensation and 2006 Corporate Bonus Plan
|
|
S-1
|
|
|
10.25
|
|
|
5/17/2006
|
|
333-134187
|
|
10
|
.15#
|
|
Director Compensation Policy
|
|
10-Q
|
|
|
10.2
|
|
|
5/5/2006
|
|
000-51567
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
|
Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
|
|
|
Material Contracts
Credit Agreements and Warrants
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.16
|
|
Loan and Security Agreement dated
December 23, 2004 by and between the Registrant and
Lighthouse Capital Partners V, L.P.
|
|
S-1
|
|
|
10.4
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.17
|
|
Second Promissory Note made
December 29, 2004 by Registrant in favor of Lighthouse
Capital Partners V, L.P.
|
|
S-1
|
|
|
10.5
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.18
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners IV, L.P.
|
|
S-1
|
|
|
10.6
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.19
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners V, L.P.
|
|
S-1
|
|
|
10.7
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.20
|
|
Warrant to Purchase Series E
Preferred Stock dated September 26, 2002 issued to Comerica
Bank
|
|
S-1
|
|
|
10.8
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.21
|
|
Loan and Security Agreement dated
as of May 15, 2006 between the Silicon Valley Bank and the
Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Contracts
Leases
|
|
S-1
|
|
|
10.24
|
|
|
5/17/2006
|
|
333-126711
|
|
10
|
.22
|
|
Standard Form Commercial Lease
dated October 17, 2000 between the Registrant and Heritage
Place, LLC, as amended by Modification to Standard Form
Commercial Lease
|
|
S-1
|
|
|
10.10
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.23
|
|
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
|
|
S-1
|
|
|
10.11
|
|
|
7/19/2005
|
|
333-126711
|
|
|
|
|
Material Contracts
Supply Agreements and Production Agreements
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.24
|
|
Supply Agreement dated as of
October 26, 2004 between the Registrant and B. Braun
Medizintechnologie GmbH
|
|
S-1
|
|
|
10.17
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.25
|
|
Supply Agreement dated
October 1, 2004 between the Registrant, EIR Medical, Inc.
and Membrana GmbH
|
|
S-1
|
|
|
10.18
|
|
|
7/19/2005
|
|
333-126711
|
|
10
|
.26
|
|
Production Agreement dated as of
June 27, 2005 between the Registrant and KMC Systems, Inc.
|
|
S-1
|
|
|
10.19
|
|
|
7/19/2005
|
|
333-126711
|
|
*10
|
.27
|
|
Supply Agreement dated as of
January 5, 2007 between the Registrant and Membrana GmbH
|
|
|
|
|
|
|
|
|
|
|
|
*10
|
.28
|
|
Supply Agreement dated as of
January 1, 2007 between the Registrant and Medisystems
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
*10
|
.29
|
|
National Service Provider
Agreement dated as of February 7, 2007 between the
Registrant and DaVita Inc.
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.30
|
|
Supply Agreement dated
March 27, 2006 between the Registrant and Laboratorios PISA
S.A. de C.V.
|
|
10-Q
|
|
|
10.01
|
|
|
5/5/2006
|
|
000-51567
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference to
|
Exhibit
|
|
|
|
Form or
|
|
|
|
Filing Date
|
|
SEC File
|
Number
|
|
Description
|
|
Schedule
|
|
Exhibit No.
|
|
with SEC
|
|
Number
|
|
|
|
|
|
Material Contracts
Stock Purchase, Investor Rights and Registration Rights
Agreements
|
|
|
|
|
|
|
|
|
|
|
|
*10
|
.31
|
|
Stock Purchase Agreement dated as
of February 7, 2007 between the Registrant and DaVita Inc.
|
|
|
|
|
|
|
|
|
|
|
|
*10
|
.32
|
|
Registration Rights Agreement
dated as of February 7, 2007 between the Registrant and
DaVita Inc.
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.33
|
|
Investors Rights Agreement
dated June 30, 1999 between the Registrant and the
Investors, as amended on January 24, 2000, May 24,
2001, April 15, 2003, August 18, 2004,
December 23, 2004 and July 8, 2005
|
|
S-1
|
|
|
10.9
|
|
|
7/19/2005
|
|
333-126711
|
|
*21
|
.1
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
*23
|
.1
|
|
Consent of Ernst & Young
LLP
|
|
|
|
|
|
|
|
|
|
|
|
*31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Exchange Act
Rules 13a-14
or 15d-14,
as adopted pursuant to Section 302 of Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
|
|
*31
|
.2
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
*32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Exchange Act
Rules 13a-14(b)
or 15d-14(b)
and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
*32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Exchange Act
Rules 13a-14(b)
or 15d-14(b)
and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Securities
and Exchange Commission. |
|
# |
|
Management contract or compensatory plan or arrangement filed as
an Exhibit to this report pursuant to 15(a) and 15(c) of
Form 10-K. |
89