NxStage Medical, Inc. - FORM 10-Q

NxStage Medical, Inc. - FORM 10-Q - November 7, 2013

Attached files

Attached files

NxStage Medical, Inc. Reports

Also read

file	filename
EXCEL - IDEA: XBRL DOCUMENT - NxStage Medical, Inc.	Financial_Report.xls
EX-10.3 - EX-10.3 - NxStage Medical, Inc.	d600333dex103.htm
EX-10.2 - EX-10.2 - NxStage Medical, Inc.	d600333dex102.htm
EX-10.1 - EX-10.1 - NxStage Medical, Inc.	d600333dex101.htm
EX-32.1 - EX-32.1 - NxStage Medical, Inc.	d600333dex321.htm
EX-31.2 - EX-31.2 - NxStage Medical, Inc.	d600333dex312.htm
EX-32.2 - EX-32.2 - NxStage Medical, Inc.	d600333dex322.htm
EX-31.1 - EX-31.1 - NxStage Medical, Inc.	d600333dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

¨	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.)

350 Merrimack St., Lawrence, MA		01843
(Address of Principal Executive Offices)		(Zip Code)

(978) 687-4700

(Registrant’s Telephone Number, Including Area Code)

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

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

There were 60,930,965 shares of the registrant’s common stock outstanding as of the close of business on November 1, 2013.

NXSTAGE MEDICAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS


	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012		3
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2013 and 2012		4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		22

PART II - OTHER INFORMATION		22
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 6. Exhibits		41
SIGNATURES		42

Note Regarding Trademarks

NxStage®, Streamline®, ButtonHole® and MasterGuard® are registered trademarks of NxStage Medical, Inc. PureFlow SL^TM and System One^TM are trademarks of NxStage Medical, Inc.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2013			December 31, 2012
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	83,159		$	106,439
Accounts receivable, net		22,523			18,990
Inventory		37,097			33,504
Prepaid expenses and other current assets		5,024			2,534

Total current assets		147,803			161,467
Property and equipment, net		47,106			36,320
Field equipment, net		13,670			10,101
Deferred cost of revenues		33,692			38,028
Intangible assets, net		17,894			19,819
Goodwill		42,329			42,421
Other assets		2,108			3,793

Total assets	$	304,602		$	311,949

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,798		$	16,645
Accrued expenses		18,160			20,400
Other current liabilities		2,516			2,187

Total current liabilities		37,474			39,232
Deferred revenues		52,361			59,262
Other long-term liabilities		19,676			15,864

Total liabilities		109,511			114,358
Commitments and contingencies (Note 10)
Stockholders’ equity:

Undesignated preferred stock: par value $0.001, 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2013 and December 31, 2012		—			—

Common stock: par value $0.001, 100,000,000 shares authorized; 61,333,363 and 59,850,117 shares issued as of September 30, 2013 and December 31, 2012, respectively		61			59
Additional paid-in capital		563,191			551,594
Accumulated deficit		(358,366	)		(344,981	)
Accumulated other comprehensive income		168			470

Treasury stock, at cost: 575,895 and 541,584 shares as of September 30, 2013 and December 31, 2012, respectively		(9,963	)		(9,551	)

Total stockholders’ equity		195,091			197,591

Total liabilities and stockholders’ equity	$	304,602		$	311,949

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(In thousands, except per share data)
Revenues	$	66,873		$	61,152		$	193,979		$	177,112
Cost of revenues		41,345			37,404			119,364			109,663

Gross profit		25,528			23,748			74,615			67,449

Operating expenses:
Selling and marketing		12,374			10,168			34,786			30,006
Research and development		4,450			4,274			13,924			12,421
Distribution		5,326			4,731			15,271			13,845
General and administrative		7,791			6,921			23,854			20,473

Total operating expenses		29,941			26,094			87,835			76,745

Loss from operations		(4,413	)		(2,346	)		(13,220	)		(9,296	)

Other expense:
Interest expense		(162	)		(26	)		(462	)		(2,675	)
Other (expense) income, net		(142	)		13			(328	)		(118	)

		(304	)		(13	)		(790	)		(2,793	)

