Attached files
file | filename |
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EX-32.1 - EX-32.1 SECTION 906 CERTIFICATION OF CEO - NxStage Medical, Inc. | b77460exv32w1.htm |
EX-32.2 - EX-32.2 SECTION 906 CERTIFICATION OF CFO - NxStage Medical, Inc. | b77460exv32w2.htm |
EX-31.1 - EX-31.1 SECTION 302 CERTIFICATION OF CEO - NxStage Medical, Inc. | b77460exv31w1.htm |
EX-31.2 - EX-31.2 SECTION 302 CERTIFICATION OF CFO - NxStage Medical, Inc. | b77460exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-51567
NxStage Medical, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 04-3454702 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
439 S. Union St., 5th Floor, Lawrence, MA | 01843 | |
(Address of Principal Executive Offices) | (Zip Code) |
(978) 687-4700
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address, and Former Fiscal year, If Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company 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
There were 46,696,500 shares of the registrants common stock issued and outstanding as of the
close of business on November 6, 2009.
NXSTAGE MEDICAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements (unaudited): |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
15 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
44 | ||||||||
45 | ||||||||
Exhibit Index |
||||||||
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
Table of Contents
NXSTAGE MEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,095 | $ | 26,642 | ||||
Accounts receivable, net |
11,668 | 11,886 | ||||||
Inventory |
27,754 | 30,862 | ||||||
Prepaid expenses and other current assets |
2,073 | 2,011 | ||||||
Total current assets |
63,590 | 71,401 | ||||||
Property and equipment, net |
10,630 | 12,254 | ||||||
Field equipment, net |
25,152 | 30,445 | ||||||
Deferred cost of revenues |
23,592 | 23,711 | ||||||
Intangible assets, net |
28,907 | 31,004 | ||||||
Goodwill |
42,698 | 42,698 | ||||||
Other assets |
901 | 553 | ||||||
Total assets |
$ | 195,470 | $ | 212,066 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 17,341 | $ | 17,183 | ||||
Accrued expenses |
10,652 | 10,746 | ||||||
Current portion of long-term debt |
62 | 9,110 | ||||||
Total current liabilities |
28,055 | 37,039 | ||||||
Deferred revenue |
32,766 | 29,634 | ||||||
Long-term debt |
37,226 | 21,054 | ||||||
Other long-term liabilities |
2,008 | 1,892 | ||||||
Total liabilities |
100,055 | 89,619 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Undesignated preferred stock: par value
$0.001, 5,000,000 shares authorized;
no shares issued and outstanding as of
September 30, 2009 and December 31, 2008 |
| | ||||||
Common stock: par value $0.001, 100,000,000
shares authorized; 46,695,539
and 46,548,585 shares issued and
outstanding as of September 30, 2009 and
December 31, 2008, respectively |
47 | 47 | ||||||
Additional paid-in capital |
362,934 | 355,266 | ||||||
Accumulated deficit |
(268,037 | ) | (233,247 | ) | ||||
Accumulated other comprehensive income |
471 | 381 | ||||||
Total stockholders equity |
95,415 | 122,447 | ||||||
Total liabilities and stockholders equity |
$ | 195,470 | $ | 212,066 | ||||
See accompanying notes to these condensed consolidated financial statements.
3
Table of Contents
NXSTAGE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
$ | 38,033 | $ | 30,466 | $ | 108,166 | $ | 93,087 | ||||||||
Cost of revenues |
28,488 | 25,684 | 82,749 | 79,872 | ||||||||||||
Gross profit |
9,545 | 4,782 | 25,417 | 13,215 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling and marketing |
7,449 | 6,839 | 22,091 | 20,937 | ||||||||||||
Research and development |
2,707 | 1,986 | 7,380 | 6,474 | ||||||||||||
Distribution |
3,267 | 3,472 | 10,476 | 10,202 | ||||||||||||
General and administrative |
4,808 | 4,744 | 14,512 | 14,443 | ||||||||||||
Total operating expenses |
18,231 | 17,041 | 54,459 | 52,056 | ||||||||||||
Loss from operations |
(8,686 | ) | (12,259 | ) | (29,042 | ) | (38,841 | ) | ||||||||
Other expense: |
||||||||||||||||
Interest income |
7 | 146 | 32 | 453 | ||||||||||||
Interest expense |
(1,130 | ) | (1,017 | ) | (5,502 | ) | (2,908 | ) | ||||||||
Change in fair value of financial
instruments |
| (1,835 | ) | | 251 | |||||||||||
Other (expense) income, net |
(59 | ) | 138 | 20 | (155 | ) | ||||||||||
(1,182 | ) | (2,568 | ) | (5,450 | ) | (2,359 | ) | |||||||||
Net loss before income taxes |
(9,868 | ) | (14,827 | ) | (34,492 | ) | (41,200 | ) | ||||||||
Provision for income taxes |
179 | 143 | 298 | 248 | ||||||||||||
Net loss |
$ | (10,047 | ) | $ | (14,970 | ) | $ | (34,790 | ) | $ | (41,448 | ) | ||||
Net loss per share, basic and diluted |
$ | (0.22 | ) | $ | (0.33 | ) | $ | (0.75 | ) | $ | (1.03 | ) | ||||
Weighted-average shares outstanding,
basic and diluted |
46,672 | 45,067 | 46,600 | 40,204 | ||||||||||||
See accompanying notes to these condensed consolidated financial statements.
4
Table of Contents
NXSTAGE MEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (34,790 | ) | $ | (41,448 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
15,367 | 14,073 | ||||||
Stock-based compensation |
6,392 | 4,456 | ||||||
Change in fair value of financial instruments |
| (251 | ) | |||||
Other |
1,977 | 660 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
337 | (1,248 | ) | |||||
Inventory |
(3,707 | ) | (24,511 | ) | ||||
Prepaid expenses and other assets |
682 | 1,073 | ||||||
Accounts payable |
25 | (4,713 | ) | |||||
Accrued expenses and other liabilities |
1,455 | (3,375 | ) | |||||
Deferred revenue |
(653 | ) | 8,331 | |||||
Net cash used in operating activities |
(12,915 | ) | (46,953 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,073 | ) | (2,604 | ) | ||||
Maturities of short-term investments |
| 1,100 | ||||||
(Increase) decrease in other assets |
(340 | ) | 818 | |||||
Net cash used in investing activities |
(1,413 | ) | (686 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from private placement sale of common stock |
| 42,553 | ||||||
Proceeds from stock option and purchase plans |
279 | 266 | ||||||
Proceeds from loans and lines of credit |
39,895 | 5,000 | ||||||
Net repayments on loans and lines of credit |
(30,523 | ) | (62 | ) | ||||
Net cash provided by financing activities |
9,651 | 47,757 | ||||||
Foreign exchange effect on cash and cash equivalents |
130 | (484 | ) | |||||
Decrease in cash and cash equivalents |
(4,547 | ) | (366 | ) | ||||
Cash and cash equivalents, beginning of period |
26,642 | 33,245 | ||||||
Cash and cash equivalents, end of period |
$ | 22,095 | $ | 32,879 | ||||
Noncash Investing Activities |
||||||||
Transfers from inventory to field equipment and deferred cost of revenues |
$ | 5,410 | $ | 18,273 | ||||
Transfers from field equipment to deferred cost of revenues |
$ | 1,957 | $ | 998 | ||||
See accompanying notes to these condensed consolidated financial statements.
5
Table of Contents
NXSTAGE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
NxStage Medical, Inc., or the Company, is a medical device company that develops, manufactures
and markets innovative products for the treatment of kidney failure, fluid overload and related
blood treatments and procedures. The Companys primary product, the NxStage System One, 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 centers. The System One is cleared by the United States Food and Drug
Administration, or 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. Dialysate used in conjunction with this system in the home is
most frequently prepared using the Companys PureFlow SL hardware and premixed concentrate bags.
The Company also sells needles and blood tubing to dialysis centers for the treatment of end-stage
renal disease, or ESRD.
The Company has experienced negative operating margins and cash flows from operations and it
expects to continue to incur net losses in the foreseeable future. The Company believes, based on
current projections, that it has the required resources to fund operating requirements at least
through 2010. Future capital requirements will depend on many factors, including the rate of
revenue growth, continued progress on improving gross margins, the expansion of selling and
marketing and research and development activities, the timing and extent of expansion into new
geographies or territories, the timing of new product introductions and enhancement to existing
products, the continuing market acceptance of products, availability of credit and potential
investments in, or acquisitions of, complementary businesses, services or technologies.
Basis of Presentation
The accompanying condensed consolidated financial statements as of September 30, 2009 and for
the three and nine months ended September 30, 2009, and related notes, are unaudited but, in
managements opinion, include all adjustments, consisting of normal recurring adjustments that the
Company considers necessary for fair statement of the interim periods presented. The Company has
prepared its unaudited, condensed consolidated financial statements following the requirements of
the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under these
rules, the Company has condensed or omitted certain footnotes and other financial information that
are normally required by generally accepted accounting principles in the United States, or GAAP.
The Companys accounting policies are described in the notes to the consolidated financial
statements in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008
and updated, as necessary, in this Quarterly Report on Form 10-Q. Operating results for the three
and nine months ended September 30, 2009 are not necessarily indicative of results for the entire
fiscal year or future periods. The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries at September 30, 2009. The December
31, 2008 condensed consolidated balance sheet contained herein was derived from audited financial
statements, but does not include all disclosures required by GAAP. For further information, refer
to the consolidated financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2008.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed 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. Certain reclassifications have been made to prior years
financial statements to conform to the 2009 presentation.
Use of Estimates
The preparation of the Companys condensed consolidated financial statements in conformity
with GAAP 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.
Revenue Recognition
The Company recognizes revenue from product sales and services when earned. Revenues are
recognized when: (a) there is persuasive evidence of an arrangement, (b) the product has been
shipped or services and supplies have been provided to the customer, (c) the sales price is fixed
or determinable and (d) collection is reasonably assured. The Companys revenue arrangements with
multiple elements are divided into separate units of accounting if specified criteria are met,
including whether the delivered element has stand-alone value to the customer and whether there is
objective and reliable evidence of the fair value of the undelivered items. The consideration
received is allocated among the separate units based on their respective fair values, and the
applicable revenue recognition criteria are applied to each of the separate units.
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Table of Contents
Certain agreements with distributors allow for product returns and credits. For shipment of
product sold to distributors revenue is recognized at the time of sale if a reasonable estimate of
future returns or refunds can be made. If a reasonable estimate of future returns or refunds
cannot be made, the Company recognizes revenue using the sell-through method. Under the
sell-through method, revenue and related costs of revenue is deferred until the final resale of
such products to end customers.
System One Segment
The Company derives its revenue in the home market from the sales of hemodialysis therapy to
customers in which the customer either purchases or rents the System One and PureFlow SL hardware
and purchases a specified number of disposable products and, in some instances, service.
Under the rental arrangements, which combine the use of the System One and PureFlow SL
hardware with a specified number of disposable products supplied to customers for a fixed price per
month, revenue is recognized on a monthly basis in accordance with agreed upon contract terms and
pursuant to binding customer purchase orders and fixed payment terms.
For customers that purchase the System One and PureFlow SL hardware, the Company recognizes
equipment revenue upon delivery if the equipment has stand-alone value and the fair value of the
undelivered items, typically the disposables and, in some instances service, can be determined. If
the fair value of the undelivered items can be determined, they are accounted for separately as
delivered. If the fair value of any of the undelivered items cannot be determined, the arrangement
is accounted for as a single unit of accounting and the fees received upon the completion of
delivery of equipment are deferred and recognized as revenue on a straight-line basis over the
expected term of the Companys remaining obligation and direct costs relating to the delivered
equipment are amortized over the same period as the related revenue, while disposable products
revenue is recognized on a monthly basis upon delivery.
In the critical care market, the Company structures sales of the System One primarily as
direct product sales. 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.
The Companys contracts for the System One in the critical care market 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.
In-Center Segment
In the In-Center segment, nearly all sales to end users are structured through supply and
distribution contracts with distributors. Some of the Companys distribution contracts for the
In-Center segment contain minimum volume commitments with negotiated pricing discounts at different
volume tiers. Each agreement may be cancelled upon a material breach, subject to certain curing
rights, and in many instances minimum volume commitments can be reduced or eliminated upon certain
events.
In addition to contractually determined volume discounts, in many agreements the Company
offers rebates based on sales to specific end customers and discount incentives for early payment.
Discounts and sales incentives are recorded as a reduction of revenues and trade accounts
receivable, based on the Companys best estimate of the amount of probable future rebate or
discount on current sales.
Concentration of Credit Risk
The following table summarizes customers who individually comprise greater than 10% of total
revenues for the periods shown below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Customer A |
22 | % | 20 | % | 22 | % | 19 | % | ||||||||
Customer B |
27 | % | 37 | % | 33 | % | 40 | % |
Sales to Customer A are primarily in the System One segment and sales to Customer B are to one
of the Companys significant distributors in the In-Center segment. Half of all Customer B sales
are to Customer A.
Two customers represented 13% and 11% of accounts receivable at September 30, 2009. Two
customers represented 26% and 10% of accounts receivable at December 31, 2008.
Warranty Costs
For a period of one year following the delivery of products to its critical care customers,
the Company provides for product repair or replacement if it is determined that there is a defect
in material or manufacture of the product. For sales into the critical care market, the Company
accrues estimated warranty costs at the time of shipment based on contractual rights and historical
experience. Warranty expense is included in cost of revenues in the consolidated statements of
operations. The following is a rollforward of the Companys warranty accrual (in thousands):
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Balance at December 31, 2008 |
$ | 235 | ||
Provision |
251 | |||
Usage |
(271 | ) | ||
Balance at September 30, 2009 |
$ | 215 |
Net Loss per Share
Basic earnings per share is computed by dividing income available to common stockholders (the
numerator) by the weighted-average number of common shares outstanding (the denominator) for the
period. The computation of diluted earnings per share is similar to basic earnings per share,
except that the denominator is increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been issued.
Options to purchase 1.1 million and 0.1 million shares of common stock for the three months
ended September 30, 2009 and 2008, respectively, and 0.4 million and 0.3 million shares of common
stock for the nine months ended September 30, 2009 and 2008, respectively, were not included in the
computation of diluted net loss per share as their effect would have been anti-dilutive.
Subsequent Events
Events
occurring subsequent to September 30, 2009 have been evaluated through November 9,
2009, the date the Company filed its Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
Effective January 1, 2009, the Company adopted a new accounting standard update regarding
business combinations. As codified under Accounting Standards Codification, or ASC, 805, this
update provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of
the fair values of acquired assets, including goodwill and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the
step acquisition model will be eliminated. Additionally, it changes current practice, in part, as
follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration; (2) transaction costs will be expensed
as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition
contingencies, such as legal issues, will generally have to be accounted for in purchase accounting
at fair value; (4) in-process research and development will be capitalized and either amortized
over the life of the product or written off if the project is abandoned or impaired; (5) changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense; and (6) restructuring costs generally will be expensed in
periods subsequent to the acquisition date.
Since this accounting update is applicable to future acquisitions completed after January 1,
2009 and the Company did not have any business combinations subsequent to January 1, 2009 to date,
the adoption of this update did not have an impact on the Companys consolidated financial
statements. This accounting update also amended accounting for uncertainty in income taxes such
that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of ASC 805 would also follow
the provisions of this update. Thus, all changes to valuation allowances and liabilities for
uncertain tax positions established in acquisition accounting will be recognized in current period
income tax expense.
Effective January 1, 2009, the Company adopted the applicable sections of an accounting
standard update as codified under ASC 820 for nonfinancial assets and liabilities that are measured
or recognized at fair value on a non-recurring basis, which were previously deferred. These
sections establish a framework for measuring fair value and expand financial statement disclosures
about fair value measurements. The adoption of the various sections of ASC 820 did not have a
material impact on the Companys consolidated financial statements.
Effective January 1, 2009, the Company adopted an accounting standard update as codified under
ASC 815 that requires the application of a two-step approach in evaluating whether an equity-linked
financial instrument (or embedded feature) is indexed to a Companys own stock, including
evaluating the instruments contingent exercise and settlement provisions, and must be applied to
all instruments outstanding on the date of adoption. The adoption of this update did not have an
impact on the Companys consolidated financial statements.
Effective April 1, 2009, the Company adopted an accounting standard update as codified under
ASC 820-10-65 which provides guidelines for making fair value measurements more consistent and
provides additional authoritative guidance in determining whether a market is active or inactive,
and whether a transaction is distressed, and is applicable to all assets and liabilities (i.e.
financial and nonfinancial) and will require enhanced disclosures. The adoption of this update did
not have an impact on the Companys consolidated financial statements.
Effective April 1, 2009, the Company adopted a new accounting standard update as codified
under ASC 825. This update requires disclosures about fair value of financial instruments in
interim as well as in annual financial statements and also requires those disclosures in all
interim financial statements. The adoption of this standard has resulted in the enhanced disclosure
of the fair values attributable to debt instruments within this interim report. Since this update
addresses disclosure requirements, the adoption of this update did not impact the Companys
financial position, results of operations or cash flows.
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Effective April 1, 2009, the Company adopted an accounting standard update as codified under
ASC 320-10-65, which provides additional guidance to provide greater clarity about the credit and
noncredit component of an other-than-temporary impairment event related to debt securities and to
more effectively communicate when an other-than-temporary impairment event has occurred. The
adoption of this update did not have an impact on the Companys consolidated financial statements.
Effective June 30, 2009, the Company adopted a new accounting standard for subsequent events
as codified in ASC 855-10. The update provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The update also requires entities to
disclose the date through which subsequent events were evaluated as well as the rationale for why
that date was selected. This disclosure should alert all users of financial statements that an
entity has not evaluated subsequent events after that date in the set of financial statements being
presented. The adoption has resulted in enhanced disclosures around subsequent events within this
interim report. Since this update primarily addresses disclosure requirements, the adoption of this
standard did not impact the Companys financial position, results of operations or cash flows.
Effective July 1, 2009, the Company adopted The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, or ASC 105. This standard establishes
only two levels of GAAP, authoritative and nonauthoritative. The Financial Accounting Standards
Board, or FASB, Accounting Standards Codification, or the Codification, became the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which
are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification became nonauthoritative. The Company began
using the new guidelines and numbering system prescribed by the Codification when referring to GAAP
in the third quarter of fiscal 2009. As the Codification was not intended to change or alter
existing GAAP, it did not have any impact on the Companys consolidated financial statements.
In June 2009, the FASB issued the following new accounting standard which has not yet been
integrated into the Codification, Statement of Financial Accounting Standards, or SFAS, No. 166,
Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166.
Accordingly SFAS 166 will remain authoritative until integrated. SFAS 166 prescribes the
information that a reporting entity must provide in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement in transferred financial assets.