Net loss before income taxes		(4,717	)		(2,359	)		(14,010	)		(12,089	)
Provision for (benefit from) income taxes		269			223			(625	)		700

Net loss	$	(4,986	)	$	(2,582	)	$	(13,385	)	$	(12,789	)

Net loss per share, basic and diluted	$	(0.08	)	$	(0.04	)	$	(0.22	)	$	(0.22	)

Weighted-average shares outstanding, basic and diluted		60,675			58,945			60,029			57,482


Other comprehensive income (loss)		257			711			(302	)		587

Total comprehensive loss	$	(4,729	)	$	(1,871	)	$	(13,687	)	$	(12,202	)

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net loss	$	(13,385	)	$	(12,789	)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		18,430			17,495
Stock-based compensation		7,830			9,213
Other		2,251			3,047
Changes in operating assets and liabilities:
Accounts receivable		(3,473	)		(3,753	)
Inventory		(14,498	)		(11,638	)
Prepaid expenses and other assets		(2,549	)		(384	)
Accounts payable		49			(863	)
Accrued expenses and other liabilities		(3,847	)		3,691
Deferred revenues		(5,707	)		(3,449	)

Net cash (used in) provided by operating activities		(14,899	)		570

Cash flows from investing activities:
Cash paid for acquisitions		(2,234	)		—
Purchases of property and equipment		(10,367	)		(5,952	)

Net cash used in investing activities		(12,601	)		(5,952	)

Cash flows from financing activities:
Proceeds from stock option and purchase plans		3,045			5,530
Purchase of treasury stock		—			(522	)
Proceeds from the issuance of debt		1,136			—

Net cash provided by financing activities		4,181			5,008

Foreign exchange effect on cash and cash equivalents		39			144

Decrease in cash and cash equivalents		(23,280	)		(230	)
Cash and cash equivalents, beginning of period		106,439			102,909

Cash and cash equivalents, end of period	$	83,159		$	102,679

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Nature of Operations

We are a medical device company that develops, manufactures and markets innovative products for the treatment of kidney failure, fluid overload and related blood treatments and procedures. Our primary product, the NxStage System One, or System One, was designed to satisfy an unmet clinical need for a system that can deliver the therapeutic flexibility and clinical benefits associated with traditional dialysis machines in a smaller, portable, easy-to-use form that can be used by healthcare professionals and trained lay users alike in a variety of settings, including patient homes, as well as more traditional care settings such as hospitals and dialysis clinics. Given its design, the System One is particularly well-suited for home hemodialysis and a range of dialysis therapies including more frequent dialysis, which clinical literature suggests provides patients better clinical outcomes and improved quality of life. The System One is cleared or approved for commercial sale in the United States, or U.S., Canada and certain other markets for the treatment of acute and chronic kidney failure and fluid overload. The System One is also CE marked in the European Union, or EU, for treatment of acute and chronic kidney failure and fluid overload. The System One is cleared specifically by the Food and Drug Administration, or FDA, for home hemodialysis as well as therapeutic plasma exchange, or TPE, in a clinical environment. The System One is also CE marked in the EU for nocturnal home hemodialysis. We also sell needles and blood tubing sets primarily to dialysis clinics for the treatment of end-stage renal disease, or ESRD. These products are cleared or approved for commercial sale in the U.S., Canada and certain other markets. These products are also CE marked in the EU. We believe our largest product market opportunity is for our System One used in the home dialysis market for the treatment of ESRD.

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2013 and for the three and nine months then ended, and related notes, are unaudited but, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, that are necessary for fair statement of the interim periods presented. Our unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission, or SEC, for interim reporting. As permitted under these rules, we have condensed or omitted certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles, or GAAP. Our accounting policies are described in the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012, or 2012 Form 10-K, and updated, as necessary, in this Quarterly Report on Form 10-Q. Operating results for any interim period are not necessarily indicative of results for the entire year or future periods. The December 31, 2012 condensed consolidated balance sheet contained herein was derived from audited financial statements, but does not include all disclosures that would be required for audited financial statements under GAAP. For further information, refer to the consolidated financial statements and footnotes thereto included in our 2012 Form 10-K.

2.	Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of NxStage Medical, Inc. and our wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires our 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.