Specifically, among other aspects, SFAS 166 amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the
concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from
applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised), or FIN
46(R), to variable interest entities that are qualifying special-purpose entities. It also modifies
the financial-components approach used in SFAS 140. SFAS 166 is effective for transfer of financial
assets occurring on or after January 1, 2010. The Company has not determined the effect the
adoption of SFAS 166 will have on its consolidated financial statements, but the effect will be
limited to future transactions.
In August 2009, the FASB issued Update No. 2009-05, which amends ASC 820 to provide further
guidance on how to measure the fair value of a liability, an area where practitioners have been
seeking further guidance. It primarily does three things: 1) sets forth the types of valuation
techniques to be used to value a liability when a quoted price in an active market for the
identical liability is not available, 2) clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability and
3) clarifies that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required are Level 1 fair
value measurements. The update is effective beginning fourth quarter of 2009 for the Company. The
adoption of this update is not expected to impact the Companys consolidated financial statements.
In September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue
Arrangementsa consensus of the FASB Emerging Issues Task Force, or ASU 2009-13. It updates the
existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which
originated primarily from the guidance in Emerging Issues Task Force, or EITF, Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. The revised guidance primarily provides two
significant changes: 1) eliminates the need for objective and reliable evidence of the fair value
for the undelivered element in order for a delivered item to be treated as a separate unit of
accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue recognition. The update
will be effective for the first annual reporting period beginning on or after June 15, 2010, with
early adoption permitted provided that the revised guidance is retroactively applied to the
beginning of the year of adoption. The Company is currently assessing the future impact of this new
accounting update to its consolidated financial statements.
In September 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That
Include Software Elements a consensus of the FASB Emerging Issues Task Force, or ASU 2009-14.
It amends ASC 985-605 such that tangible products,
containing both software and non-software components that function together to deliver the
tangible products essential functionality, are no longer within the scope of ASC 985-605. It also
amends the determination of how arrangement consideration should be allocated to deliverables in a
multiple-deliverable revenue arrangement. This update will become effective for the Company for
revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier
application is permitted. The adoption of this update will not have an impact on the Companys
consolidated financial statements as the Company has concluded the software component of its
tangible products is incidental.
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3. Inventory
Inventories, stated at lower of cost or market, consist of the following (in thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Purchased components |
$ | 14,119 | $ | 15,296 | ||||
Work in process |
1,385 | 1,402 | ||||||
Finished goods |
12,250 | 14,164 | ||||||
$ | 27,754 | $ | 30,862 | |||||
4. Property and Equipment and Field Equipment
Accumulated depreciation on property and equipment was $9.6 million and $7.1 million at
September 30, 2009 and December 31, 2008, respectively. Accumulated depreciation on field
equipment was $24.3 million and $17.5 million at September 30, 2009 and December 31, 2008,
respectively.
5. Intangible Assets
Accumulated amortization of intangible assets was $5.6 million and $3.5 million at September
30, 2009 and December 31, 2008, respectively.
6. Debt
In June 2009, the Company closed a $40.0 million term loan and security agreement with Asahi
Kasei Kuraray Medical, or Asahi. Borrowings bear interest at a rate of 8% per annum, with fifty
percent of such interest being deferred until the maturity date on May 31, 2013. Principal is
payable in one balloon payment at maturity. The term loan is secured by all of the Companys assets
other than cash, bank accounts, accounts receivable, field equipment, and inventory. The term loan
may be prepaid, without penalty, at the Companys option. In the event the term loan reaches
maturity, Asahi may require that all of the principal and interest on the term loan that is unpaid
as of the maturity date be converted into shares of the Companys common stock, with the number of
shares to be determined based upon the average closing stock price of the Companys common stock
during the thirty business days preceding the maturity date. Under no circumstance would the
Company be obligated to issue more than 10% of the number of its shares of common stock outstanding
on the maturity date to Asahi in satisfaction of this obligation; provided that the Company and
Asahi may mutually agree, in each of its own sole discretion, to increase the 10% limitation up to
20%.
Borrowings under the term loan and security agreement were recorded at their estimated fair
value at issuance, net of a $3.7 million discount. The discount will be recorded to interest
expense over the term of the agreement, through May 31, 2013, on a straight-line basis.
The Company used $30.0 million of the proceeds from the term loan and security agreement to
pay off the Companys debt obligation owed under its credit and security agreement with GE Capital
Corporation, or GE, including $2.0 million of prepayment and other transactions fees which were
recorded to interest expense during the three months ended June 30, 2009.
7. Comprehensive Loss
The following table presents the components of comprehensive loss (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (10,047 | ) | $ | (14,970 | ) | $ | (34,790 | ) | $ | (41,448 | ) | ||||
Foreign currency translation adjustment |
43 | (523 | ) | 90 | (150 | ) | ||||||||||
Comprehensive loss |
$ | (10,004 | ) | $ | (15,493 | ) | $ | (34,700 | ) | $ | (41,598 | ) | ||||
8. Segment Disclosures
After careful evaluation of the business activities regularly reviewed by the Companys chief
operating decision-maker for which separate discrete financial information is available, management
determined that the Company has two reporting segments, System One and In-Center. Beginning in the
first quarter of 2009, the Company allocated previously unallocated cost of revenues to its System
One and In-Center segments. Prior year segment information has been changed to conform to the
current presentation.
The accounting policies of the reportable segments are the same as those described in Note 2,
Summary of Significant Accounting Policies. The profitability measure employed by the Company and
its chief operating decision maker for making decisions about
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allocating resources to segments and
assessing segment performance is segment (loss) profit, which consists of sales, less cost of
sales, selling and marketing and distribution expenses.
The Companys management measures are designed to assess performance of these operating
segments excluding certain items. As a result, certain corporate expenses are excluded from the
segment operating performance measures, including research and development expenses and general and
administrative expenses, as they are managed centrally.
Within the System One segment, the Company derives revenue from the sale and rental of the
System One and PureFlow SL equipment and the sale of disposable products in the home and critical
care markets. The home market is devoted to the treatment of ESRD patients in the home, while the
critical care market is devoted to the treatment of hospital-based patients with acute kidney
failure or fluid overload. Within the System One segment, the Company sells a similar technology
platform of the System One with different features. Some of the Companys largest customers in the
home market provide outsourced renal dialysis services to some of the Companys customers in the
critical care market. Sales of product to both markets are made through dedicated sales forces and
products are distributed directly to the customer, or the patient.
Within the In-Center segment, the Company sells blood tubing sets and needles for hemodialysis
and needles for apheresis primarily for the treatment of ESRD patients at dialysis centers. Nearly
all In-Center products are sold through national distributors.
The Companys reportable segments consist of the following (in thousands):
System One | In-Center | Unallocated | Total | |||||||||||||
Three Months Ended September 30, 2009 |
||||||||||||||||
Revenues from external customers |
$ | 22,028 | $ | 16,005 | | $ | 38,033 | |||||||||
Segment (loss) profit |
(4,116 | ) | 2,945 | (7,515 | ) | (8,686 | ) | |||||||||
Segment assets |
69,908 | 18,258 | 107,304 | 195,470 | ||||||||||||
Three Months Ended September 30, 2008 |
||||||||||||||||
Revenues from external customers |
$ | 16,813 | $ | 13,653 | $ | | $ | 30,466 | ||||||||
Segment (loss) profit |
(6,805 | ) | 1,276 | (6,730 | ) | (12,259 | ) | |||||||||
Segment assets |
81,668 | 17,067 | 122,981 | 221,716 | ||||||||||||
Nine Months Ended September 30, 2009 |
||||||||||||||||
Revenues from external customers |
$ | 61,295 | $ | 46,871 | $ | | $ | 108,166 | ||||||||
Segment (loss) profit |
(14,733 | ) | 7,583 | (21,892 | ) | (29,042 | ) | |||||||||
Segment assets |
69,908 | 18,258 | 107,304 | 195,470 | ||||||||||||
Nine Months Ended September 30, 2008 |
||||||||||||||||
Revenues from external customers |
$ | 47,914 | $ | 45,173 | $ | | $ | 93,087 | ||||||||
Segment (loss) profit |
(21,910 | ) | 3,986 | (20,917 | ) | (38,841 | ) | |||||||||
Segment assets |
81,668 | 17,067 | 122,981 | 221,716 |
The following table presents a reconciliation of the total segment assets to total assets (in
thousands):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Total segment assets |
$ | 88,166 | $ | 96,904 | ||||
Corporate assets: |
||||||||
Cash and cash equivalents |
22,095 | 26,642 | ||||||
Property and equipment, net |
10,630 | 12,254 | ||||||
Intangible assets, net |
28,907 | 31,004 | ||||||
Goodwill |
42,698 | 42,698 | ||||||
Prepaid and other assets |
2,974 | 2,564 | ||||||
Total assets |
$ | 195,470 | $ | 212,066 | ||||
9. Income Taxes
The Companys provision for income taxes of $179,000 and $143,000 for the three months ended
September 30, 2009 and 2008, respectively, and $298,000 and $248,000 for the nine months ended
September 30, 2009 and 2008, respectively, relates to the profitable operations of certain foreign
entities.
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10. Stock-Based Compensation
The captions in the Companys condensed consolidated statements of operations for the three
and nine months ended September 30, 2009 and 2008 include stock-based compensation as follows (in
thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Cost of revenues |
$ | 434 | $ | 231 | $ | 1,098 | $ | 795 | ||||||||
Selling and marketing |
1,046 | 465 | 2,497 | 1,674 | ||||||||||||
Research and development |
232 | 95 | 545 | 388 | ||||||||||||
General and administrative |
802 | 385 | 2,252 | 1,599 | ||||||||||||
$ | 2,514 | $ | 1,176 | $ | 6,392 | $ | 4,456 | |||||||||
Stock Options
The Company grants stock options to employees, officers and directors under its current stock
plans. The Company granted options to purchase 43,000 and 92,217 shares of common stock during the
three months ended September 30, 2009 and 2008, respectively, and options to purchase 1,700,430 and
1,583,617 shares of common stock during the nine months ended September 30, 2009 and 2008,
respectively. The weighted-average fair value of options granted during the nine months ended
September 30, 2009 and 2008 was $1.26 and $2.86 per option, respectively.
Performance-Based Plans
In March 2009, the Company committed to grant up to 1,591,250 restricted stock units to
certain employees and executive officers based on the Companys financial performance for the year
ending December 31, 2009, which the Company refers to as the 2009 Performance Share Plan. The
grants are being recognized as compensation expense, adjusted as necessary based on the number of
awards expected to vest over the requisite service period of three years using the graded vesting
method. In March 2009, the Company approved its 2009 corporate bonus plan, or the 2009 Bonus Plan.
Payout under the 2009 Bonus Plan will be based on the Companys financial performance for the year
ending December 31, 2009 and may be paid in cash, or in restricted stock units, at the discretion
of the Compensation Committee of the Companys Board of Directors. The estimated payout under the
2009 Bonus Plan is being recognized as compensation expense during 2009 and has been classified as
a liability on the Companys condensed consolidated balance sheet.
The Company recorded $0.9 million and $1.5 million in stock-based compensation expense during
the three and nine months ended September 30, 2009, respectively, in connection with the 2009
Performance Share Plan and 2009 Bonus Plan. As of September 30, 2009, unrecognized compensation
expense of $1.6 million for the 2009 Bonus Plan and the 2009 Performance Share Plan is expected to
be recognized over a period of approximately 2.3 years.
11. Stockholders Equity
On May 22, 2008, the Company entered into Securities Purchase Agreements relating to a private
placement of shares of its common stock and warrants to purchase shares of its common stock.
The warrants to purchase shares of common stock issued in connection with the Securities
Purchase Agreements were classified as a current liability on the Companys balance sheet for the
year ended December 31, 2008. The fair value of the warrants upon issuance was $3.3 million for
warrants issued on May 28, 2008 and $1.8 million for warrants issued on August 1, 2008. The
Company recognized a $0.2 million loss and a $1.0 million gain in other expense, net during the three
and nine months ended September 30, 2008, respectively, related to changes in fair value of
outstanding warrants. These amounts were determined using the Black-Scholes option pricing model
and calculated using the following assumptions: 65% volatility; expected term of 5 years; 3.2%
risk-free interest rate; and 0% dividend. The fair value of the warrants represents a noncash
financing activity.
In connection with this private placement, the Company entered into an obligation on May 22,
2008 to sell 4.0 million shares and warrants to purchase 0.8 million shares of its common stock
which met the definition of a derivative instrument under ASC 815, Derivatives and Hedging. The
fair value of the derivative instrument upon issuance on May 22, 2008 was $1.3 million. The fair
value of the derivative instrument upon settlement on August 1, 2008 was $0.6 million and was
recorded in equity as a reduction of the total proceeds. These amounts were determined using the
Black-Scholes option pricing model and calculated using the following assumptions: 76% volatility;
expected term of 32 to 71 days; 1.9% risk-free interest rate; and 0% dividend. The Company
recognized losses of $1.6 million and $0.7 million in other expense, net during the three and nine
months ended September 30, 2008 related to changes in fair value of this derivative instrument. The
fair value of the derivative instrument represents a noncash financing activity.
The exercise price of the warrants to purchase shares of the Companys common stock issued in
connection with this private placement was fixed at $5.50 per share on December 31, 2008 based on
the Companys achievement of over 3,100 ESRD patients prescribed to receive therapy using the
System One. As a result, the fair value of these warrants of $1.9 million at December 31, 2008 was
reclassified from a current liability to equity on January 1, 2009. The reclassification on
January 1, 2009 represents a noncash
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financing activity.
12. Related-Party Transactions
On June 4, 2007, the Company entered into a stock purchase agreement with David S. Utterberg,
a director and significant stockholder of the Company, under which the Company agreed to purchase
from Mr. Utterberg the issued and outstanding shares of Medisystems Corporation and certain
affiliated entities, which the Company refers to as the MDS Entities in exchange for the issuance
of 6.5 million shares of the Companys common stock, which the Company refers to as the Acquisition
shares. The Company may be required to issue additional shares of common stock to Mr. Utterberg
since, pursuant to the terms of the stock purchase agreement, Mr. Utterberg and the Company have
agreed to indemnify each other in the event of certain breaches or failures, and any such
indemnification amounts must be paid in shares of the Companys common stock, valued at the time of
payment. However, the Company will not be required to issue shares for indemnification purposes
that in the aggregate would exceed 20% of the then outstanding shares of the Companys common stock
without first obtaining stockholder approval, and any such shares will not be registered under the
Securities Act of 1933, as amended. The stock purchase agreement provided that an aggregate of one
million shares would be held back in escrow to secure any indemnification obligations of Mr.
Utterberg for a period of two years. All shares have been released from escrow effective November
2009, consistent with the terms of the escrow agreement entered into between the parties.
In connection with the acquisition of the MDS Entities, which the Company refers to as the
Medisystems Acquisition, the Company assumed a $2.8 million liability owed to DSU Medical
Corporation, or DSU, a Nevada corporation, which is wholly-owned by Mr. Utterberg, as a result of
the acquisition of the MDS Entities. The Company paid $2.0 million of the liability owed during the
quarter ended March 31, 2008 and the remaining liability of $0.6 million, net of receivable from
DSU for reimbursements of costs related to the acquisition of $0.2 million, during the quarter
ended September 30, 2008.
As a condition to the parties obligations to consummate the Medisystems Acquisition, Mr.
Utterberg and DSU entered into a
consulting agreement with the Company dated October 1, 2007, which the Company refers to as
the Consulting Agreement. The Company paid Mr. Utterberg and DSU $50,000 during both the three
months ended September 30, 2009 and 2008 and $150,000 during both the nine months ended September
30, 2009 and 2008 in connection with this Consulting Agreement. The agreement expired on October
1, 2009.
Finally, in connection with the Medisystems Acquisition, the Company agreed that if Mr.
Utterberg is no longer a director of the Company, the Companys Board of Directors will nominate
for election to the Companys Board of Directors any director nominee proposed by Mr. Utterberg,
subject to certain conditions.
On May 22, 2008, the Company entered into Securities Purchase Agreements relating to a private
placement of shares of its common stock and warrants to purchase shares of its common stock. The
private placement took place in two closings, on May 28, 2008 and August 1, 2008, and raised $25.0
million and $18.0 million, respectively, in gross proceeds. Participants in the private placement
consist of unaffiliated and affiliated accredited institutional investors. One of these investors,
the Sprout Group, is affiliated with one of the Companys Board members, Dr. Philippe O. Chambon.
The Sprout Group purchased 1.0 million shares and warrants to purchase 0.2 million shares of the
Companys common stock at a price similar to that of unaffiliated investors. Under applicable
rules of the NASDAQ Global Market, the second closing of the private placement, which included all
shares issued to the Sprout Group and other affiliated accredited institutional investors, was
subject to stockholder approval, which was obtained at a special meeting on July 31, 2008.
The Securities Purchase Agreements entered into with OrbiMed Advisors, LLC, or OrbiMed, in
connection with the private placement required that the Company appoint one individual nominated by
OrbiMed to its Board of Directors upon the earlier of the second closing of the private placement
or sixty days after the first closing of the private placement. The appointment of Mr. Jonathan
Silverstein, a general partner of OrbiMed, on July 23, 2008, to the Board satisfied this
requirement. OrbiMed purchased an aggregate of 5.6 million shares and warrants to purchase 1.1
million shares of the Companys common stock in connection with the private placement at a price
similar to that of unaffiliated investors.
13. Fair Value Measurements
At September 30, 2009, the Company had $12.8 million in money market funds, included in cash
and cash equivalents, measured at fair value on a recurring basis utilizing quoted prices
(unadjusted) in active markets of identical assets, also referred to as level 1 inputs.
The carrying amounts reflected in the consolidated balance sheets for cash, accounts
receivable, prepaids and other current and non-current assets, accounts payable and accrued
expenses approximate fair value due to their short-term nature.
The carrying amount of the Companys long-term debt approximates fair value. The fair value
of the Companys long-term debt was estimated using inputs derived principally from market
observable data, including current rates offering to the Company for debt of the same or similar
remaining maturities. Within the hierarchy of fair value measurements, these are level 2 inputs.
14. Significant Revenue Contracts
National Service Provider Agreement and Stock Purchase Agreement with DaVita
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In February 2007, the Company entered into a National Service Provider Agreement and a Stock
Purchase Agreement with DaVita, a significant customer, which the Company considers to be a single
arrangement.
In connection with the National Service Provider Agreement, the Company agreed to sell the
System One and PureFlow SL hardware along with the right to purchase disposable products and
service on a monthly basis. The National Service Provider Agreement included other terms such as
development efforts, training, market collaborations, limited market exclusivity and volume
discounts. The sales of the equipment and other items included in the arrangement are considered
multiple-element sales arrangements pursuant to ASC 605, Revenue Recognition. The Company has
determined that it cannot account for the sale of equipment as a separate unit of accounting.
Therefore, fees received upon the completion of delivery of equipment under this arrangement are
deferred and recognized as revenue on a straight-line basis over the expected term of the Companys
obligation to supply disposables and service pursuant to the agreement which is seven years. The
Company has deferred both the unrecognized revenue and direct costs relating to the delivered
equipment, which costs are being amortized over the same period as the related revenue.