Concentration of Credit Risk

Concentration of credit risk with respect to accounts receivable is primarily limited to certain customers to whom we make substantial sales. One customer represented 24% of accounts receivable at September 30, 2013, and two customers represented 16% and 12% of accounts receivable at December 31, 2012.

Warranty Costs

We accrue estimated costs that we may incur under our product warranty programs at the time the product revenue is recognized based on contractual rights and historical experience. Warranty expense is included in cost of revenues in the condensed consolidated statements of comprehensive loss. The following is a rollforward of our warranty accrual (in thousands):


Balance at December 31, 2012	$	324
Provision		349
Usage		(352	)

Balance at September 30, 2013	$	321

Recent Accounting Pronouncements

Effective January 1, 2013, we adopted revised guidance related to the presentation of significant reclassifications out of accumulated other comprehensive income. This guidance does not impact the requirements for reporting net income or other comprehensive income in the financial statements, however, it does require that we disclose, in either a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. This guidance is required to be applied prospectively, and we have elected to include the required disclosures in the notes to the financial statements. The implementation of this guidance introduces new disclosure requirements but does not impact the amounts in our financial statements.

3.	Inventory

Inventory includes material, labor and overhead, and is stated at lower of cost (first-in, first-out) or market. The components of inventory are as follows (in thousands):


	September 30, 2013		December 31, 2012
Purchased components	$	13,246	$	16,322
Work in process		13,263		8,390
Finished goods		10,588		8,792

Total	$	37,097	$	33,504

4.	Property and Equipment and Field Equipment

Accumulated depreciation on property and equipment was $20.4 million and $17.3 million at September 30, 2013 and December 31, 2012, respectively. Accumulated depreciation on field equipment was $35.9 million and $33.8 million at September 30, 2013 and December 31, 2012, respectively.

5.	Intangible Assets

Accumulated amortization of intangible assets was $16.8 million and $14.7 million at September 30, 2013 and December 31, 2012, respectively.

6.	Net Loss per Share

Basic net loss per share is computed by dividing loss available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted loss per share is similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

The following potential common stock equivalents, as calculated using the treasury stock method, were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive due to the net loss incurred (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Options to purchase common stock		1,104		1,313		1,053		1,771
Unvested restricted stock		177		239		136		191
Warrants to purchase common stock		—		875		—		959

Total		1,281		2,427		1,189		2,921

7.	Accrued expenses

The components of accrued expenses are as follows (in thousands):


	September 30, 2013		December 31, 2012
Payroll, compensation and related benefits	$	8,282	$	8,320
Distribution expenses		2,360		3,175
Contingent consideration (Payable to Seller)		576		—
General and administrative expenses		2,462		2,337
Accrued taxes		681		2,475
Other		3,799		4,093

Total	$	18,160	$	20,400

Debt

We entered into two euro denominated mortgages collateralized by a manufacturing facility in Italy that we acquired in May 2013. The first mortgage is in the principal amount of $0.6 million, subject to an annual interest rate of 6.0%, and payable quarterly over a 10 year period. The second mortgage is in the principal amount of $0.5 million, subject to an annual interest rate of 2.0%, and payable biannually over a 10 year period.

9.	Segment Disclosures

We have two reportable business segments: System One and In-Center.

Our System One segment includes revenues from the sale and rental of the System One and PureFlow SL equipment and the sale of disposable products in the home and critical care markets. The home market is devoted to the treatment of ESRD patients in the home, while the critical care market is devoted to the treatment of hospital-based patients with acute kidney failure or fluid overload. Some of our largest customers in the home market provide outsourced renal dialysis services to some of our customers in the critical care market. Sales of product to both markets are made primarily through dedicated sales forces and distributed directly to the customer or the patient, with certain products sold through distributors internationally. The results of our international business are included in the System One segment.

Our In-Center segment includes revenues from the sale of blood tubing sets and needles for hemodialysis primarily for the treatment of ESRD patients at dialysis centers and needles for apheresis. Nearly all In-Center products are sold through national distributors.

The remainder of our operations and financial information, included within the Other category, relates primarily to (1) the manufacturing of dialyzers for sale to Asahi Kuraray Medical Co., or Asahi, (2) certain business development activities, including our continuing work on establishing centers of excellence, which are dialysis clinics focused on the provision of home therapy and flexible in-center options, and (3) research and development and general and administrative expenses that are excluded from the segment operating performance measures.

The accounting policies of our reportable segments are the same as those described in Note 2 to the consolidated financial statements included in our 2012 Form 10-K. Our chief operating decision maker allocates resources to our business segments and assesses segment performance based on segment profit (loss), which consists of revenues less cost of revenues, selling and marketing and distribution expenses.

The following summarizes the operating performance of our reportable segments (in thousands):


	System One		In-Center		Other			Total
Three Months Ended September 30, 2013
Revenues from external customers	$	44,337	$	21,269	$	1,267		$	66,873
Segment profit (loss)		5,518		4,214		(14,145	)		(4,413	)
Depreciation and amortization		4,511		332		1,328			6,171

Three Months Ended September 30, 2012
Revenues from external customers	$	41,024	$	19,637	$	491		$	61,152
Segment profit (loss)		6,330		2,905		(11,581	)		(2,346	)
Depreciation and amortization		4,584		362		969			5,915

Nine Months Ended September 30, 2013
Revenues from external customers	$	130,003	$	61,207	$	2,769		$	193,979
Segment profit (loss)		17,644		11,950		(42,814	)		(13,220	)
Depreciation and amortization		13,440		1,014		3,976			18,430

Nine Months Ended September 30, 2012
Revenues from external customers	$	120,428	$	55,477	$	1,207		$	177,112
Segment profit (loss)		17,716		6,848		(33,860	)		(9,296	)
Depreciation and amortization		13,605		1,069		2,821			17,495

Substantially all of our revenues have been derived from the sale of the System One and related products, which cannot be used with any other dialysis system, and from needles and blood tubing sets to customers located in the U.S.

The following table summarizes the customers who individually comprise greater than 10% of total revenues and their respective portion of total revenues:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Customer A		21	%		20	%		22	%		20	%
Customer B		8	%		11	%		10	%		10	%
Customer C		13	%		11	%		13	%		12	%
Customer D		14	%		11	%		13	%		11	%

Sales to Customer A and D are nearly all in the System One segment and sales to Customer B and C are to significant distributors in the In-Center segment. A portion of Customer B’s sales of our products are to Customer A. All of Customer C’s sales of our products are to Customer A.

10.

Commitments and Contingencies

As discussed in our 2012 Form 10-K, a civil complaint was filed against us on February 28, 2012 in the US District Court for the District of Massachusetts by Gambro Renal Products, Inc., or Gambro (Case No. 1:12cv10370-PBS). The complaint alleges that we violated Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), and Massachusetts General Laws Chapter 93A by making false and misleading statements about our and Gambro’s allegedly competing products in the critical care market in commercial and promotional activities. The complaint also alleges that we wrongfully interfered with contractual and

advantageous relationships of Gambro in its critical care business. Gambro seeks compensatory and treble damages, disgorgement of profits and injunctive relief. We believe the suit is without merit and intend to defend against it vigorously. At this time we do not believe a loss is probable and we are not able to estimate a range of possible loss.

Other significant commitments and contingencies at September 30, 2013 are consistent with those discussed in Note 10 to the consolidated financial statements in our 2012 Form 10-K.

11.

Income Taxes

We recognized a provision for income taxes of $0.3 million during the three months ended September 30, 2013 and a benefit from income taxes of $0.6 million during the nine months ended September 30, 2013 compared to a provision for income taxes of $0.2 million and $0.7 million for the three and nine months ended September 30, 2012, respectively. We recorded income tax expense during both 2013 and 2012 for certain profitable foreign subsidiaries. The net benefit from income taxes recorded during 2013 includes the favorable conclusion of a foreign income tax audit in the second quarter which resulted in the recognition of a $1.2 million income tax benefit.

While we had a gross reserve for unrecognized tax benefits of $1.5 million as of December 31, 2012, we have no reserve for unrecognized tax benefits as of September 30, 2013.

12.