In connection with the Stock Purchase Agreement, DaVita purchased 2.0 million shares of the
Companys common stock for $10.00 per share, which on the date of the purchase represented a
premium over the market price of $1.50 per share, or $3.0 million. The Company has recorded the
$3.0 million premium as deferred revenue and is recognizing this revenue ratably over seven years,
consistent with its equipment service obligation to DaVita.
Asahi Strategic Business Alliance
In May 2009, the Company entered into a series of agreements with Asahi Kasei Kuraray Medical,
or Asahi, a leading medical supply company headquartered in Japan which the company considers to be
a single arrangement. The signed agreements between the partners are multi-faceted and include a
Term Loan and Security Agreement, or Loan Agreement, Technology and Trademark License Agreement, or
License Agreement, a Dialyzer Production Agreement, a Supply and Purchase Agreement and a
Collaboration Agreement.
Under the terms of the Loan Agreement, Asahi agreed to provide the Company with $40 million of
debt financing. The four year loan bears interest at 8% annually, with 50% of the interest
deferred to maturity. The Company estimated the fair value of the loan at issuance using quoted
prices for similar debt instruments, level 2 measurements within the fair value hierarchy. The
fair value of the loan of $36.3 million was recorded by the Company, net of a $3.7 million
discount. The discount will be amortized over the term of the loan into interest expense on a
straight-line basis. In accordance with the terms of the License Agreement, the Company granted
Asahi a royalty-free license to its Streamline blood tubing set technology and production
technology to make and sell the Companys current dialyzer design. The Company estimated the fair
value of the license using an income approach, namely the relief from royalty approach, which
requires assumptions related to future cash flows, assumed royalty rates and a discount rate, level
3 measurements within the fair value hierarchy. The fair value of the license of $3.7 million was
recorded to deferred revenue and will be recognized as revenue over the estimated life of the
underlying patents, of six to seven years. The deferral of the consideration allocated to the
license represents a noncash operating activity.
Under the term of the Dialyzer Production Agreement in which the Company agreed to
manufacturer dialyzers for Asahi, the Company will recognize revenue from product sales at the
later of the time of shipment or, if applicable, delivery in accordance with contract terms.
Kimal Strategic Business Alliance
In March 2009, the Company signed a five year exclusive distribution agreement with Kimal plc,
or Kimal. Pursuant to the agreement the Company will sell Kimal the NxStage System One and certain
other products for use or resale in the UK and Ireland.
The Company has determined that it cannot account for the sale of equipment as a separate unit
of accounting. Therefore, fees received upon the completion of delivery of equipment under this
arrangement are deferred and recognized as revenue on a straight-line basis over shorter of the
economic life of the equipment or the expected term of the Companys obligation to supply
disposables pursuant to the agreement which is five years. The Company has deferred both the
unrecognized revenue and direct costs relating to the delivered equipment, which costs are being
amortized over the same period as the related revenue.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward Looking Statements
The following discussion should be read with our unaudited condensed consolidated financial
statements and notes included in Part I, Item 1 of this Quarterly Report, as well as the audited
financial statements and notes and Managements Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended December 31, 2008, included in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission, or SEC. This Quarterly Report contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our
future results are based on current expectations, estimates, forecasts and projections and the
beliefs and assumptions of our management including, without limitation, our expectations regarding
our results of operations, revenues, cost of revenues, distribution expenses, sales and marketing
expenses, general and administrative expenses, research and development expenses, the impact of the
acquisition of Medisystems Corporation, our liquidity and capital resources, and the sufficiency of
our cash for future operations. Words such as expect, anticipate, target, project,
believe, goals, estimate, potential, predict, may, will, might, could, intend,
variations of these terms or the negative of those terms and similar expressions are intended to
identify these forward-looking statements, although not all forward-looking statements contain
these identifying words. Readers are cautioned that these forward-looking statements are
predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual results may differ materially and adversely from those expressed in any
forward-looking statements.
Among the important factors that could cause actual results to differ materially from those
indicated by our forward-looking statements are those discussed under the heading Risk Factors in
Item 1A of Part II. We undertake no obligation to revise or update publicly any forward-looking
statement for any reason. Readers should carefully review the factors described under the heading
Risk Factors in Item 1A of Part II of this Quarterly Report and in Managements Discussion and
Analysis of Financial Condition and Results of Operations, as well as in other documents filed by
us with the SEC, as they may be amended from time to time, including our Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q.
Recent Events
In June 2009, we entered into a five year distribution agreement with Gambro Renal Products,
Inc., or Gambro, pursuant to which we will supply blood tubing sets, including our ReadySet and the
Streamline product lines, to Gambro. Gambro, in turn, will exclusively supply the blood tubing sets
to DaVita, Inc., or DaVita, for use with specific dialysis machines, subject to certain conditions.
In May 2009, we entered into a series of agreements with Asahi Kasei Kuraray Medical Co.,
Ltd., or Asahi, a leading medical supply company headquartered in Japan. The agreements are
multi-faceted and include a term loan and security agreement, or term loan, pursuant to which Asahi
agreed to provide us with $40 million of debt financing. The term loan bears interest at a rate of
8% per annum, with fifty percent of such interest being deferred until the maturity date on May 31,
2013. Principal matures in four years from the effective date, and is payable in one balloon
payment at maturity. The term loan is secured by all of our assets other than cash, bank accounts,
accounts receivable, field equipment, and inventory and may be prepaid, without penalty, at our
option. In the event the term loan reaches maturity, Asahi may require that all of the principal
and interest on the term loan that is unpaid as of the maturity date be converted into shares of
our common stock, with the number of shares to be determined based upon the average closing stock
price of our common stock during the thirty business days preceding the maturity date, subject to
certain conditions. We used $30.0 million of the proceeds to pay off the entire debt obligation,
including prepayment and other transaction fees, owed under our credit and security agreement with
GE Capital Corporation, or GE. Remaining proceeds will be used for operating purposes.
In May 2009, we signed a five year exclusive distribution agreement with Kimal plc, or Kimal,
a distributor of medical device technology across the United Kingdom and international healthcare
markets, for the promotion, sale, delivery and service of the System One and certain of our other
products in the United Kingdom and Ireland. The agreement marks our first international expansion
for the System One outside of the United States and Canada. Under the terms of the agreement, the
System One and PureFlow SL dialysate preparation system will be available to dialysis centers and
hospitals throughout the United Kingdom and Ireland exclusively through Kimal, which also has the
option to make our blood tubing sets and needles available to their customers in these regions.
Overview
We are a medical device company that develops, manufactures and markets innovative products
for the treatment of kidney failure, fluid overload and related blood treatments and procedures.
Our primary product, the 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 centers. 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 cleared by the United States Food and Drug
Administration, or FDA, for home hemodialysis as well as hospital and clinic-based dialysis. We
also sell needles and blood tubing sets primarily to dialysis centers for the treatment of
end-stage renal disease, or ESRD. We believe our largest future product market opportunity is for
our System One used in the home hemodialysis market, or home market, for the treatment of ESRD.
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We report the results of our operations in two segments: the System One segment and the
In-Center segment.
In the System One segment we derive our revenues from the sale and rental of equipment and the
sale of disposable products in the home and critical care markets. The home market is
devoted to the treatment of ESRD patients in the home, and the critical care market is devoted to
the treatment of hospital-based patients with acute kidney failure or fluid overload. In the
In-Center segment, we derive our revenues from the sale of needles and blood tubing sets primarily
used for in-center dialysis treatments.
Within the System One segment, we offer a similar technology platform of the System One for
the home and critical care markets with different features. The FDA has cleared the System One for
hemodialysis, hemofiltration and ultrafiltration. We offer primarily needles and blood tubing sets
in the In-Center segment. Our products are predominantly used by our customers to treat patients
suffering from ESRD or acute kidney failure. We have marketing and sales efforts dedicated to each
market, although nearly all sales in the In-Center segment are made through distributors.
We received clearance from the FDA in July 2003 to market the System One for treatment of
renal failure and fluid overload using hemodialysis as well as hemofiltration and ultrafiltration.
In the first quarter of 2003, we initiated sales of the System One in the critical care market to
hospitals and medical centers in the United States. In late 2003, we initiated sales of the System
One for the treatment of patients with ESRD. At the time of these early marketing efforts, our
System One was cleared by the FDA under a general indication statement, allowing physicians to
prescribe the System One for hemofiltration, hemodialysis and/or ultrafiltration at the location,
time and frequency they considered in the best interests of their patients. Our original indication
did not include a specific home clearance, and we were not able to promote the System One for home
use at that time. The FDA cleared the System One in June 2005 for hemodialysis in the home. We are
presently pursuing a nocturnal indication for the System One under an FDA-approved investigational
device exemption, or IDE, study started in the first quarter of 2008. We recently completed
enrollment in our IDE study and expect to have it completed and submitted to the FDA by the first
quarter of 2010.
Our business expanded significantly in late 2007 in connection with the October 1, 2007
acquisition of Medisystems Corporation and certain affiliated entities, which we refer to as the
Medisystems Acquisition. With that acquisition, we acquired our needle and blood tubing set product
lines for use predominantly in hemodialysis performed in-center as well as apheresis. The In-Center
segment is significantly more mature than our System One segment. Medisystems Corporation and
certain affiliated entities, which we refer to collectively as the MDS Entities, have been selling
products to dialysis centers for the treatment of ESRD since 1981, and they have achieved leading
positions in the United States market for both blood tubing sets and needles. Our blood tubing set
products include the ReadySet High Performance Blood Tubing set, or ReadySet, and the Streamline
Airless Blood Tubing set, or Streamline. ReadySet has been on the market since 1993. Streamline is
our next generation blood tubing product designed to provide improved patient outcomes and lower
costs to dialysis centers. This product is early in its market launch and adoption has been
somewhat limited to date. Our needle product line includes AV fistula needle sets incorporating
safety features including MasterGuard Anti-Stick Needle Protectors and MasterGuard technology and
ButtonHole needle sets. Our AV fistula needle sets with MasterGuard Anti-Stick Needle Protector
were commercially introduced in 1995 and our ButtonHole needle sets were commercially introduced in
2002.
Our customers, which include dialysis centers and hospitals, receive reimbursement for the
dialysis treatments provided with our products typically from Medicare and, to a lesser degree,
from private insurers. Medicare provides comprehensive and well-established reimbursement in the
United States for ESRD. Reimbursement claims for dialysis therapy using the System One or our blood
tubing sets and needles are typically submitted by the dialysis center or hospital to Medicare and
other third-party payors using established billing codes for dialysis treatment or, in the critical
care setting, based on the patients primary diagnosis. Medicare presently limits reimbursement for
chronic hemodialysis to three treatments per week, absent a finding of medical justification.
Because most of our System One home dialysis patients are treated more than three times a week,
expanding Medicare reimbursement over time to more predictably cover more frequent therapy may be
critical to the market penetration of the System One in the home market and to our revenue growth
in the future. As a result of the Medicare Improvements for Patients and Providers Act of 2008, or
MIPPA legislation, Centers for Medicare & Medicaid Services, or CMS, has announced that, in 2011,
it will implement a new bundled payment for dialysis treatment. Proposed rules have been released
by CMS and the public comment period will conclude on December 16, 2009. Final rules will likely
be published in 2010. It is not possible at this time to determine what impact this will have on
the adoption of home and/or daily hemodialysis or the price for which we can sell our products.
The manufacture of our products is accomplished through a complementary combination of
outsourcing and internal production. Specifically, we manufacture our System One Cycler and
PureFlow SL hardware, and assemble, package and label our PureFlow SL disposables, within our
Fresnillo, Mexico facility. We manufacture components used in our System One cartridge assembly,
and assemble the System One disposable cartridge and some blood tubing sets and other ancillary
products, in Tijuana, Mexico. We manufacture our dialyzers in Rosdorf, Germany and manufacture
components for some blood tubing sets, dialyzers and System One cartridges in Modena, Italy. We
outsource the manufacture of our premixed dialysate, needles and some blood tubing sets.
In our System One segment, we market the System One in the home and critical care markets
through a direct sales force in the United States primarily to dialysis centers, for ESRD
hemodialysis patients, and hospitals. In our In-Center segment, we market our blood tubing and
needle products primarily through distributors, although we also have a small dedicated sales force
for that business. Nearly all In-Center sales are made to customers in the United States, with very
limited amounts sold internationally through distributors. In May 2009, we announced our first
international distribution agreement for the System One with Kimal. To date substantially all System One segment
revenues have been derived from sales within the United States. Under our agreement with Kimal, we
began selling the System One in the United Kingdom and Republic of Ireland this year, and expect to sell
Streamline and ButtonHole needles through Kimal in those territories in the future.
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Since inception, we have incurred losses every quarter, and at September 30, 2009, we had an
accumulated deficit of approximately $268.0 million. We expect our operating expenses to continue
to increase as we grow our business. While we have achieved positive gross margins for our
products, in aggregate, since the fourth quarter of 2007, we cannot provide assurance that our
gross margins will improve or, if they do improve, the rate at which they will improve. We cannot
provide assurance that we will achieve profitability, when we will become profitable, the
sustainability of profitability, should it occur, or the extent to which we will be profitable. Our
ability to become profitable depends principally upon implementing design and process improvements
to lower the costs of manufacturing our products, obtaining better purchasing terms and prices,
growing revenue, increasing reliability of our products, improving our field equipment utilization,
achieving efficiencies in manufacturing and supply chain overhead costs, achieving efficiencies in
the distribution of our products and achieving a sufficient scale of operations.
We have experienced negative operating margins and cash flows from operations and expect to
continue to incur net losses in the foreseeable future. We believe, based on current projections,
that we have the required resources to fund operating requirements at least through 2010. Future
capital requirements will depend on many factors, including the rate of revenue growth, continued
progress on improving gross margins, the expansion of selling and marketing and research and
development activities, the timing and extent of expansion into new geographies or territories, the
timing of new product introductions and enhancement to existing products, the continuing market
acceptance of products, availability of credit and potential investments in, or acquisitions of
complementary businesses, services or technologies.
Statement of Operations Components
Revenues
In the System One segment we derive our revenues from the sale and rental of equipment and the
sale of disposable products in the home and critical care markets. In the home market, customers
rent or purchase the System One equipment, including cycler and PureFlow SL, and then purchase the
related disposable products based on a specific patient prescription. In the critical care market,
we sell or rent the System One and related disposables to hospital customers. In the In-Center
segment, the majority of revenues are derived from supply and distribution contracts with
distributors.
In the home market, for those customers that rent the System One, we recognize revenues on a
monthly basis in accordance with customer contracts under which we supply the use of hardware and
disposables needed to perform dialysis therapy sessions during a month. For customers that purchase
the System One in the home market, we recognize revenue from the equipment sale ratably over the
expected service obligation period and disposable product revenue upon delivery.
Our rental contracts with dialysis centers for ESRD home dialysis patients generally include
terms providing for the sale of disposable products to accommodate up to the prescribed treatments
per month per patient and the monthly rental of System One cyclers and, in some instances, our
PureFlow SL hardware. These contracts typically have a term of one year, and are automatically
renewed on a month-to-month basis thereafter, subject to a 30-day termination notice. Under these
contracts, if home hemodialysis is prescribed, supplies are shipped directly to patient homes and
paid for by the treating dialysis center. We also include vacation delivery terms, providing for
the shipment of products to a designated vacation destination for a specified number of vacation
days. We derive an insignificant amount of revenues from the sale of ancillary products, such as
extra lengths of tubing. Over time, as more home patients are treated with the System One and more
systems are placed in patient homes that provide for the purchase or rental of the machine and the
purchase of the related disposables, we expect this recurring revenue stream to continue to grow.
In early 2007, we began entering into long-term contracts with customers in the home market
that provide for the purchase as well as the rental of the System One equipment, including the
cycler and PureFlow SL. The term of these agreements varies but is generally at least three years,
and may be cancelled upon a material breach, subject to certain curing rights. Under our 2007
contract with DaVita, our largest customer, DaVita agreed to purchase rather than rent a
significant percentage of its future System One equipment needs. In the home market, we expect, at
least in the near term, that the majority of dialysis providers will choose to rent rather than
purchase the System One.
Our critical care contracts with hospitals generally include terms providing for the sale of
our System One hardware and disposables, although we also provide a hardware rental option. We
recognize revenue from direct product sales at the later of the time of shipment or, if applicable,
delivery in accordance with contract terms. These contracts typically have a term of one year. We
expect, at least in the near term, as hospitals face continued pressure to reduce capital spending,
increasingly more of our sales will include the rental rather than the sale of our System One
hardware than we have experienced in the past. We derive a small amount of revenue from the sale
of one and two year service contracts following the expiration of our standard one-year warranty
period for System One hardware. To further support service in this market, we have implemented a
bio-medical training program, whereby we train bio-medical engineers on how to service and repair
certain aspects of the System One in the critical care setting. Bio-medical training is not
offered for the home market within our System One segment. Bio-medical training is typically
provided under a two-year contract following the expiration of our standard one-year warranty
period for System One hardware. Similar to our home market, as more System One equipment is placed
within hospitals, we expect to derive a growing recurring revenue stream from the sale of
disposable cartridges and fluids for use with our placed System One equipment as well as, to a much
lesser degree, from the sale of service and bio-medical training contracts.
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Our In-Center segment revenues are highly concentrated in several significant purchasers.
Revenues from Henry Schein, our primary distributor, represented 65% and 75% of our In-Center
segment revenues during the three and nine months ended September 30, 2009, respectively. During the third quarter of 2009 we began recognizing
revenue from the sale of blood tubing sets to Gambro. Revenues
from our three other significant distributors, including Gambro, over each of the same periods were 25% and 20% of our
In-Center segment revenues, respectively. Sales to
DaVita, through Henry Schein represented, and in the future through Gambro are expected to
represent, a significant percentage of these revenues. DaVita contractually committed to purchase
our needles through January 2013. Under our recently signed Gambro agreement, Gambro has
contractually committed to exclusively supply our blood tubing sets in the United States to DaVita
through July 2014. Gambros long term product supply agreement with DaVita entered into in
connection with the sale of Gambros United States dialysis clinic business to DaVita, obligates
DaVita to purchase a significant majority of its product requirements from Gambro. Our In-Center
segment revenues are subject to fluctuation as a result of changes in sales volumes and variations
in inventory management policies with both our distributors and end users. We regularly monitor
the amount of inventory held by distributors to ensure it is not excessive when compared to end
user demand.
Some of the distribution contracts for our In-Center segment contain minimum volume
commitments with negotiated pricing discounts at different volume tiers. Each agreement may be
cancelled upon a material breach, subject to certain curing rights, and in many instances minimum
volume commitments can be reduced or eliminated upon certain events. In addition to contractually
determined volume discounts, we offer rebates based on sales to specific end customers and discount
incentives for early payment. Our sales revenues are presented net of these rebates, incentives,
discounts and returns. As of September 30, 2009, we had $1.8 million reserved against trade
accounts receivable for future sales incentives. We recorded $2.3 million and $7.2 million during
the three and nine months ended September 30, 2009, respectively, as a reduction of sales in
connection with sales incentives.