Stock-Based Compensation

Stock-based Compensation Expense

Our stock-based compensation expense is allocated among the following components of our condensed consolidated statements of comprehensive loss (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	219	$	299	$	774	$	944
Selling and marketing		928		1,179		2,689		3,578
Research and development		357		345		1,242		1,094
General and administrative		891		1,138		3,125		3,597

Total	$	2,395	$	2,961	$	7,830	$	9,213

Stock Options and Restricted Stock Units

The Company granted options to purchase 112,033 and 55,037 shares of common stock during the three months ended September 30, 2013 and 2012, respectively, and 1,103,315 and 451,519 shares of common stock during the nine months ended September 30, 2013 and 2012, respectively. The weighted-average fair value of options granted during the nine months ended September 30, 2013 and 2012 was $6.29 and $9.31 per option, respectively.

The Company awarded 62,140 and 53,117 restricted stock units during the three months ended September 30, 2013 and 2012, respectively, and 289,905 and 176,498 restricted stock units during the nine months ended September 30, 2013 and 2012, respectively, which vest based on continued employment over a period of four years. The weighted-average fair value of these restricted stock units awarded during the nine months ended September 30, 2013 and 2012 was $11.91 and $17.19 per unit, respectively.

Performance Based Plans

In March 2013, the Compensation Committee of our Board of Directors approved the grant of up to 433,267 restricted stock units pursuant to performance based awards subject to the achievement of certain Company financial performance metrics for the year ending December 31, 2013. The restricted stock units, if earned, vest over a requisite service period of three years and have a fair value of $11.03 per unit. The estimated expense will be recognized as stock-based compensation expense over the requisite three year service period based on the number of shares expected to vest. Further, in March 2013, the Compensation Committee made awards subject to individual performance and the achievement of certain Company financial performance metrics for the year ending December 31, 2013. Awards are payable in shares of the Company’s common stock or in cash, at the discretion of the Compensation Committee. The estimated payout of these awards is being recognized as compensation expense during 2013, with a majority of this compensation expense classified as stock-based compensation expense, and has been classified as a liability on the Company’s condensed consolidated balance sheet.

13.

Stockholders’ Equity

We received 34,311 and 32,310 shares of common stock that were surrendered in payment for the exercise of stock options through the nine months ended September 30, 2013 and 2012, respectively.

14.

Business Combination

On April 2, 2013, we acquired substantially all of the System One assets of Kimal PLC, or Kimal, a distributor of our products in the United Kingdom. The aggregate purchase price is estimated at $3.9 million. The acquisition is consistent with our move to a direct sales model in the United Kingdom.

The acquisition was accounted for using the purchase method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations. Our financial statements include the results of operations of Kimal subsequent to the acquisition date. We have not provided pro forma financial information for this acquisition given its results are not material to our consolidated financial statements. Transaction costs associated with this acquisition were expensed as incurred and are not material for the three or nine month periods ended September 30, 2013.

The purchase price includes an initial cash payment of $2.2 million paid in July 2013, the forgiveness of a capital lease liability due from Kimal of $1.4 million, up to $0.7 million in deferred payments payable within 12 months of the acquisition date subject to certain post-closing conditions and the reclassification of deferred revenues of $0.3 million, net of related deferred cost of revenues, associated with sales of equipment to Kimal prior to January 1, 2011.

The following is a summary of the estimated purchase price as of April 2, 2013, the date of acquisition (in thousands):


Cash	$	2,181
Fair value of lease liability forgiven		1,447
Fair value of contingent consideration (payable to seller)		540
Other		(307	)

Total Purchase Price	$	3,861

The following table presents the preliminary allocation of the purchase price to the estimated fair value of the assets acquired at April 2, 2013, the date of acquisition (in thousands):


Assets purchased:
Inventory	$	523
Field Equipment		3,168
Customer relationships		170

Assets acquired	$	3,861

The fair values of inventory and field equipment noted above approximate their net book value at the time of acquisition. The $0.2 million of customer relationships was valued using the multi-period excess-earnings method, a form of the income approach, using certain significant unobservable inputs (classified as level 3 in the fair value hierarchy), namely, a discount rate of 11.5%, projected future cash flows, and patient growth rates. The preliminary purchase price allocation is subject to adjustment based on a final valuations of assets purchased.

15.