Our distribution agreement with Henry Schein, our primary distributor for the In-Center
segment, originally scheduled to expire in July 2009, has been extended while the parties work to
negotiate a new agreement. If we are unable to negotiate a renewal, we will need to seek
alternative distribution relationships or to sell our In-Center segment products directly to end
users. Our agreements with our other primary two distributors for the In-Center segment are
scheduled to expire in July 2011 and February 2012, respectively. Our blood tubing set distribution
agreement with Gambro expires in July 2014.
DaVita continues to be our most significant customer for both segments. We have long-term
agreements directly or indirectly covering products sales to DaVita in both the System One and
In-Center segments; however, the initial term of our agreement for the home market with DaVita is
scheduled to expire in December 2009. The loss of any of this business, at least in the near term,
would have an adverse effect on our business.
Cost of Revenues
Cost of revenues consists primarily of direct product costs, including material and labor
required to manufacture our products, service of System One equipment that we rent and sell to
customers and production overhead. It also includes the cost of inspecting, servicing and repairing
System One equipment prior to sale or during the warranty period and stock-based compensation. The
cost of our products depends on several factors, including the efficiency of our manufacturing
operations, the cost at which we can obtain labor and products from third-party suppliers, product
reliability and related servicing costs and the design of our products.
Operating Expenses
Selling and Marketing. Selling and marketing expenses consist primarily of salary, benefits
and stock-based compensation for sales and marketing personnel, travel, promotional and marketing
materials and other expenses associated with providing clinical training to our customers. Included
in selling and marketing are the costs of clinical educators, usually nurses, we employ to teach
our customers about our products and prepare our customers to use the equipment and to instruct
nursing colleagues in the operation of our products.
Research and Development. Research and development expenses consist primarily of salary,
benefits and stock-based compensation for research and development personnel, supplies, materials
and expenses associated with product design and development, clinical studies, regulatory
submissions, reporting and compliance and expenses incurred for outside consultants or firms who
furnish services related to these activities.
Distribution. Distribution expenses include the freight costs of delivering our products to
our customers or our customers patients, depending on the market and the specific agreements with
our customers, salary, benefits and stock-based compensation for distribution personnel and the
cost of any equipment lost or damaged in the distribution process. We use common carriers and
freight companies to deliver our products and we do not operate our own delivery service. Also
included in this category are the expenses of shipping products under warranty from customers back
to our service center for repair and the related expense of shipping a replacement product to our
customers or their patients.
General and Administrative. General and administrative expenses consist primarily of salary,
benefits and stock-based compensation for our executive management, legal and finance and
accounting staff, fees of outside legal counsel, fees for our annual audit and tax services, and
general expenses to operate the business, including insurance and other corporate-related expenses.
Results of Operations
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The following table presents, for the periods indicated, information expressed as a percentage
of revenues. This information has been derived from our condensed consolidated statements of
operations included elsewhere in this Quarterly Report on Form 10-Q. You should not draw any
conclusions about our future results from the results of operations for any period.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenues |
75 | % | 84 | % | 77 | % | 86 | % | ||||||||
Gross profit |
25 | % | 16 | % | 23 | % | 14 | % | ||||||||
Operating expenses: |
||||||||||||||||
Selling and marketing |
19 | % | 22 | % | 20 | % | 22 | % | ||||||||
Research and development |
7 | % | 7 | % | 7 | % | 7 | % | ||||||||
Distribution |
9 | % | 11 | % | 10 | % | 11 | % | ||||||||
General and administrative |
13 | % | 16 | % | 13 | % | 16 | % | ||||||||
Total operating expenses |
48 | % | 56 | % | 50 | % | 56 | % | ||||||||
Loss from operations |
(23 | %) | (40 | %) | (27 | %) | (42 | %) | ||||||||
Other expense: |
||||||||||||||||
Interest income |
| | | | ||||||||||||
Interest expense |
(3 | %) | (3 | %) | (5 | %) | (3 | %) | ||||||||
Change in fair value of
financial instruments |
| (6 | %) | | | |||||||||||
Other (expense) income, net |
| | | | ||||||||||||
(3 | %) | (9 | %) | (5 | %) | (3 | %) | |||||||||
Provision for income taxes |
| | | | ||||||||||||
Net loss |
(26 | %) | (49 | %) | (32 | %) | (45 | %) | ||||||||
Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
Revenues
Our revenues for the three and nine months ended September 30, 2009 and 2008 were as follows
(in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
System One
segment |
||||||||||||||||||||||||||||||||
Home |
$ | 16,356 | 43 | % | $ | 12,412 | 41 | % | $ | 45,914 | 42 | % | $ | 34,807 | 37 | % | ||||||||||||||||
Critical Care |
5,672 | 15 | % | 4,401 | 14 | % | 15,381 | 15 | % | 13,107 | 14 | % | ||||||||||||||||||||
Total System One
segment |
22,028 | 58 | % | 16,813 | 55 | % | 61,295 | 57 | % | 47,914 | 51 | % | ||||||||||||||||||||
In-Center segment |
16,005 | 42 | % | 13,653 | 45 | % | 46,871 | 43 | % | 45,173 | 49 | % | ||||||||||||||||||||
Total |
$ | 38,033 | 100 | % | $ | 30,466 | 100 | % | $ | 108,166 | 100 | % | $ | 93,087 | 100 | % | ||||||||||||||||
The increase in revenues was attributable to increased sales and rentals of the System One and
related disposables in both the home and critical care markets, primarily as a result of the
growing number of patients using the System One as we continue to penetrate the
market place, and an increase in sales of blood tubing sets in our In-Center segment.
In the home market, revenues increased $3.9 million, or 32%, and $11.1 million, or 32%, for
the three and nine months ended September 30, 2009, respectively, versus the prior year comparable
period as a result of an increase in the number of patients prescribed to use and centers offering
the System One. Critical care market revenues increased $1.3 million, or 29%, and $2.3 million, or
17%, for the three and nine months ended September 30, 2009, respectively, versus the prior year
comparable period as a result of higher disposable sales volumes. Higher disposable revenue is a
result of the increase in the installed base of System One units. Future demand for our products
in both the home and critical care markets is expected to remain strong due to the life-sustaining,
non-elective nature of dialysis therapy. Revenues in the home market are expected to continue to
increase as we further penetrate the market place. However, in the critical care market, we
expect, at least in the short-term, to see a continuation of a conservative capital spending
environment as hospitals face pressure to reduce capital spending.
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In-Center segment revenues increased $2.4 million, or 17%, for the three months ended
September 30, 2009 and increased $1.7 million, or 4%, for the nine months ended September 30, 2009,
respectively, versus the prior year comparable period. The fluctuations in revenues for both
periods were a result of growth in the business and changes in
distributor inventory levels. We expect future revenues
will continue to be susceptible to fluctuation as a result of changes in sales volumes and variations in
inventory management policies with both our distributors and end users.
Cost of Revenues and Gross Profit
Our cost of revenues for the three and nine months ended September 30, 2009 and 2008 were as
follows (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | % | September 30, | September 30, | % | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
System One segment |
$ | 16,692 | $ | 14,412 | 16 | % | $ | 47,250 | $ | 42,398 | 11 | % | ||||||||||||
In-Center segment |
11,796 | 11,272 | 5 | % | 35,499 | 37,474 | (5 | %) | ||||||||||||||||
Total Cost of
revenue |
$ | 28,488 | $ | 25,684 | 11 | % | $ | 82,749 | $ | 79,872 | 4 | % | ||||||||||||
Gross profit for the System One segment increased $2.9 million, or 122%, from $2.4
million for the three months ended September 30, 2008 to $5.3 million for the three months ended
September 30, 2009. Gross profit increased $8.5 million, or 155%, from $5.5 million for the nine
months ended September 30, 2008 to $14.0 million for the nine months ended September 30, 2009. The
increase in gross profit for both periods was a result of increased revenues, the favorable impact
of foreign currency rates versus the United States dollar and lower overall costs of manufacturing
as we continue to realize the benefits of certain cost saving initiatives such as the transition of
manufacturing and equipment service to lower cost labor markets and improvements in product design
and reliability.
Gross profit for the In-Center segment increased $1.8 million, or 77%, from $2.4 million for
the three months ended September 30, 2008 to $4.2 million for the three months ended September 30,
2009. Gross profit increased $3.7 million, or 48%, from $7.7 million for the nine months ended
September 30, 2008 to $11.4 million for the nine months ended September 30, 2009. The increase in
gross profit for both periods was due to increased revenues and lower manufacturing costs due to
the benefits of certain cost savings initiatives.
We expect the cost of revenues as a percentage of revenues to continue to decline over time
for three general reasons. First, we expect to introduce additional process improvements and
product design changes that have inherently lower cost than our current products. Second, we expect
to continue to improve product reliability, which would reduce service costs. Finally, we
anticipate that increased volume and realization of economies of scale will lead to better
purchasing terms and prices and efficiencies in manufacturing and supply chain overhead costs. We
cannot, however, guarantee that we will achieve our expected cost reduction plans.
Selling and Marketing
Our selling and marketing expenses for the three and nine months ended September 30, 2009 and
2008 were as follows (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | % | September 30, | September 30, | % | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
System One segment |
$ | 6,498 | $ | 6,077 | 7 | % | $ | 19,315 | $ | 18,318 | 5 | % | ||||||||||||
In-Center segment |
951 | 762 | 25 | % | 2,776 | 2,619 | 6 | % | ||||||||||||||||
Total Selling and
marketing |
$ | 7,449 | $ | 6,839 | 9 | % | $ | 22,091 | $ | 20,937 | 6 | % | ||||||||||||
The increase in selling and marketing expenses was primarily the result of higher
personnel and personnel-related costs due to expanded sales and marketing and customer service
functions. 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 home market
and other products, particularly Streamline, in the in-center market, and as we add additional
sales support and marketing personnel, but decrease as a percent of revenues as we continue to
leverage our existing structure.
Research and Development
Our research and development expenses for the three and nine months ended September 30, 2009
and 2008 were as follows (in thousands, except percentages):
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | % | September 30, | September 30, | % | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
Research and
development |
$ | 2,707 | $ | 1,986 | 36 | % | $ | 7,380 | $ | 6,474 | 14 | % | ||||||||||||
The increase in research and development expenses for the three and nine months ended
September 30, 2009 was primarily a result of timing of research and development project spending,
increased clinical trials expenses due to increased patient registration in our Nocturnal IDE study
and FREEDOM study, as well as increased personnel and personnel-related costs due to increased
headcount. The increase in research and development expenses for the nine months ended September
30, 2009 was primarily the result of increased clinical trial costs due to increased patient
registration in our nocturnal IDE study and FREEDOM study and increased personnel and
personnel-related costs due to increased headcount. We expect research and development expenses
will increase in absolute dollars but remain relatively constant as a percentage of revenues in the
foreseeable future as we seek to further enhance our System One and related products, and their
reliability, and with the increased activity associated with our nocturnal IDE study and FREEDOM
study.
Distribution
Our distribution expenses for the three and nine months ended September 30, 2009 and 2008 were
as follows (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | % | September 30, | September 30, | % | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
System One segment |
$ | 2,954 | $ | 3,129 | (6 | %) | $ | 9,463 | $ | 9,108 | 4 | % | ||||||||||||
In-Center segment |
313 | 343 | (9 | %) | 1,013 | 1,094 | (7 | %) | ||||||||||||||||
Total Distribution |
$ | 3,267 | $ | 3,472 | (6 | %) | $ | 10,476 | $ | 10,202 | 3 | % | ||||||||||||
The decrease in distribution expenses for the three months ended September 30, 2009
versus the three months ended September 30, 2008 was primarily a result of better pricing obtained
from carriers and shipping efficiencies. The increase in distribution expenses for the nine months
ended September 30, 2009 versus the nine months ended September 30, 2008 was primarily a result of
increased distribution expenses for the System One segment due to increased shipments of products
to the growing number of patients. This increase was offset by a decrease in distribution expenses
for the In-Center segment due to shipping efficiencies. Distribution expenses were 9% and 10% of
revenues for both the three and nine months ended September 30, 2009 respectively versus 11% for
both the three and nine months ended September 30, 2008. We expect that distribution expenses will
continue to increase at a lower rate than revenues due to expected efficiencies gained from
increased business volume, better pricing obtained from carriers following recent price
negotiations and increased volume, customer adoption of our PureFlow SL hardware, which
significantly reduces the weight and quantity of monthly disposable shipments, and improved
reliability of System One equipment. We cannot predict the estimated impact, if any, of fuel costs
on future distribution costs.
General and Administrative
Our general and administrative expenses for the three and nine months ended September 30, 2009
and 2008 were as follows (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | % | September 30, | September 30, | % | |||||||||||||||||||
2009 | 2008 | Change | 2009 | 2008 | Change | |||||||||||||||||||
General and
administrative |
$ | 4,808 | $ | 4,744 | 1 | % | $ | 14,512 | $ | 14,443 | 0 | % | ||||||||||||
General and administrative expenses as a percentage of revenues decreased to 13% of
revenues for the three and nine months ended September 30, 2009 versus 16% for the three and nine
months ended September 30, 2008. The decrease was due to our continued initiative to leverage our
overhead structure. We expect that general and administrative expenses will remain relatively flat
in the near term as we continue to leverage our existing structure.
Other Income and Expense
Interest income decreased $0.1 million
for the three months ended September 30, 2009
and decreased $0.4 million for the nine months ended September 30, 2009, versus the prior
year comparable periods due to lower interest rates on investments. Interest income is derived
primarily from investments in money market funds.
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Interest expense increased $0.1 million for the three months ended September 30,
2009, versus the prior year comparable period due to an increase in outstanding borrowings.
Interest expense increased $2.6 million for the nine months ended September 30, 2009,
versus the prior year comparable periods due primarily to prepayment and other transaction fees of
$2.0 million incurred during the three months ended June 30, 2009 to pay off the entire debt
obligation owed under our credit and security agreement with GE.
The change in fair value of the warrants issued on May 22, 2008 and August 1, 2008 in
connection with the private placement resulted in the recognition of a $0.2 million loss and a $1.0
million gain for the three and nine months ended September 30, 2008 and the change in fair value of
the obligation entered into on May 22, 2008 in connection with the second tranche resulted in the
recognition of a $1.6 million and $0.7 million loss for the three and nine months ended September
30, 2008. The obligation was settled on August 1, 2008.
Other expense of $59,000 and other income of $20,000 for the three and nine months ended
September 30, 2009, respectively, and other income of $138,000 and other expense of $155,000 for
the three and nine months ended September 30, 2008, respectively, is derived primarily from foreign
currency gains and losses.
Provision for Income Taxes
The provision for income taxes of $179,000 and $298,000 for the three and nine months ended
September 30, 2009, respectively, and $143,000 and $248,000 for the three and nine months ended
September 30, 2008, respectively, relates to the profitable operations of certain of our foreign
entities.
Liquidity and Capital Resources
We have operated at a loss since our inception in 1998. As of September 30, 2009, our
accumulated deficit was $268.0 million and we had cash and cash equivalents of $22.1 million.
Our primary ongoing cash requirements will be to fund operating activities, product
development and debt service. Our primary sources of liquidity are cash on hand and ongoing
revenues. At September 30, 2009, we had $22.1 million of cash and cash equivalents and working
capital of $35.5 million. A significant factor affecting the management of our ongoing cash
requirements is our ability to execute upon cost reduction initiatives to lower product cost. We
have the flexibility under our term loan with Asahi to seek up to $40.0 million in additional
borrowings at market interest rates to fund our growth objectives, if necessary, or desirable, and
we may seek to take advantage of this flexibility opportunistically if we are able to obtain
additional debt financing on favorable terms. However, based on the current credit market, the
interest rates obtained may be less favorable than historical interest rates and the interest rates
available to us under our current credit facility.
In May 2009, we entered into a series of agreements with Asahi. The signed agreements between
the partners are multi-faceted and include a term loan in which Asahi agreed to provide us with $40
million of debt financing. The term loan bears interest at a rate of 8% per annum, with fifty
percent of such interest being deferred until the maturity date on May 31, 2013. Principal matures
in four years from the effective date, and is payable in one balloon payment at maturity. The term
loan is secured by all of our assets other than cash, bank accounts, accounts receivable, field
equipment, and inventory and may be prepaid, without penalty, at our option. In the event the term
loan reaches maturity, Asahi may require that all of the principal and interest on the term loan
that is unpaid as of the maturity date be converted into shares of our common stock, with the
number of shares to be determined based upon the average closing stock price of our common stock
during the thirty business days preceding the maturity date, subject to certain conditions. We
used $30.0 million of the proceeds to pay off the entire debt obligation, including prepayment
and other transaction fees, owed under our credit and security agreement with GE. We intend to use
the remaining proceeds for operating purposes.
We maintain postemployment benefit plans for employees in certain foreign subsidiaries. The
plans provide lump sum benefits, payable based on statutory regulations for voluntary or
involuntary termination. Where required, we obtain an annual actuarial valuation of the benefit
plans. We have recorded a liability of $1.6 million as other long-term liabilities at September
30, 2009 for costs associated with these plans. The expense recorded in connection with these
plans was not significant for the three or nine months ended September 30, 2009.
The following table sets forth the components of our cash flows for the periods indicated (in
thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net cash used in operating activities |
$ | (12,915 | ) | $ | (46,953 | ) | ||
Net cash used in investing activities |
(1,413 | ) | (686 | ) | ||||
Net cash provided by financing activities |
9,651 | 47,757 | ||||||
Effect of exchange rate changes on cash |
130 | (484 | ) | |||||
Net cash flow |
$ | (4,547 | ) | $ | (366 | ) | ||
Net Cash Used in Operating Activities. For each of the nine months ended September
30, 2009 and 2008, 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 for the nine months ended September
30, 2009
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included increases in inventory purchases of System One and PureFlow SL hardware to
support the growing number of patients, and $1.9 million of prepayment and other transactions fees
incurred in connection with the termination of the term loan and security agreement with GE. Significant uses of cash from
operations for the nine months ended September 30, 2008 included increases in accounts receivable
and inventory purchases of System One and PureFlow SL hardware as we began closing out our outside
manufacturing contracts. Non-cash transfers from inventory to field equipment and deferred costs
for the placement of rental units and sales to our customers decreased to $5.4 million during the
nine months ended September 30, 2009 versus $18.3 million during the nine months ended September
30, 2008. The decrease is primarily due to lower equipment costs, improved equipment reliability
and our continued effort to improve equipment utilization. Non-cash transfers from field equipment
to deferred costs for sales of units to customers represented $2.0 million and $1.0 million for the
nine months ended September 30, 2009 and 2008, respectively.
Net Cash Used in Investing Activities. Net cash used in investing activities reflected
purchases of property and equipment of $1.1 million and $2.6 million for the nine months ended
September 30, 2009 and 2008, respectively, primarily for research and development, information
technology, manufacturing operations and capital improvements to our facilities. Net maturities of
short-term investments were $1.1 million for the nine months ended September 30, 2008.