Derivative Instruments and Hedging

We operate a manufacturing and service facility in Mexico where we purchase materials and pay our employees in Pesos, and as such, we are potentially exposed to adverse as well as beneficial movements in foreign currency exchange rates. To minimize the impact of foreign currency exchange rate fluctuations on these Peso denominated expenses, we entered into foreign exchange forward contracts. These contracts have a duration of up to twelve months and are designated as cash flow hedges. The counterparties to these foreign exchange forward contracts are creditworthy financial institutions; therefore, we do not consider the risk of counterparty nonperformance to be material. As of September 30, 2013, the notional amount of our outstanding contracts that are designated as cash flow hedges was $11.4 million. The fair value of these contracts at September 30, 2013 included a liability of $0.3 million recorded on the balance sheet in accrued expenses. As of December 31, 2012, the notional amount of our outstanding contracts that were designated as cash flow hedges was approximately $7.8 million. The fair value of these contracts at December 31, 2012 was an asset of $0.4 million recorded on the balance sheet in prepaid expenses and other current assets. Gains or losses related to hedge ineffectiveness recognized in earnings were not material during the nine months ended September 30, 2013 or 2012. Given the short-term nature of our contracts, any gains or losses recorded within accumulated other comprehensive income (loss) will be recognized in earnings within the next twelve months.

The following table presents the effect of these contracts designated as cash flow hedges on our condensed consolidated financial statements (in thousands):


	Gain (Loss) Recognized in OCI (Effective Portion)			Gain (Loss) Reclassified from OCI into Income (Effective Portion)		Classification within the Condensed Consolidated Statement of Comprehensive Loss
Three Months Ended September 30, 2013
Foreign exchange forward contracts	$	(153	)	$	43	Cost of revenues
Nine Months Ended September 30, 2013
Foreign exchange forward contracts	$	3		$	684	Cost of revenues

16.

Accumulated Other Comprehensive (Loss) Income

The following additional information is provided with respect to the accumulated other comprehensive (loss) income as presented on the condensed consolidated balance sheets (in thousands):


	Unrealized gain (loss) on derivative instruments			Other (2)		Total
Balance as of December 31, 2012	$	389		$	81	$	470
Other comprehensive income before reclassifications		3			379		382
Gain reclassified to earnings (1)		(684	)		—		(684	)

Total other comprehensive income (loss)		(681	)		379		(302	)

Balance as of September 30, 2013	$	(292	)	$	460	$	168

(1)	Reclassifications of gains (losses) on derivative instruments are included in cost of revenues on the condensed consolidated statement of comprehensive loss. See Note 15 for further information.

(2)	Other includes cumulative translation adjustments and pension benefits.

17.

Fair Value Measurements

We have certain financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis recorded in our condensed consolidated balance sheets. The fair value measurements used are based on quoted prices, when available, or through the use of alternative approaches. The inputs used to determine fair value have been classified as Level 1, 2 or 3. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves for similar instruments and model-derived valuations whose inputs are observable. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.

We measure the fair value of our foreign exchange forward contracts classified as derivative instruments using an income approach, based on prevailing market forward rates less the contract rate multiplied by the notional amount. The product of this calculation is then adjusted for counterparty risk.

Our contingent consideration liability relates to deferred payments in connection with our acquisition of substantially all of the System One assets of Kimal on April 2, 2013. We recognized a liability equal to the estimated fair value of the contingent payment we expect to make as of the acquisition date and we re-measure this liability each reporting period with changes in the fair value recorded in earnings. There were no significant changes in our contingent consideration liability during the three and nine months ended September 30, 2013. The liability recorded at acquisition and at September 30, 2013 was measured using probability weighted discounted cash flow method and includes certain significant unobservable inputs, namely, a discount rate of 11.5% and patient growth rates.

We did not have any transfers between Level 1 and Level 2 or transfers in or out of Level 3, excluding the contingent consideration liability, during the nine months ended September 30, 2013.

The following table presents assets and liabilities measured at fair value on a recurring basis and their level within the value hierarchy (in thousands):


September 30, 2013	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Money market funds (1)	$	73,778	$	—	$	—	$	73,778
Foreign exchange forward contracts (2)		—		25		—		25
Liabilities
Foreign exchange forward contracts (2)	$	—	$	358	$	—	$	358
Contingent consideration liability (3)		—		—		576		576

(1)	Money market funds are included within cash and cash equivalents.