Net Cash Provided by Financing Activities. Net cash provided by financing activities during
the nine months ended September 30, 2009 included $40.0 million of borrowings under our term loan
with Asahi offset by $0.1 million in fees paid in connection with the Asahi debt issuance, $30.0
million in repayments of borrowings under our credit and security agreement with GE and $0.5
million amendment fee paid in connection with the March 16, 2009 amendment to our credit and
security agreement with GE. Net cash provided by financing activities during the nine months ended
September 30, 2008 included $5.0 million of additional borrowings under our credit and security
agreement with GE and $42.6 million net proceeds from the sale of 9.6 million shares of our common
stock and warrants to purchase 1.9 million shares of our common stock.
We have experienced negative operating margins and cash flows from operations and expect to
continue to incur net losses in the foreseeable future. We believe that we have the required
resources to fund operating requirements at least through 2010. Future capital requirements will
depend on many factors, including the rate of revenue growth, continued progress on improving gross
margins, the expansion of selling and marketing and research and development activities, the timing
and extent of expansion into new geographies or territories, the timing of new product
introductions and enhancement to existing products, the continuing market acceptance of products,
availability of credit and potential investments in, or acquisitions of, complementary businesses,
services or technologies.
As of September 30, 2009, our financial contractual obligations described in our annual report
on Form 10-K for the year ended December 31, 2008 have not materially changed, with the exception
of our debt obligations. In May 2009, we borrowed $40.0 million under our term loan and security
agreement with Asahi and paid off the entire debt obligation owed under our credit and security
agreement with GE.
The following table summarizes our contractual commitments as of September 30, 2009 and the
effect those commitments are expected to have on liquidity and cash flow in future periods (in thousands):
Less Than | More Than | |||||||||||||||||||
Total | One Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Debt obligations |
$ | 40,645 | $ | 62 | $ | 63 | $ | 40,520 | $ | | ||||||||||
Operating leases |
4,359 | 1,759 | 2,563 | 37 | | |||||||||||||||
Purchase obligations (1) |
53,149 | 28,724 | 19,277 | 3,168 | 1,980 | |||||||||||||||
Total |
$ | 98,153 | $ | 30,545 | $ | 21,903 | $ | 43,725 | $ | 1,980 | ||||||||||
(1) | Purchase obligations include purchase commitments for System One components, primarily for equipment, blood tubing sets, needles, and fluids pursuant to contractual agreements with several of our suppliers. Certain of these commitments may be extended and/or canceled at our option. |
Summary of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with 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.
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A summary of those accounting policies and estimates that we believe are most critical to
fully understanding and evaluating our financial results is described in Item 7 in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 and updated, as necessary, in this
Quarterly Report on Form 10-Q. This summary should be read in conjunction with our condensed
consolidated financial statements and the related notes included elsewhere in this Quarterly Report
on Form 10-Q.
Revenue Recognition
We recognize revenue from product sales and services when earned. Revenues are recognized
when: (a) there is persuasive evidence of an arrangement, (b) the product has been shipped or
services and supplies have been provided to the customer, (c) the sales price is fixed or
determinable and (d) collection is reasonably assured. Our revenue arrangements with multiple
elements are divided into separate units of accounting if specified criteria are met, including
whether the delivered element has stand-alone value to the customer and whether there is objective
and reliable evidence of the fair value of the undelivered items. The consideration received is
allocated among the separate units based on their respective fair values, and the applicable
revenue recognition criteria are applied to each of the separate units.
Certain agreements with distributors allow for product returns and credits. For shipment of
product sold to distributors, revenue is recognized at the time of sale if a reasonable estimate of
future returns or refunds can be made. If a reasonable estimate of future returns or refunds
cannot be made, we recognize revenue using the sell-through method. Under the sell-through
method, revenue and related costs of revenue is deferred until the final resale of such products to
end customers.
System One Segment
We derive revenue in the home market from the sales of hemodialysis therapy to customers in
which the customer either purchases or rents the System One and PureFlow SL hardware and purchases
a specified number of disposable products and, in some instances, service.
Under the rental arrangements, which combine the use of the System One and PureFlow SL
hardware with a specified number of disposable products supplied to customers for a fixed price per
month, revenue is recognized on a monthly basis in accordance with agreed upon contract terms and
pursuant to binding customer purchase orders and fixed payment terms.
For customers that purchase the System One and PureFlow SL hardware, we recognize equipment
revenue upon delivery if the equipment has stand-alone value and the fair value of the undelivered
items, typically the disposables and, in some instances service, can be determined. If the fair
value of the undelivered items can be determined, they are accounted for separately as delivered.
If the fair value of any of the undelivered items cannot be determined, the arrangement is
accounted for as a single unit of accounting and the fees received upon the completion of delivery
of equipment are deferred and recognized as revenue on a straight-line basis over the expected term
of our remaining obligation and direct costs relating to the delivered equipment are amortized over
the same period as the related revenue, while disposable products revenue is recognized on a
monthly basis upon delivery.
In the critical care market, we structure sales of the System One as direct product sales. We
recognize revenue from direct product sales at the later of the time of shipment or, if applicable,
delivery in accordance with contract terms.
Our contracts for the System One in the critical care market provide for training, technical
support and warranty services to its 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.
In-Center Segment
In the In-Center segment, nearly all sales to end users are structured through supply and
distribution contracts with distributors. Some of our distribution contracts for the In-Center
segment contain minimum volume commitments with negotiated pricing discounts at different volume
tiers. Each agreement may be cancelled upon a material breach, subject to certain curing rights,
and in many instances minimum volume commitments can be reduced or eliminated upon certain events.
In addition to contractually determined volume discounts, in many agreements we offer rebates
based on sales to specific end customers and discount incentives for early payment. Discounts and
incentives are recorded as a reduction of sales and trade accounts receivable, based on our best
estimate of the amount of probable future rebate or discount on current sales.
Related-Party Transactions
On June 4, 2007, we entered into a stock purchase agreement with David S. Utterberg, a
director and significant stockholder, under which we agreed to purchase from Mr. Utterberg the
issued and outstanding shares of Medisystems Corporation and certain affiliated entities, which we
refer to as the MDS Entities in exchange for the issuance of 6.5 million shares of our common
stock, which we refer to as the Acquisition Shares. We may be required to issue additional shares
of common stock to Mr. Utterberg since, pursuant to the terms of the stock purchase agreement, Mr.
Utterberg and we have agreed to indemnify each other in the event of certain breaches or failures,
and any such indemnification amounts must be paid in shares of our common stock, valued at the
time of payment. However, we will not be required to issue shares for indemnification purposes that
in the aggregate would exceed 20% of the then outstanding shares of our common stock without first
obtaining stockholder approval, and any such shares will not be registered under the Securities Act
of 1933, as amended. The Stock purchase agreement provided that an aggregate of one million shares
would be held back in escrow to secure any indemnification obligations of Mr. Utterberg for a
period of two years. All shares have been released from escrow effective November 2009, consistent
with the terms of the escrow agreement entered into between the parties.
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In connection with the acquisition of the MDS Entities, which we refer to as the Medisystems
Acquisition, we assumed a $2.8 million liability owed to DSU Medical Corporation, or DSU, a Nevada
corporation, which is wholly-owned by Mr. Utterberg, as a result of the acquisition of the MDS
Entities. We paid $2.0 million of the liability owed during the quarter ended March 31, 2008 and
the remaining liability of $0.6 million, net of receivable from DSU for reimbursements of costs
related to the acquisition of $0.2 million, during the quarter ended September 30, 2008.
As a condition to the parties obligations to consummate the Medisystems Acquisition, Mr.
Utterberg and DSU entered into a consulting agreement with us dated October 1, 2007, which we refer
to as the Consulting Agreement. We paid Mr. Utterberg and DSU $50,000 during both the three months
ended September 30, 2009 and 2008 and $150,000 during both the nine months ended September 30, 2009
and 2008 in connection with this Consulting Agreement. The agreement expired on October 1, 2009.
Finally, in connection with the Medisystems Acquisition, we also agreed that if Mr. Utterberg
is no longer a director of NxStage, our Board of Directors will nominate for election to our Board
of Directors any director nominee proposed by Mr. Utterberg, subject to certain conditions.
On May 22, 2008, we entered into Securities Purchase Agreements relating to a private
placement of shares of our common stock and warrants to purchase shares of our common stock. The
private placement took place in two closings, on May 28, 2008 and August 1, 2008, and raised $25.0
million and $18.0 million, respectively, in gross proceeds. Participants in the private placement
consist of unaffiliated and affiliated accredited institutional investors. One of these investors,
the Sprout Group, is affiliated with one of our Board members, Dr. Philippe O. Chambon. The Sprout
Group purchased 1.0 million shares and warrants to purchase 0.2 million shares of our common stock
at a price similar to that of unaffiliated investors. Under applicable rules of the NASDAQ Global
Market, the second closing of the private placement, which included all shares issued to the Sprout
Group and other affiliated accredited institutional investors, was subject to stockholder approval,
which was obtained at a special meeting on July 31, 2008.
The Securities Purchase Agreements entered into with OrbiMed Advisors, LLC, or OrbiMed, in
connection with the private placement required that we appoint one individual nominated by OrbiMed
to our Board of Directors upon the earlier of the second closing of the private placement or sixty
days after the first closing of the private placement. The appointment of Mr. Jonathan Silverstein,
a general partner of OrbiMed, on July 23, 2008, to the Board satisfied this requirement. OrbiMed
purchased an aggregate of 5.6 million shares and warrants to purchase 1.1 million shares of our
common stock in connection with the private placement at a price similar to that of unaffiliated
investors.
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 in the Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.
Recent Accounting Pronouncements
Effective January 1, 2009, we adopted a new accounting standard update regarding business
combinations. As codified under Accounting Standards Codification, or ASC, 805, this update
provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of the
fair values of acquired assets, including goodwill and assumed liabilities, with only limited
exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the
step acquisition model will be eliminated. Additionally, it changes current practice, in part, as
follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration; (2) transaction costs will be expensed
as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition
contingencies, such as legal issues, will generally have to be accounted for in purchase accounting
at fair value; (4) in-process research and development will be capitalized and either amortized
over the life of the product or written off if the project is abandoned or impaired; (5) changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense; and (6) restructuring costs generally will be expensed in
periods subsequent to the acquisition date.
Since this accounting update is applicable to future acquisitions completed after January 1,
2009 and we did not have any business combinations subsequent to January 1, 2009 to date, the
adoption of this update did not have an impact on our consolidated financial statements. This
accounting update also amended accounting for uncertain income taxes such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions
that closed prior to the effective date of ASC 805 would also follow the provisions of this update.
Thus, all changes to valuation allowances and liabilities for uncertain tax positions established
in acquisition accounting will be recognized in current period income tax expense.
Effective January 1, 2009, we adopted the applicable sections of an accounting standard update
as codified under ASC for nonfinancial assets and liabilities that are measured or recognized at
fair value on a non-recurring basis, which were previously deferred. These sections establish a
framework for measuring fair value and expand financial statement disclosures about fair value
measurements. The adoption of the various sections of ASC 820 did not have a material impact on
our consolidated financial statements.
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Effective January 1, 2009, we adopted an accounting standard update as codified under ASC 815
that requires the application of a two-step approach in evaluating whether an equity-linked
financial instrument (or embedded feature) is indexed to a Companys own stock, including
evaluating the instruments contingent exercise and settlement provisions, and must be applied to
all instruments outstanding on the date of adoption. The adoption of this update did not have an
impact our consolidated financial statements.
Effective April 1, 2009, we adopted an accounting standard update as codified under ASC
820-10-65 which provides guidelines for making fair value measurements more consistent and provides
additional authoritative guidance in determining whether a market is active or inactive, and
whether a transaction is distressed, and is applicable to all assets and liabilities (i.e.
financial and nonfinancial) and will require enhanced disclosures. The adoption of this update did
not have an impact on our consolidated financial statements.
Effective April 1, 2009, we adopted a new accounting standard update as codified under ASC
825. This update requires disclosures about fair value of financial instruments in interim as well
as in annual financial statements and also requires those disclosures in all interim financial
statements. The adoption of this standard has resulted in the enhanced disclosure of the fair
values attributable to debt instruments within this interim report. Since this update addresses
disclosure requirements, the adoption of this update did not impact our financial position, results
of operations or cash flows.
Effective April 1, 2009, we adopted an accounting standard update as codified under ASC
320-10-65, which provides additional guidance to provide greater clarity about the credit and
noncredit component of an other-than-temporary impairment event related to debt securities and to
more effectively communicate when an other-than-temporary impairment event has occurred. The
adoption of this update did not have an impact on our consolidated financial statements.
Effective June 30, 2009, we adopted a new accounting standard for subsequent events as
codified in ASC 855-10. The update provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. The update also requires entities to disclose
the date through which subsequent events were evaluated as well as the rationale for why that date
was selected. This disclosure should alert all users of financial statements that an entity has not
evaluated subsequent events after that date in the set of financial statements being presented. The
adoption has resulted in enhanced disclosures around subsequent events within this interim report.
Since this update primarily addresses disclosure requirements, the adoption of this standard did
not impact our financial position, results of operations or cash flows.
Effective July 1, 2009, we adopted The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, or ASC 105. This standard establishes only
two levels of generally accepted accounting principles in the United States, or GAAP, authoritative
and nonauthoritative. The Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or the Codification, became the source of authoritative, nongovernmental GAAP, except
for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC
registrants. All other non-grandfathered, non-SEC accounting literature not included in the
Codification became nonauthoritative. We began using the new guidelines and numbering
system prescribed by the Codification when referring to GAAP in the third quarter of fiscal
2009. As the Codification was not intended to change or alter existing GAAP, it did not have any
impact on our consolidated financial statements.
In June 2009, the FASB issued the following new accounting standard which has not yet been
integrated into the Codification, Statement of Financial Accounting Standards No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140, or SFAS 166.
Accordingly, SFAS 166 will remain authoritative until integrated. SFAS 166 prescribes the
information that a reporting entity must provide in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement in transferred financial assets.
Specifically, among other aspects, SFAS 166 amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the
concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from
applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised), or FIN
46(R), to variable interest entities that are qualifying special-purpose entities. It also modifies
the financial-components approach used in SFAS 140. SFAS 166 is effective for transfer of financial
assets occurring on or after January 1, 2010. We have not determined the effect the adoption of
SFAS 166 will have on our financial statements, but the effect will be limited to future
transactions.
In August 2009, the FASB issued Update No. 2009-05 which amends ASC 820 to provide further
guidance on how to measure the fair value of a liability, an area where practitioners have been
seeking further guidance. It primarily does three things: 1) sets forth the types of valuation
techniques to be used to value a liability when a quoted price in an active market for the
identical liability is not available, 2) clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents the transfer of the liability and
3) clarifies that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required are Level 1 fair
value measurements. The update is effective beginning our fourth quarter of 2009. The adoption of
this update is not expected to impact our consolidated financial statements.
In September 2009, the FASB issued Update No. 2009-13, Multiple-Deliverable Revenue
Arrangementsa consensus of the FASB Emerging Issues Task Force, or ASU 2009-13. It updates the
existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which
originated primarily from the guidance in Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. The revised guidance primarily provides two significant
changes: 1) eliminates the need for
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objective and reliable evidence of the fair value for the
undelivered element in order for a delivered item to be treated as a separate unit of accounting,
and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the
guidance also expands the disclosure requirements for revenue recognition. The update will be
effective for the first annual reporting period beginning on or after June 15, 2010, with early
adoption permitted provided that the revised guidance is retroactively applied to the beginning of
the year of adoption. We are currently assessing the future impact of this new accounting update to
our consolidated financial statements.
In September 2009, the FASB issued Update No. 2009-14, Certain Revenue Arrangements That
Include Software Elements a consensus of the FASB Emerging Issues Task Force, or ASU 2009-14.
It amends ASC 985-605 such that tangible products, containing both software and non-software
components that function together to deliver the tangible products essential functionality, are no
longer within the scope of ASC 985-605. It also amends the determination of how arrangement
consideration should be allocated to deliverables in a multiple-deliverable revenue arrangement.
This ASU will become effective for us for revenue arrangements entered into or materially modified
on or after April 1, 2011. Earlier application is permitted with required transition disclosures
based on the period of adoption. The adoption of this update will not have an impact on our
consolidated financial statements as we have concluded the software component of our tangible
products to be incidental.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the nine months ended September 30, 2009, there were no material changes in our market
risk exposure. For quantitative and qualitative disclosures about market risk affecting NxStage,
see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008. As of the date of this report, there have
been no material changes to the market risks described in our Annual Report on Form 10-K for
December 31, 2008.
Item 4. 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 September 30,
2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or 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. Our 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 our disclosure controls and procedures as of September
30, 2009, our chief executive officer and chief financial officer concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2009 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
Item 1A. Risk Factors
In addition to the factors discussed in Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report, the following are some of the
important risk factors that could cause our actual results to differ materially from those
projected in any forward-looking statements.
Risks Related to our Business
We expect to derive a significant percentage of our future revenues from the rental or sale of our
System One and a limited number of other products.
Since our inception, we have devoted a substantial amount of our efforts to the development of
the System One and the related products used with the System One. We commenced marketing the System
One and the related disposable products to the critical care market in February 2003. We commenced
marketing the System One for chronic hemodialysis treatment in September 2004. Prior to the
Medisystems Acquisition, nearly 100% of our revenues were derived from the rental or sale of our
System One and the sale of related disposables. Although the Medisystems Acquisition broadened our
product offerings, we expect that in 2009 and in the foreseeable future, we will continue to derive
a significant percentage of our revenues from the System One, and that we will derive the remainder
of our revenues from the sale of a few key disposable products acquired in the Medisystems
Acquisition, including blood tubing sets and needles. To the extent that any of our primary
products is not commercially successful or is withdrawn from the market for any reason, our
revenues will be adversely impacted, and we do not have other significant products in development
that could readily replace these revenues.
We cannot accurately predict the size of the home hemodialysis market, and it may be smaller, and
may develop more slowly than we expect.
We believe our largest future product market opportunity is the home hemodialysis market.
However this market is presently very small and adoption of the home hemodialysis treatment options
has been limited. The most widely adopted form of dialysis therapy used in a setting other than a
dialysis clinic is peritoneal dialysis. Based on the most recently available data from the United
States Renal Data System, or USRDS, the number of patients receiving peritoneal dialysis was
approximately 26,000 in 2006, representing approximately 8% of all patients receiving dialysis
treatment for ESRD in the United States. Very few ESRD patients receive hemodialysis treatment
outside of the clinic setting. Because the adoption of home hemodialysis has been limited to date,
the number of patients who desire to, and are capable of, administering their own hemodialysis
treatment with a system such as the System One is unknown and there is limited data upon which to
make estimates. Many dialysis clinics also do not presently have the infrastructure in place to
support home hemodialysis and most do not have the infrastructure in place to support a significant
home hemodialysis patient population. Our long-term growth will depend on the number of patients
who adopt home-based hemodialysis and how quickly they adopt it, which in turn is driven by the
number of physicians willing to prescribe home hemodialysis and the number of dialysis clinics able
or willing to establish and support home hemodialysis therapies.
Because nearly all our home hemodialysis patients are also receiving more frequent dialysis,
meaning dialysis delivered five or more times a week, the market adoption of our System One for
home hemodialysis is also dependent upon the penetration and market acceptance of more frequent
hemodialysis. Given the increased provider supply costs associated with providing more frequent
dialysis versus conventional three-times per week dialysis, market acceptance will be impacted,
especially for Medicare patients, at least in part by whether dialysis clinics are able to obtain
reimbursement for additional dialysis treatments provided in excess of three times a week.
Presently, we understand that a some customers may not be able to obtain such additional
reimbursement, and that there are increased administrative burdens associated with articulating the
medical justification for treatments beyond three times per week. Both of these facts will likely
negatively impact the rate and extent of any further market expansion of our System One for home
hemodialysis. Expanding Medicare reimbursement over time to predictably cover more frequent
therapy, with less administrative burden for our customers, may be critical to our ability to
significantly expand the market penetration of the System One in the home market and to grow our
revenue in the future. As a result of 2008 MIPPA legislation, CMS has announced that, in 2011, it
will implement a new bundled payment for dialysis treatment. Proposed rules have been released
by CMS and the public comment period will conclude on December 16, 2009. Final rules will likely
be published in 2010. It is not possible at this time to determine what impact this will have on
the adoption of home and/or daily hemodialysis or the price for which we can sell our products.
New regulations particularly impacting home hemodialysis technologies can also negatively
impact the rate and extent of any further market expansion of our System One for home hemodialysis.
In 2008, CMS released new Conditions for Coverage applicable to our customers. These Conditions for
Coverage impose water testing requirements on our patients using our PureFlow SL product. These
water testing requirements increase the burden of our therapy for our patients and may impair
market adoption, especially for our PureFlow SL product. To the extent additional regulations are
introduced unique to the home environment, market adoption could be even further impaired.
Finally we are in a developing market and we will need to continue to devote significant
resources to developing the home market. We cannot be certain that this market will develop, how
quickly it will develop or how large it will be.
We require significant capital to build our business, and financing may not be available to us on
reasonable terms, if at all.
We have experienced negative operating margins and cash flows from operations and we expect to
continue to incur net losses in
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the foreseeable future. In addition, our System One home market relies heavily upon a rental sales
model whereby approximately half of our sales to customers in the home market include the rental
rather than the purchase of System One equipment. This sales model requires significant amounts of
working capital to manufacture System One equipment for rental to dialysis clinics. Our agreement
with DaVita signed in early 2007 departs from the rental model, which helps us to conserve cash
flow. In our 2007 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 equipments needs. The
initial term of that agreement, however, expires in December 2009.
We believe that we have the required resources to fund operating requirements at least through
2010. Future capital requirements will depend on many factors including the rate of revenue growth,
continued progress on improving gross margins, the expansion of selling and marketing activities
and research and development activities, the timing and extent of expansion into new geographies or
territories, the timing of new product introductions and enhancement to existing products, the
continuing market acceptance of products, availability of credit and potential investments in, or
acquisitions of complementary businesses, services or technologies. There is no assurance that
additional debt or equity capital will be available to us on favorable terms, if at all.
If we sell additional equity or issue debt securities to fund future capital requirements, it
will likely result in dilution to our stockholders, and we cannot be certain that additional public
or private financing will be available in amounts or on terms acceptable to us, or at all. If we
are unable to obtain additional financing when needed, we may be required to delay, reduce the
scope of, or eliminate one or more aspects of our business development activities, which would
likely harm our business.
We have limited operating experience, a history of net losses and an accumulated deficit of $268.0
million at September 30, 2009. We cannot guarantee if, when and the extent to which we will become
profitable, or that we will be able to maintain profitability if it is achieved.
Since inception, we have incurred losses every quarter and, at September 30, 2009, we had an
accumulated deficit of approximately $268.0 million. We expect to incur increasing operating
expenses as we continue to grow our business. Additionally, while we have achieved positive gross
margins for our products, in aggregate, since the fourth quarter of 2007, we cannot provide
assurance that our gross margins will continue to improve or, if they do improve, the rate at which
they will improve. We cannot provide assurance that we will achieve profitability, when we will
become profitable, the sustainability of profitability should it occur, or the extent to which we
will be profitable. Our ability to become profitable depends principally upon implementing design
and process improvements to lower our costs of manufacturing our products, accessing lower labor
cost markets for the manufacture of our products, growing revenue, increasing the reliability of
our products, improving our field equipment utilization, achieving efficiencies in manufacturing
and supply chain overhead costs, achieving efficient distribution of our products, achieving a
sufficient scale of operations, and obtaining better purchasing terms and prices.
Our customers in the System One and In-Center segment are highly consolidated, with concentrated buying power.
Fresenius and DaVita own and operate the two largest chains of dialysis clinics in the United States. Collectively,
these entities provide treatment to more than 60% of United States dialysis patients. Additionally, DaVita has certain dialysis supplies purchase obligations to Gambro under a long-term preferred supplier
agreement. 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. With less than 40% of United
States dialysis patients cared for by independent dialysis clinics, our market adoption, at least within the United States, will be more constrained without the presence of one or both of DaVita and Fresenius as customers for our System One and In-Center products.
DaVita is our largest customer for System One and In-Center products. Our long term supply agreement with
DaVita, entered into in February 2007, gave DaVita certain market rights for the System One for home hemodialysis therapy.
DaVita was granted exclusive rights in a small percentage of geographies and limited exclusivity in the majority of other US
geographies. Our agreement with DaVita further limited, but did not prohibit, our sale of System One products for the treatment
of chronic home hemodialysis patients to Fresenius. These exclusivity rights were subject to DaVita meeting certain requirements,
including patient volume commitments and training rates. The initial term of the agreement expires on December 31, 2009. We are working with DaVita to negotiate an amended agreement,
and expect that DaVita will remain our largest customer in the home market for the foreseeable future. We have less experience with Fresenius, with a low, but growing, volume of sales in the System
One segment for home use. We expect that our sales to other
customers, including Fresenius, may
expand in the future although we have no assurance that this will occur.
DaVita is a key customer for our System One and In-Center product lines. The partial or complete
loss of DaVita as a customer would materially impair our financial results, at least in the near
term.
DaVita is our most significant customer. Sales through distributors to DaVita of products
accounted for nearly half of In-Center segment revenues for both the three and nine months ended
September 30, 2009, and direct sales to DaVita accounted for approximately 38% of our System One
segment revenues for both the three and nine months ended September 30, 2009, and nearly half of
our home hemodialysis patients. Our national service provider agreement with DaVita for the home
market does not impose minimum purchase requirements, and the initial term expires in December
2009. We cannot guarantee we will be able to negotiate an extension to this agreement with DaVita
on favorable terms, if at all, or the extent to which DaVita will purchase our products. Although
we expect that DaVita will continue to be a significant customer in the home market, we cannot be
certain that DaVita will continue to purchase and/or rent the System One or add additional System
One patients in the future. Our contract for needles with
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DaVita, expiring in December 2013, includes certain minimum order requirements; however, these can
be reduced significantly under certain circumstances. Our contract for blood tubing sets with
DaVita expired in September 2009. However, in June 2009, we entered into a five year distribution
agreement in the United States with Gambro, pursuant to which Gambro will exclusively supply our
blood tubing sets, including our ReadySet and the Streamline product lines to DaVita. The partial
or complete loss of DaVita as a customer for any of these product lines would adversely affect our
business, at least in the near term. Further, given the significance of DaVita as a customer, any
change in DaVitas ordering or clinical practices can have a significant impact on our revenues,
especially in the near term.
We entered into a $40.0 million term loan and security agreement with Asahi in May 2009. We are
obligated to pay 50% of the interest on the first day of November and May, beginning on November 1,
2009, and repay the remaining interest and principal upon maturity in May 2013. If we fail to
comply with all terms under this agreement, we may go into default, which could trigger, among
other things, the acceleration of all of our indebtedness thereunder or the sale of our assets.
In May 2009, we entered into a $40.0 million term loan, with Asahi. The four year term loan
bears interest at 8% annually, payable on the first day of November and May beginning on November
1, 2009, with 50% of the interest deferred to maturity.
The term loan and security agreement includes certain affirmative covenants including timely
filings with the Securities and Exchange Commission and limitations on contingent debt obligations
and sales of assets. The term loan and security agreement also contains customary events of
default, including nonpayment, misrepresentation, breach of covenants, material adverse effects,
and bankruptcy. In the event we fail to satisfy our covenants, or otherwise go into default, Asahi
has a number of remedies, including sale of our assets and acceleration of all outstanding
indebtedness. Any of these remedies would likely have a material adverse effect on our business.
We compete against other dialysis equipment manufacturers with much greater financial resources and
established products and customer relationships, which may make it difficult for us to penetrate
the market and achieve significant sales of our products. Our competitors may also introduce new
products or features which could impair the competitiveness of our own product portfolio.
Our product lines in the in-center market compete directly against products produced by
Fresenius Medical Care AG, Gambro AB, Nipro, B. Braun, Baxter Healthcare, JMS and others. Our
System One in the critical care market competes against Gambro AB, Fresenius Medical Care AG,
Baxter Healthcare, B. Braun and others. Our System One in the home market is currently the only
system specifically indicated for use in the home market in the United States. Our competitors
each market one or more FDA-cleared medical devices for the treatment of acute or chronic kidney
failure. Each of these competitors offers products that have been in use for a longer time than our
System One, and in some instances many of our Medisystems products, and are more widely recognized
by physicians, patients and providers. These competitors have significantly more financial and
human resources, more established sales, service and customer support infrastructures and spend
more on product development and marketing than we do. Many of our competitors also have established
relationships with the providers of dialysis therapy and, Fresenius owns and operates a chain of
dialysis clinics. The product lines of most of these companies are broader than ours, enabling them
to offer a broader bundle of products and have established sales forces and distribution channels
that may afford them a significant competitive advantage. Finally, one of our competitors, Gambro
AB, had been subject to an import hold imposed by the FDA on its acute and chronic dialysis
machines. Since the import hold has lifted, competition from Gambro has increased, which could
impair our performance in the future in the critical care market.
The market for our products is competitive, subject to change and affected by new product
introductions and other market activities of industry participants, including increased
consolidation of ownership of clinics by large dialysis chains. If we are successful, our
competitors are likely to develop products that offer features and functionality similar to our
products, including our System One. Improvements in existing competitive products or the
introduction of new competitive products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better reliability, convenience or
effectiveness or are offered at lower prices. Baxter has announced a research and development
collaboration with DEKA Research & Development Corporation and HHD, LLC, and has recently indicated
that it hopes to commence clinical studies of DEKAs new home hemodialysis system in 2010. We are
unable to predict when, if ever, this product, or products from other companies, may attain
regulatory clearance and appear in the market, or how successful they may be should they be
introduced, but if additional viable products are introduced to the market, it would adversely
affect our sales and growth. Our ability to successfully market our products could also be
adversely affected by pharmacological and technological advances in preventing the progression of
ESRD and/or in the treatment of acute kidney failure or fluid overload. If we are unable to compete
effectively against existing and future competitors and existing and future alternative treatments
and pharmacological and technological advances, it will be difficult for us to penetrate the market
and achieve significant sales of our products.
Our continued growth is dependent on our development and successful commercialization of new and
improved products.
Our future success will depend in part on timely development and introduction of new and
improved products that address changing market requirements. To the extent that we fail to
introduce new and innovative products or incremental product improvements, we may lose revenues or
market share to our competitors, which may be difficult to regain. Our inability, for technological
or other reasons, to successfully develop and introduce new or improved products could reduce our
growth rate or otherwise damage our business. We cannot assure you that our developments will keep
pace with the marketplace, or that our new or improved products will adequately meet the
requirements of the marketplace.
The success and growth of our business will depend upon our ability to achieve expanded market
acceptance of our System One.
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In the home market, we have to convince four distinct constituencies involved in the choice of
dialysis therapy, namely operators of dialysis clinics, nephrologists, dialysis nurses and
patients, that the System One provides an effective alternative to other existing dialysis
equipment. In the in-center market, we have to convince all of these constituencies, but to a
lesser degree, patients, that our blood tubing sets and needles provide an effective alternative to
other dialysis disposables. In the critical care market, we have to convince hospital purchasing
groups, hospitals, nephrologists, dialysis nurses and critical care nurses that our system provides
an effective alternative to other existing dialysis equipment. Each of these constituencies use
different considerations in reaching their decision. Lack of acceptance by any of these
constituencies will make it difficult for us to grow our business. We may have difficulty gaining
widespread or rapid acceptance of any of our products, including the System One, for a number of
reasons including:
| the failure by us to demonstrate to operators of dialysis clinics, hospitals, nephrologists, dialysis nurses, patients and others that our products are equivalent or superior to existing therapy options; | ||
| competition from products sold by companies with longer operating histories and greater financial resources, more recognizable brand names and better established distribution networks and relationships with hospitals or dialysis clinics; | ||
| the failure by us to continue to improve product reliability and the ease of use of our products; | ||
| limitations on the existing infrastructure in place to support home hemodialysis, including without limitation, home hemodialysis training nurses, and the willingness, cost associated with, and ability of dialysis clinics to build that infrastructure; | ||
| the ownership and operation of some dialysis providers by companies that also manufacture and sell competitive dialysis products; | ||
| the introduction of competing products or treatments that may be more effective, easier to use or less expensive than ours; | ||
| regulations that impose additional burden on patients and their caregivers, such as the recently adopted Medicare conditions for coverage which impose additional water testing requirements in connection with the use of our PureFlow SL; | ||
| the number of patients willing and able to perform therapy independently, outside of a traditional dialysis clinic, may be smaller than we estimate; and | ||
| the availability of satisfactory reimbursement from healthcare payors, including Medicare and any negative impact of the bundle payment method to be implemented by CMS in 2011. |
Our business and results of operations may be negatively impacted by general economic and financial
market conditions and such conditions may increase other risks that affect our business.
The worlds financial markets are currently experiencing significant turmoil, resulting in
reductions in available credit, increased costs of credit, increased volatility in security prices,
rating downgrades of investments and reduced valuations of securities generally. These events have
materially and adversely impacted the availability of financing to a wide variety of businesses and
the resulting uncertainty has led to reductions in capital investments, overall spending levels and
future product plans and sales projections. In general, we believe demand for our products in the
home and in-center market will not be substantially affected by the current market conditions as
regular dialysis is a life-sustaining, non-elective therapy. However, revenues in the in-center
market could be impacted due to changes in sales volumes and inventory management policies with
both our distributors and end customers. Finally, the impact of tightened credit markets on
hospitals could continue to impair the manner and pace in which we sell equipment in the critical
care market or delay equipment placements. Hospitals facing pressure to reduce capital spending
may choose to rent equipment rather than purchase it outright, or to enter into other less-capital
intensive purchase structures with us, which may, in turn, have a negative impact on our cash
flows.
Current Medicare reimbursement rates, at three times per week, limit the price at which we can
market our home products, and adverse changes to reimbursement would likely negatively affect the
adoption or continued sale of our home products.
Our ability to attain profitability will be driven in part by our ability to set or maintain
adequate pricing for our products. As a result of legislation passed by the United States Congress
more than 30 years ago, Medicare provides broad and well-established reimbursement in the United
States for ESRD. With over 80% of United States ESRD patients covered by Medicare, the
reimbursement rate is an important factor in a potential customers decision to use the System One
or our other products and limits the fee for which we can rent or sell our products. Additionally,
current CMS rules limit the number of hemodialysis treatments paid for by Medicare to three times a
week, unless there is medical justification provided by the patients physician for additional
treatments. Most patients using the System One in the home treat themselves, with the help of a
partner, up to six times per week. To the extent that Medicare contractors elect not to pay for the
additional treatments, adoption of the System One would likely be impaired. The determination of
medical justification must be made at the local Medicare contractor level on a case-by-case basis,
based on documentation provided by our customers. If daily therapy is prescribed, a clinics
decision as to how much it is willing to spend on dialysis equipment and services will be at least
partly dependent on whether Medicare will reimburse more than three treatments per week for the
clinics patients. Medicare is switching from intermediaries to Medicare authorized contractors.
This change in the reviewing entity for Medicare claims could lead to a change in whether a
customer receives Medicare reimbursement for additional treatments. If an adverse change to
historical payment practices occurs, market adoption of our System One in the home market may
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be impaired. We understand that a number of our customers are unable to obtain additional
reimbursement for more frequent therapy, and that there are increased administrative burdens
associated with articulating the medical justification for treatments beyond three times a week.
Both of these factors will likely negatively impact the rate and extent of any further market
expansion of our System One for home hemodialysis. Expanding Medicare reimbursement over time to
more predictably cover more frequent therapy, with less administrative burden for our customers,
may be critical to our ability to significantly expand the market penetration of the System One in
the home market and to our revenue growth in the future. Additionally, any adverse changes in the
rate paid by Medicare for ESRD treatments in general would likely negatively affect demand for our
products in the home market and the prices we charge for them. As a result of 2008 MIPPA
legislation, CMS has announced that, in 2011, it will implement a new bundled payment for
dialysis treatment. Proposed rules have been released by CMS and the public comment period will
conclude on December 16, 2009. Final rules will likely be published in 2010. It is not possible
at this time to determine what impact this will have on the adoption of home and/or daily
hemodialysis or the price for which we can sell our products.
As our business continues to grow, we may have difficulty managing our growth and expanding our
operations successfully.
As the commercial launch of the System One and Streamline continues, we will need to expand
our manufacturing, sales and marketing and on-going development capabilities or contract with other
organizations to provide these capabilities for us. As our operations expand, we expect that we
will need to manage additional relationships with various partners, suppliers, manufacturers and
other organizations. Our ability to manage our operations and growth requires us to continue to
improve our information technology infrastructure, operational, financial and management controls
and reporting systems and procedures. Such growth could place a strain on our administrative and
operational infrastructure. We may not be able to make improvements to our management information
and control systems in an efficient or timely manner and may discover deficiencies in existing
systems and controls.
If we are unable to improve on the product reliability of our System One product or maintain strong
product reliability for our other products, our ability to maintain or grow our business and
achieve profitability could be impaired.
We continue to experience product reliability issues associated with our System One and
PureFlow SL that are higher than we expect long-term, and have led us to incur increased service
and distribution costs, as well as to 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 associated with any of our product lines can also lead to decreases in
customer satisfaction and our ability to grow or maintain our revenues. We continue to work to
improve product reliability for all products, and have achieved some improvements to date. If we
are unable to continue to improve product reliability of our System One, PureFlow SL products and
Streamline products, our ability to achieve our growth objectives as well as profitability could be
significantly impaired.
We have a significant amount of System One field equipment, and our ability to effectively manage
this asset could negatively impact our working capital requirements and future profitability.
Because a significant percentage of our System One home care business continues to rely upon
an equipment rental model, our ability to manage System One equipment is important to minimizing
our working capital requirements. In addition, our gross margins may be negatively impacted if we
have excess equipment deployed, and unused, in the field. If we are unable to successfully track,
service and redeploy equipment, we could (1) incur increased costs, (2) realize increased cash
requirements and/or (3) have material write-offs of equipment. This would negatively impact our
working capital requirements and future profitability.
If kidney transplantation becomes a viable treatment option for more patients with ESRD, or if
medical or other solutions for renal replacement become viable, the market for our products may be
limited.
While kidney transplantation is the treatment of choice for most ESRD patients, it is not
currently a viable treatment for most- patients due to the limited number of donor kidneys, the
high incidence of kidney transplant rejection and the higher surgical risk associated with older
ESRD patients. According to USRDS data, in 2007, approximately 17,500 patients received kidney
transplants in the United States. The development of new medications designed to reduce the
incidence of kidney transplant rejection, progress in using kidneys harvested from genetically
engineered animals as a source of transplants or any other advances in kidney transplantation could
limit the market for our products. The development of viable medical or other solutions for renal
replacement may also limit the market for our products.
If we are unable to convince additional hospitals and healthcare providers of the benefits of our
products for the treatment of acute kidney failure and fluid overload, we will not be successful in
increasing our market share in the critical care market.
We sell the System One in the critical care market for use in the treatment of acute kidney
failure and fluid overload associated with, among other conditions, congestive heart failure.
Physicians currently treat most acute kidney failure patients using conventional hemodialysis
systems or dialysis systems designed specifically for use in the intensive care unit, or ICU. We
will need to convince hospitals and healthcare providers that using the System One is as effective
as using conventional hemodialysis systems or ICU-specific dialysis systems for treating acute
kidney failure and that it provides advantages over conventional systems or other ICU-specific
systems because of its significantly smaller size, ease of operation and clinical flexibility. In
addition, the impact of tightened credit markets on hospitals could impair the manner in which we
sell products in the critical care market. Hospitals facing pressure to reduce capital spending may
choose to delay capital equipment purchases or seek alternative financing options. One of our
competitors in the critical care market, Gambro AB, had been subject to an FDA import hold that was
lifted in late 2007. Since the import hold has lifted, competition from Gambro has increased, which
could impair our performance in the future in the critical care market.
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We could be subject to costly and damaging product liability and professional liability claims and
may not be able to maintain sufficient product liability and professional liability insurance to
cover claims against us.
If any of our employees or products is found to have caused or contributed to injuries or
deaths, we could be held liable for substantial damages. Claims of this nature may also adversely
affect our reputation, which could damage our position in the market. While we maintain insurance,
including professional liability, product and excess liability claims may be brought against us
that could result in court judgments or settlements in amounts that are in excess of the limits of
our insurance coverage. In addition, due to the recent tightening of global credit and the
disruption in the financial markets, there may be a disruption in our insurance coverage or delay
or disruption in the payment of claims by our insurance providers. Our insurance policies also have
various exclusions, and we may be subject to a product or professional liability claim for which we
have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement
that exceed our coverage limitations or that are not covered by our insurance.
Any product liability or professional liability claim brought against us, with or without
merit, could result in the increase of our product liability or professional liability insurance
rates, respectively, or the inability to secure additional insurance coverage in the future. A
product liability claim, whether meritorious or not, could be time consuming, distracting and
expensive to defend and could result in a diversion of management and financial resources away from
our primary business, in which case our business may suffer.
We maintain insurance at levels deemed adequate by management; however, future claims could exceed
our applicable insurance coverage.
We maintain insurance for property and general liability, directors and officers liability,
professional liability, workers compensation, and other coverage in amounts and on terms deemed
adequate by management based on our expectations for future claims. Future claims could, however,
exceed our applicable insurance coverage, or our coverage could not cover the applicable claims.
We face risks associated with having international manufacturing operations, and if we are unable
to manage these risks effectively, our business could suffer.
We operate manufacturing facilities in Germany, Italy and Mexico. We also purchase components
and supplies from foreign vendors. We are subject to a number of risks and challenges that
specifically relate to these international operations, and we may not be successful if we are
unable to meet and overcome these challenges. Significant among these risks are risks relating to
foreign currency, in particular the Euro, Peso and Thai Baht. To the extent we fail to control our
exchange rate risk, our profitability could suffer and our ability to maintain mutually beneficial
and profitable relationships with foreign vendors could be impaired. In addition to these risks,
through our international operations, we are exposed to costs associated with sourcing and shipping
goods internationally, difficulty managing operations in multiple locations, local regulations that
may restrict or impair our ability to conduct our operations, and health issues, such as pandemic
disease risk including the swine flu virus, which could disrupt our manufacturing and logistical
and import activities.
We currently rely upon Kawasumi, a third-party manufacturer, to manufacture a significant
percentage of our blood tubing set products using our supplied components and all of our needles.
Kawasumis contractual obligation to manufacture blood tubing sets expires in January 2010, with
opportunities for extension, and its obligation to supply needles expires in February 2011. In the
event these agreements are not renewed or extended upon favorable terms, if at all, or in the event
we are unable to sufficiently expand our manufacturing capabilities, or obtain alternative third
party supply prior to the expiration of these agreements, our growth and ability to meet customer
demand would be impaired.
Historically, we have relied upon a third-party manufacturer, Kawasumi, to manufacture a
significant percentage of our blood tubing set products using our supplied components. Kawasumi has
a strong history of manufacturing high-quality product for us. In May 2008, we negotiated a new
agreement with Kawasumi extending their obligation to supply blood tubing sets to us through
January 31, 2010, with opportunities to extend the term beyond that date. We cannot be certain that
after the expiration of this agreement we would be able to manufacture independently the volume of
products currently manufactured by Kawasumi, and therefore, whether we would have sufficient
capacity to meet all of our customer demand, that we would be able to manufacture products at the
same cost at which we currently purchase products from Kawasumi or that we could find a third party
to supply blood tubing sets on favorable terms, if at all, the failure of any of which could impair
our business. We also depend solely on Kawasumi for all of our finished goods needles. Kawasumis
obligation to supply needles to us expires in February 2011, with opportunities to extend the term
beyond that date. In the event this agreement is not renewed or extended on favorable terms, if at
all, and we are unable to manufacture comparable needles for ourselves prior to the contract
expiration, or if we are unable to obtain comparable needles from another third party on favorable
terms, if at all, the revenues and profitability of our business will be impaired.
Our In-Center segment relies heavily upon third-party distributors.
We sell the majority of our In-Center products through distributors, which collectively
accounted for substantially all of In-Center revenues for the three and nine months ended September
30, 2009, with our primary distributor, Henry Schein, accounting for 65% and 75% of In-Center
revenues for both the three and nine months ended September 30, 2009, respectively. Our
distribution agreement with Henry Schein, originally scheduled to expire in July 2009, has been
extended while the parties seek to negotiate a new agreement. There is, however no assurance that
a new agreement will be signed on favorable terms, if at all. In June 2009, we entered into a
five year distribution agreement in the United States with Gambro, pursuant to which Gambro will
exclusively supply our blood tubing sets, including our ReadySet and the Streamline product lines,
to DaVita.
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During the fourth quarter of
2009, we expect to see some fluctuation in revenues as we transition a portion of our blood tubing
set business from Henry Schein to Gambro.
Unless we can demonstrate sufficient product differentiation in our blood tubing set business
through Streamline or products that we introduce in the future, we will continue to be susceptible
to further pressures to reduce product pricing and more vulnerable to the loss of our blood tubing
set business to competitors in the dialysis industry.
Our blood tubing set business has historically been a commodities business. Prior to the
Medisystems Acquisition, Medisystems competed favorably and gained share through the development of
a high quality, low-cost, standardized blood tubing set, which could be used on several different
dialysis machines. Our products continue to compete favorably in the dialysis blood tubing set
business, but are increasingly subject to pricing pressures, especially given recent market
consolidation in the United States dialysis services industry, with Fresenius and DaVita
collectively controlling approximately 60% of United States dialysis services business. Unless we
can successfully demonstrate to customers the differentiating features of the Streamline product or
products that we introduce in the future, we may be susceptible to further pressures to reduce our
product pricing and more vulnerable to the loss of our blood tubing set business to competitors in
the dialysis industry.
The activities of our business involve the import of finished goods into the United States from
foreign countries, subject to customs inspections and duties, and the export of components and
certain other products from other countries into Germany, Mexico and Thailand. If we misinterpret
or violate these laws, or if laws governing our exemption from certain duties changes, we could be
subject to significant fines, liabilities or other adverse consequences.
We import into the United States disposable medical supplies from Germany, Thailand and
Mexico. We also import into the United States disposable medical components from China, Germany and
Italy and export components and assemblies into Mexico, Thailand and Italy. The import and export
of these items are subject to extensive laws and regulations with which we will need to comply. To
the extent we fail to comply with these laws or regulations, or fail to interpret our obligations
accurately, we may be subject to significant fines, liabilities and a disruption to our ability to
deliver product, which could cause our combined businesses and operating results to suffer. To the
extent there are modifications to the Generalised System of Preferences or cancellation of the
Nairobi Protocol Classification such that our products would be subject to duties, our
profitability would also be negatively impacted. The current Swine Flu Virus, or similar
pandemics, could also impair our ability to import or export goods internationally. At present,
there is no impact from the Swine Flu Virus on our supply chain. However, there can be no
assurance that should the pandemic worsen, our supply chain would not be impaired.
The success of our business depends on the services of each of our senior executives as well as
certain key engineering, scientific, manufacturing, clinical and marketing personnel, the loss of
whom could negatively affect the combined businesses.
Our success has always depended upon the skills, experience and efforts of our senior
executives and other key personnel, including our research and development and manufacturing
executives and managers. Much of our expertise is concentrated in relatively few employees, the
loss of whom for any reason could negatively affect our business. Competition for our highly
skilled employees is intense and we cannot prevent the future resignation of any employee. We
maintain key person insurance for only one of our executives, Jeffrey Burbank, our Chief Executive
Officer.
We have filed a resale registration statement covering shares of our common stock that we recently
sold in a private placement. If the holders of these shares are unable to sell the shares under the
registration statement, we may be obligated to pay them damages, which could harm our financial
condition.
In 2008, we sold an aggregate of 9,555,556 shares of our common stock and warrants to purchase
an additional 1,911,111 shares of our common stock in a private placement. We were required to
register the common stock and the common stock issuable upon exercise of the warrants with the
Securities and Exchange Commission, which we did on August 8, 2008. If the holders of the shares or
the accompanying warrant shares are unable to sell such shares or warrant shares under the
registration statement for more than 30 days in any 365 day period after the effectiveness of the
registration statement, we may be obligated to pay damages equal to up to 1% of the share purchase
price per month that the registration statement is not effective and the investors are unable to
sell their shares.
Risks Related to the Regulatory Environment
We are subject to significant regulation, primarily by the FDA. We cannot market or commercially
distribute our products without obtaining and maintaining necessary regulatory clearances or
approvals.
Our products are medical devices subject to extensive regulation in the United States, and in
foreign markets we may wish to enter. To market a medical device in the United States, approval or
clearance by the FDA is required, either through the pre-market approval process or the 510(k)
clearance process. We have obtained the FDA clearances necessary to sell our current products under
the 510(k) clearance process. Medical devices may only be promoted and sold for the indications for
which they are approved or cleared. In addition, even if the FDA has approved or cleared a product,
it can take action affecting such product approvals or clearances if serious safety or other
problems develop in the marketplace. We may be required to obtain 510(k) clearances or pre-market
approvals for additional products, product modifications, or for new indications for our products.
Presently, we are pursuing a nocturnal indication for the System One under an IDE study started in
the first quarter of 2008. We cannot provide assurance that this or other clearances or approvals
will 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.
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Modifications to our marketed devices may require new regulatory clearances or pre-market
approvals, or may require us to cease marketing or recall the modified devices until clearances or
approvals are obtained.
Any modifications to a 510(k) cleared device that could significantly affect its safety or
effectiveness, or would constitute a major change in its intended use, requires the submission of
another 510(k) pre-market notification to address the change. Although in the first instance we may
determine that a change does not rise to a level of significance that would require us to make a
pre-market notification submission, the FDA may disagree with us and can require us to submit a
510(k) for a significant change in the labeling, technology, performance specifications or
materials or major change or modification in intended use, despite a documented rationale for not
submitting a pre-market notification. We have modified various aspects of our products and have
filed and received clearance from the FDA with respect to some of the changes in the design of our
products. If the FDA requires us to submit a 510(k) for any modification to a previously cleared
device, or in the future a device that has received 510(k) clearance, we may be required to cease
marketing the device, recall it, and not resume marketing until we obtain clearance from the FDA
for the modified version of the device. Also, we may be subject to regulatory fines, penalties
and/or other sanctions authorized by the Federal Food, Drug, and Cosmetic Act. In the future, we
intend to introduce new products and enhancements and improvements to existing products. We cannot
provide assurance that the FDA will clear any new product or product changes for marketing or what
the timing of such clearances might be. In addition, new products or significantly modified
marketed products could be found to be not substantially equivalent and classified as products
requiring the FDAs approval of a pre-market approval application, or PMA, before commercial
distribution would be permissible. PMAs usually require substantially more data than 510(k)
submissions and their review and approval or denial typically takes significantly longer than a
510(k) decision of substantial equivalence. Also, PMA products require approval supplements for any
change that affects safety and effectiveness before the modified device may be marketed. Delays in
our receipt of regulatory clearance or approval will cause delays in our ability to sell our
products, which will have a negative effect on our revenues growth.
Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply
with ongoing regulatory requirements our products could be subject to restrictions or withdrawal
from the market.
We are subject to the 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:
| untitled letters, warning letters, fines, injunctions and civil penalties; | ||
| administrative detention, which is the detention by the FDA of medical devices believed to be adulterated or misbranded; | ||
| customer notification, or orders for repair, replacement or refund; | ||
| voluntary or mandatory recall or seizure of our products; | ||
| operating restrictions, partial suspension or total shutdown of production; | ||
| refusal to review pre-market notification or pre-market approval submissions; | ||
| rescission of a substantial equivalence order or suspension or withdrawal of a pre-market approval; and | ||
| criminal prosecution. |
Our products are subject to market withdrawals or product recalls after receiving FDA clearance or
approval, and market withdrawals and product recalls could cause the price of our stock to decline
and expose us to product liability or other claims or could otherwise harm our reputation and
financial results.
Medical devices can experience performance problems in the field that require review and
possible corrective action by us or the product manufacturer. We cannot provide assurance that
component failures, manufacturing errors, design defects and/or labeling inadequacies, which could
result in an unsafe condition or injury to the operator or the patient will not occur. These could
lead to a government mandated or voluntary recall by us. The FDA has the authority to require the
recall of our products in the event a product presents a reasonable probability that it would cause
serious adverse health consequences or death. Similar regulatory agencies in other countries have
similar authority to recall devices because of material deficiencies or defects in design or
manufacture that could endanger health. We believe that the FDA would request that we initiate a
voluntary recall if a product was defective or presented a risk of injury or gross deception. Any
recall would divert management attention and financial resources, could cause the price of our
stock to decline and expose us to product liability or other claims and harm our reputation with
customers.
If we or our contract manufacturers fail to comply with FDAs Quality System Regulations, our
manufacturing operations could be interrupted, and our product sales and operating results could
suffer.
Our finished goods manufacturing processes, and those of some of our contract manufacturers,
are required to comply with the FDAs Quality System Regulations, or QSRs, which cover the
procedures and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces its QSRs
through periodic unannounced inspections of manufacturing facilities. We and our contract
manufacturers have been, and anticipate in the future being, subject to such inspections. Our
manufacturing facility formerly located in Lawrence, MA U.S. has previously had three
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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. Medisystems has been inspected by the
FDA on eight occasions, and all inspections resulted in no action indicated. We cannot provide
assurance that we can maintain a comparable level of regulatory compliance in the future at our
facilities.
We cannot provide assurance that any future inspections would have the same result. If one of
our manufacturing facilities or those of any of our contract manufacturers fails to take
satisfactory corrective action in response to an adverse QSR inspection, the FDA could take
enforcement action, including issuing a public warning letter, shutting down our manufacturing
operations, embargoing the import of components from outside of the United States, recalling our
products, refusing to approve new marketing applications, instituting legal proceedings to detain
or seize products or imposing civil or criminal penalties or other sanctions, any of which could
cause our business and operating results to suffer.
Healthcare reform legislation could adversely affect our revenue and financial condition.
In recent years, there have been numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for, the availability of and reimbursement for
healthcare services in the United States. These initiatives have ranged from proposals to
fundamentally change federal and state healthcare reimbursement programs, including providing
comprehensive healthcare coverage to the public under governmental funded programs, to minor
modifications to existing programs. Recently, President Obama and members of Congress have proposed
significant reforms to the U.S. healthcare system. Both the U.S. Senate and House of
Representatives have conducted hearings about U.S. healthcare reform and a number of bills have
been proposed in Congress. A leading proposal includes an excise tax on the medical device industry
that would be payable based on revenue, not income. In addition, recent legislation and many of
these proposed bills include funding to assess the comparative effectiveness of medical devices. It
is unclear what impact the excise tax proposal or the comparative effectiveness analysis would have
on our financial results. The ultimate content or timing of any future healthcare reform
legislation, and its impact on medical device companies such as us, is impossible to predict,
although the impact should be less than what may be seen in other healthcare contexts due to the
fact that the vast majority of ESRD patients already are covered under a federal health care
program. If significant reforms are made to the healthcare system in the United States, or in
other jurisdictions, those reforms may have a material adverse effect on our financial condition
and results of operations.
Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our
products outside the United States.
Historically, we have not sold or marketed the System One outside the United States and
Canada. In May 2009, we announced our first international distribution agreement for the System
One with Kimal, granting Kimal distribution rights for the System One as well as Streamline and
ButtonHole needles in the United Kingdom and Ireland. We may look to other markets for the System
One in the future as well. Our In-Center products are presently sold in the United States as well
as in several other countries, through distributors. We presently have CE marking as well as
Canadian regulatory authority to sell our System One as well as certain other products in Canada
and Europe. However, in order to market directly our products in other foreign jurisdictions, we
must obtain separate regulatory approvals and comply with numerous and varying regulatory
requirements. The approval procedure varies from country to country and can involve additional
testing. The time required to obtain approval abroad may be longer than the time required to obtain
FDA clearance. The foreign regulatory approval process includes many of the risks associated with
obtaining FDA clearance and we may not obtain foreign regulatory approvals on a timely basis, if at
all. FDA clearance does not ensure approval by regulatory authorities in other countries, and
approval by one foreign regulatory authority does not ensure approval by regulatory authorities in
other foreign countries. We may not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market outside the United States, which
could negatively affect our overall market penetration.
We currently have obligations under our contracts with dialysis clinics and hospitals to protect
the privacy of patient health information.
In the course of performing our business we obtain, from time to time, confidential patient
health information. For example, we learn patient names and addresses when we ship our System One
supplies to home hemodialysis patients. We may learn patient names and be exposed to confidential
patient health information when we provide training on our products to our customers staff. Our
home hemodialysis patients may also call our customer service representatives directly and, during
the call, disclose confidential patient health information. United States Federal and state laws
protect the confidentiality of certain patient health information, in particular individually
identifiable information, and restrict the use and disclosure of that information. At the federal
level, the Department of Health and Human Services promulgated health information and privacy and
security rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. At
this time, we are not a HIPAA covered entity 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 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.
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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. In addition, several states
require us to report and disclose the value, nature, purpose and particular recipient of any fee,
payment, subsidy or economic benefit which we may from time to time provide to certain physicians
or health care providers. These laws affect our sales, marketing and other promotional activities
by limiting the kinds of financial arrangements, including sales programs; we may have with
hospitals, physicians or other potential purchasers or users of medical devices. They also impose
additional administrative and compliance burdens on our company. In particular, these laws
influence, among other things, how we structure our sales and rental offerings, including discount
practices, customer support, education and training programs and physician consulting and other
service arrangements. Although we seek to structure such arrangements in compliance with applicable
requirements, these laws are broadly written, and it is often difficult to determine precisely how
these laws will be applied in specific circumstances. If one of our sales representatives were to
offer an inappropriate inducement to purchase our products to a customer, we could be subject to a
claim under the Medicare/ Medicaid anti-kickback laws or similar state laws. If we fail to comply
with particular reporting requirements, we could be subject to penalties under applicable state
anti-kickback laws, or healthcare provider sunshine 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.
To date, our marketing efforts have been confined nearly exclusively to the United States. We
have had limited activities in Canada with our System One, and in certain other jurisdictions with
our In-Center products sold through distributors. In May 2009, we announced an international
distribution agreement with Kimal, whereby we would commence promotion and sales of our System One,
as well as Streamline and ButtonHole needles, in the United Kingdom and Ireland. We may, in the
future, seek to market our products in other markets. In some foreign countries, particularly in
the European Union, the pricing of medical devices is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take considerable time after the
receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some
countries, we may be required to supply data that compares the cost-effectiveness of our products
to other available therapies. If reimbursement of our products is unavailable or limited in scope
or amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our
products outside of the United States, which would negatively affect the long-term growth of our
business. Further, reimbursement provided to our products in other jurisdictions could change,
positively or negatively. In the event reimbursements were to be negatively changed, such as, for
example, in the United Kingdom, our ability to sell our products could be impaired.
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act which generally prohibits
United States companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business and requires companies to maintain accurate
books and records and internal controls, including at foreign controlled subsidiaries. We can make
no assurance that our employees or other agents will not engage in prohibited conduct under the
Foreign Corrupt Practices Act for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial condition and
results of operations.
Our business activities involve the use of hazardous materials, which require compliance with
environmental and occupational safety laws regulating the use of such materials. If we violate
these laws, we could be subject to significant fines, liabilities or other adverse consequences.
Our research and development programs as well as our manufacturing operations involve the
controlled use of hazardous materials. Accordingly, we are subject to federal, state and local laws
governing the use, handling and disposal of these materials. Although we believe that our safety
procedures for handling and disposing of these materials comply in all material respects with the
standards
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prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident or failure to comply with
environmental laws, we could be held liable for resulting damages, and any such liability could
exceed our insurance coverage.
Risks Related to Operations
We obtain some of our raw materials or components from a single source or a limited group of
suppliers. We also obtain sterilization services from a single supplier. The partial or complete
loss of one of these suppliers could cause significant production delays, an inability to meet
customer demand and a substantial loss in revenues.
We depend on a number of single-source suppliers for some of the raw materials and components
we use in our products. We also obtain sterilization services from a single supplier. Membrana GmbH
is our sole supplier of the fiber used in our filters for System One products. Pisa is our sole
supplier of lactate-based dialysate and Kawasumi is our only supplier of needles. We also obtain
certain other components from other single source suppliers or a limited group of suppliers. Our
dependence on single source suppliers of components, subassemblies and finished goods exposes us to
several risks, including disruptions in supply, price increases, late deliveries, and an inability
to meet customer demand. This could lead to customer dissatisfaction, damage to our reputation, or
customers switching to competitive products. Any interruption in supply could be particularly
damaging to our customers using the System One to treat chronic ESRD and who need access to the
System One and related disposables.
Finding alternative sources for these components and subassemblies would be difficult in many
cases and may entail a significant amount of time and disruption. In the case of Membrana, for
fiber, we are contractually prevented from obtaining an alternative source of supply for our System
One products. In the case of other suppliers, we would need to change the components or
subassemblies if we sourced them from an alternative supplier. This, in turn, could require a
redesign of our System One or other products and, potentially, further FDA clearance or approval of
any modification, thereby causing further costs and delays.
Resin is a key input material to the manufacture of our products and System One cartridge. Oil
prices affect both the pricing and availability of this material. Escalation of oil prices could
affect our ability to obtain sufficient supply of resin at the prices we need to manufacture our
products at current rates of profitability.
We currently source resin from a small number of suppliers. Rising oil prices over the last
several years have resulted in significant price increases for this material. We cannot guarantee
that prices will not continue to increase. Our contracts with customers restrict our ability to
immediately pass on these price increases, and we cannot guarantee that future pricing to customers
will be sufficient to accommodate increasing input costs.
Distribution costs represent a significant percentage of our overall costs, and these costs are
dependent upon fuel prices. Increases in fuel prices could lead to increases in our distribution
costs, which, in turn, could impair our ability to achieve profitability.
We currently incur significant inbound and outbound distribution costs. Our distribution costs
are dependent upon fuel prices. Increases in fuel prices could lead to increases in our
distribution costs, which could impair our ability to achieve profitability.
We have labor agreements with our production employees in Italy and in Mexico. We cannot guarantee
that we will not in the future face strikes, work stoppages, work slowdowns, grievances,
complaints, claims of unfair labor practices, other collective bargaining disputes or in Italy,
anti-union behavior, that may cause production delays and negatively impact our ability to deliver
our products on a timely basis.
Our wholly-owned subsidiary in Italy has a national labor contract with Contratto collettivo
nazionale di lavoro per gli addetti allindustria della gomma cavi elettrici ed affini e
allindustria delle materie plastiche, and our wholly-owned subsidiary in Mexico has entered into a
collective bargaining agreement with a Union named Mexico Moderno de Trabajadores de la Baja
California C.R.O.C. We have not to date experienced strikes, work stoppages, work slowdowns,
grievances, complaints, claims of unfair labor practices, other collective bargaining disputes, or
in Italy, anti-union behavior, however we cannot guarantee that we will not be subject to such
activity in the future. Any such activity would likely cause production delays, and negatively
affect our ability to deliver our production commitments to customers, which could adversely affect
our reputation and cause our combined businesses and operating results to suffer. Additionally,
some of our key single source suppliers have labor agreements. We cannot guarantee that we will not
have future disruptions, which could adversely affect our reputation and cause our business and
operating results to suffer.
We do not have long-term supply contracts with many of our third-party suppliers.
We purchase raw materials and components from third-party suppliers, including some single
source suppliers, through purchase orders and do not have long-term supply contracts with many of
these third-party suppliers. Many of our third-party suppliers, therefore, are not obligated to
perform services or supply products for any specific period, in any specific quantity or at any
specific price, except as may be provided in a particular purchase order. We do not maintain large
volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished
goods, our ability to meet customer demand could be delayed and our competitive position and
reputation could be harmed. In addition, if we fail to effectively manage our relationships with
these suppliers, we may be required to change suppliers, which would be time consuming and
disruptive and could lead to disruptions in product supply, which could permanently impair our
customer base and reputation.
Certain of our products are recently developed and we have recently transitioned the manufacturing
of certain of these products to new locations. We, and certain of our third-party manufacturers,
have limited manufacturing experience with these products.
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We continue to develop new products and make improvements to existing products. We have also
relocated the manufacture of certain of our products to Mexico. As such, we and certain of our
third-party manufacturers, have limited manufacturing experience with certain of our products. We
are, therefore, more exposed to risks relating to product quality and reliability until the
manufacturing processes for these new products mature.
Risks Related to Intellectual Property
If we are unable to protect our intellectual property and prevent its use by third parties, we will
lose a significant competitive advantage.
We rely on patent protection, as well as a combination of copyright, trade secret and
trademark laws to protect our proprietary technology and prevent others from duplicating our
products. However, these means may afford only limited protection and may not:
| prevent our competitors from duplicating our products; | ||
| prevent our competitors from gaining access to our proprietary information and technology; or | ||
| permit us to gain or maintain a competitive advantage. |
Any of our patents, including those we license, may be challenged, invalidated, circumvented
or rendered unenforceable. We cannot provide assurance that we will be successful should one or
more of our patents be challenged for any reason. If our patent claims are rendered invalid or
unenforceable, or narrowed in scope, the patent coverage afforded our products could be impaired,
which could make our products less competitive.
As of September 30, 2009, we had 44 pending patent applications, including foreign,
international and U.S. applications, and 42 U.S. and international issued patents. Under our
license agreement with DSU Medical Corporation, we also license approximately 29 pending patent
applications, including foreign, international and U.S. applications, and approximately 76 U.S. and
international issued patents. We cannot specify which of these patents individually or as a group
will permit us to gain or maintain a competitive advantage. We cannot provide assurance that any
pending or future patent applications we hold will result in an issued patent or that if patents
are issued to us, that such patents will provide meaningful protection against competitors or
against competitive technologies. The issuance of a patent is not conclusive as to its validity or
enforceability. The United States federal courts or equivalent national courts or patent offices
elsewhere may invalidate our patents or find them unenforceable. Competitors may also be able to
design around our patents. Our patents and patent applications cover particular aspects of our
products. Other parties may develop and obtain patent protection for more effective technologies,
designs or methods for treating kidney failure. If these developments were to occur, it would
likely have an adverse effect on our sales.
The laws of foreign countries may not protect our intellectual property rights effectively or
to the same extent as the laws of the United States. If our intellectual property rights are not
adequately protected, we may not be able to commercialize our technologies, products or services
and our competitors could commercialize similar technologies, which could result in a decrease in
our revenues and market share.
Our products could infringe the intellectual property rights of others, which may lead to
litigation that could itself be costly, could result in the payment of substantial damages or
royalties, and/or prevent us from using technology that is essential to our products.
The medical device industry in general has been characterized by extensive litigation and
administrative proceedings regarding patent infringement and intellectual property rights. Products
to provide kidney replacement therapy have been available in the market for more than 30 years and
our competitors hold a significant number of patents relating to kidney replacement devices,
therapies, products and supplies. Although no third party has threatened or alleged that our
products or methods infringe their patents or other intellectual property rights, we cannot provide
assurance that our products or methods do not infringe the patents or other intellectual property
rights of third parties. If our business is successful, the possibility may increase that others
will assert infringement claims against us.
Infringement and other intellectual property claims and proceedings brought against us,
whether successful or not, could result in substantial costs and harm to our reputation. Such
claims and proceedings can also distract and divert management and key personnel from other tasks
important to the success of the business. In addition, intellectual property litigation or claims
could force us to do one or more of the following:
| cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our revenues; | ||
| pay substantial damages for past use of the asserted intellectual property; | ||
| 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 | ||
| 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. |
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
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In order to protect our proprietary technology and processes, we also rely in part on
confidentiality agreements with our corporate partners, employees, consultants, outside scientific
collaborators and sponsored researchers, advisors and others. These agreements may not effectively
prevent disclosure of confidential information and trade secrets and may not provide an adequate
remedy in the event of unauthorized disclosure of confidential information. In addition, others may
independently discover or reverse engineer trade secrets and proprietary information, and in such
cases we could not assert any trade secret rights against such party. Costly and time consuming
litigation could be necessary to enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could adversely affect our competitive
position.
We may be subject to damages resulting from claims that our employees or we have wrongfully used or
disclosed alleged trade secrets of other companies.
Many of our employees were previously employed at other medical device companies focused on
the development of dialysis products, including our competitors. Although no claims against us are
currently pending, we may be subject to claims that these employees or we have inadvertently or
otherwise used or disclosed trade secrets or other proprietary information of their former
employers. Litigation may be necessary to defend against these claims. If we fail in defending such
claims, in addition to paying monetary damages, we may lose valuable intellectual property rights.
Even if we are successful in defending against these claims, litigation could result in substantial
costs, damage to our reputation and be a distraction to management.
Risks Related to our Common Stock
Our stock price is likely to be volatile, and the market price of our common stock may drop.
The market price of our common stock could be subject to significant fluctuations. Market
prices for securities of early stage companies have historically been particularly volatile. As a
result of this volatility, you may not be able to sell your common stock at or above the price you
paid for the stock. Some of the factors that may cause the market price of our common stock to
fluctuate include:
| timing of market launch and/or market acceptance of our products; | ||
| timing of achieving profitability and positive cash flow from operations; | ||
| changes in estimates of our financial results or recommendations by securities analysts or the failure to meet or exceed securities analysts expectations; | ||
| actual or anticipated variations in our quarterly operating results; | ||
| future debt or equity financings; | ||
| developments or disputes with key vendors or customers; | ||
| disruptions in product supply for any reason, including product recalls, our failure to appropriately forecast supply or demand, difficulties in moving products across the border, or the failure of third party suppliers to produce needed products or components; | ||
| 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; | ||
| 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; | ||
| product recalls; | ||
| defaults under our material contracts, including without limitation our credit agreement; | ||
| regulatory developments in the United States and foreign countries; | ||
| changes in third-party healthcare reimbursements, particularly a decline in the level of Medicare reimbursement for dialysis treatments; | ||
| litigation involving our company or our general industry or both; | ||
| announcements of technical innovations or new products by us or our competitors; | ||
| developments or disputes concerning our patents or other proprietary rights; | ||
| our ability to manufacture and supply our products to commercial standards; | ||
| significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; | ||
| departures of key personnel; and | ||
| investors general perception of our company, our products, the economy and general market conditions. |
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,
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following periods of volatility in the market price of a companys securities, stockholders have
often instituted class action securities litigation against those companies. Such litigation, if
instituted, could result in substantial costs and diversion of management attention and resources,
which could significantly harm our profitability and reputation.
Anti-takeover provisions in our restated certificate of incorporation and amended and restated
bylaws and under Delaware law could make an acquisition of us more difficult and may prevent
attempts by our stockholders to replace or remove our current management.
Provisions in our restated certificate of incorporation and our amended and restated bylaws
may delay or prevent an acquisition of us. In addition, these provisions may frustrate or prevent
attempts by our stockholders to replace or remove members of our board of directors. Because our
board of directors is responsible for appointing the members of our management team, these
provisions could in turn affect any attempt by our stockholders to replace current members of our
management team. These provisions include:
| a prohibition on actions by our stockholders by written consent; | ||
| 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; | ||
| advance notice requirements for nominations of directors or stockholder proposals; and | ||
| the requirement that board vacancies be filled by a majority of our directors then in office. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of
15% of our outstanding voting stock from merging or combining with us for a period of three years
after the date of the transaction in which the person acquired in excess of 15% of our outstanding
voting stock, unless the merger or combination is approved in a prescribed manner. These provisions
would apply even if the offer may be considered beneficial by some stockholders.
If there are substantial sales of our common stock in the market by our large existing
stockholders, our stock price could decline.
If our existing stockholders sell a large number of shares of our common stock or the public
market perceives that existing stockholders might sell shares of common stock, the market price of
our common stock could decline significantly. We have 46,695,539 shares of common stock outstanding
as of September 30, 2009. 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 466,955 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.
At September 30, 2009, subject to certain conditions, holders of an aggregate of approximately
24,280,888 shares of our common stock have rights with respect to the registration of these shares
of common stock with the Securities and Exchange Commission, or SEC. If we register their shares of
common stock following the expiration of the lock-up agreements, they can sell those shares in the
public market.
As of September 30, 2009, 11,472,430 shares of common stock are authorized for issuance under
our stock incentive plan, employee stock purchase plan and outstanding stock options. As of
September 30, 2009, 6,920,434 shares were subject to outstanding options, of which 3,670,778 were
exercisable and can be freely sold in the public market upon issuance, subject to the restrictions
imposed on our affiliates under Rule 144.
Our executive officers, directors and current and principal stockholders own a large percentage of
our voting common stock and could limit new stockholders influence on corporate decisions or could
delay or prevent a change in corporate control.
Our directors, executive officers and current holders of more than 5% of our outstanding
common stock, together with their affiliates and related persons, beneficially hold, in the
aggregate, approximately 66% of our outstanding common stock. David S. Utterberg, one of our
directors, holds approximately 18% of our outstanding common stock. As a result, these
stockholders, if acting together, may have the ability to determine the outcome of matters
submitted to our stockholders for approval, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets and other extraordinary
transactions. The interests of this group of stockholders may not always coincide with our
corporate interests or the interests of other stockholders, and they may act in a manner with which
you may not agree or that may not be in the best interests of other stockholders. This
concentration of ownership may have the effect of:
| delaying, deferring or preventing a change in control of our company; | ||
| entrenching our management and/or Board; | ||
| impeding a merger, consolidation, takeover or other business combination involving our company; or | ||
| discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. |
We may grow through additional acquisitions, which could dilute our existing shareholders and could
involve substantial integration risks.
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As part of our business strategy, we may acquire other businesses and/or technologies in the
future. We may issue equity securities as consideration for future acquisitions that would dilute
our existing stockholders, perhaps significantly depending on the terms of the acquisition. We may
also incur additional debt in connection with future acquisitions, which, if available at all, may
place additional restrictions on our ability to operate our business. Acquisitions may involve a
number of risks, including:
| difficulty in transitioning and integrating the operations and personnel of the acquired businesses, including different and complex accounting and financial reporting systems; | ||
| potential disruption of our ongoing business and distraction of management; | ||
| potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of our finance, accounting and product distribution systems; | ||
| difficulty in incorporating acquired technology and rights into our products and technology; | ||
| unanticipated expenses and delays in completing acquired development projects and technology integration; | ||
| management of geographically remote units both in the United States and internationally; | ||
| impairment of relationships with partners and customers; | ||
| customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products; | ||
| entering markets or types of businesses in which we have limited experience; | ||
| potential loss of key employees of the acquired company; and | ||
| inaccurate assumptions of acquired companys product quality and/or product reliability. |
As a result of these and other risks, we may not realize anticipated benefits from our
acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired
businesses and technologies could seriously harm our business.
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Item 6. Exhibits
Exhibit | ||
Number | ||
31.1
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 the of Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the 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 the 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 the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NXSTAGE MEDICAL, INC. |
||||
By: | /s/ Robert S. Brown | |||
Robert S. Brown Chief Financial Officer (Duly authorized officer and principal financial and accounting officer) |
||||
November 9, 2009
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