(2)	Foreign exchange forward contracts are included within prepaid expenses and other current assets or accrued expenses depending on the gain (loss) position.

(3)	Net present value of expected payments under contingent consideration liability are reported in accrued expenses.

Assets measured at fair value on a non-recurring basis in the current period include the assets acquired in a business combination, as described in Note 14.

The carrying amounts reflected in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses and other current and non-current assets, accounts payable and accrued expenses approximate fair value due to their short-term nature.

18.

Supplemental Cash Flow Information

The following additional information is provided with respect to the condensed consolidated statements of cash flows (in thousands):


	Nine Months Ended September 30,
	2013		2012
Noncash Investing and Financing Activities:
Transfers from inventory to field equipment	$	9,315	$	8,183
Transfers from field equipment to deferred cost of revenues		6,012		7,279
Payment of corporate bonus in common stock		1,034		878
Market value of shares received in payment for exercise of stock options		412		513
Construction-in-process financed by construction liability		2,604		7,235
Payment of Asahi debt through the issuance of equity		—		45,219
Leasehold improvements paid by the landlord		—		4,300
Property and equipment acquired under capital lease		745		1,210
Acquisition of business		3,861		—
Deferred revenues and deferred costs related to acquiree recorded as a reduction of consideration paid		335		—

Item 2. Management’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2012, included in our 2012 Form 10-K.

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition, including statements with respect to: our market opportunity and the market adoption of our products in the U.S. and internationally; the growth of the home, critical care and in-center dialysis markets in general and the home dialysis market in particular; access to home or more frequent hemodialysis; plans for expanding internationally; the development and commercialization of new products and improvements to existing products; the results and timing of clinical studies and plans for regulatory submissions; sales to our key customers, including DaVita HealthCare Partners Inc., or DaVita, and Fresenius Medical Care, or Fresenius; the adequacy of our funding; expectations with respect to future demand for our products and revenue growth; the timing, scope and success of our initiatives to improve our gross profit as a percentage of revenues; our manufacturing operations and supply chain; our initiative to establish our dialysis centers of excellence; expectations with respect to our operating expenses and working capital requirements; changes with respect to our expenses as a percentage of revenues; proposed reduction in the base payment rate under the ESRD prospective payment system; achieving our business plan; the impact of global economic conditions; expectations with respect to achieving positive operating margins, positive cash flows and profitable operations; volatility of our stock price; product cost reduction plans; expectations with respect to achieving improvements in product reliability; the impact of our acquisition of Kimal’s System One assets; our ability to withstand supply chain disruptions; anticipated requirements for premixed dialysate; and expectations with respect to our litigation with Gambro Renal Products, Inc. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, costs, plans and objectives are forward-looking statements. When used in this report, the words “expect”, “anticipate”, “intend”, “plan”, “believe”, “seek”, “estimate”, “potential”, “continue”, “predict”, “may”, “will” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements.

Readers should carefully review the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in this Quarterly Report, as these sections describe important factors that could cause actual results to differ materially from those indicated by our forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement.

Introduction

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 clinics. Given its design, the System One is particularly well-suited for home hemodialysis and a range of dialysis therapies including more frequent dialysis, which clinical literature suggests provides patients better clinical outcomes and improved quality of life. The System One is cleared or approved for commercial sale in the U.S., Canada and certain other markets for the treatment of acute and chronic kidney failure and fluid overload. The System One is also CE marked in the EU for the treatment of acute and chronic kidney failure and fluid overload. The System One is cleared specifically by the FDA for home hemodialysis as well as TPE in a clinical environment. The System One is also CE marked in the EU for nocturnal home hemodialysis. We also sell needles and blood tubing sets primarily to dialysis clinics for the treatment of ESRD. These products are cleared or approved for commercial sale in the U.S., Canada and certain other markets. These products are also CE marked in the EU. We believe our largest product market opportunity is for our System One used in the home dialysis market for the treatment of ESRD.

We have two reportable business segments: System One and In-Center.

Our System One segment includes revenues from the sale and rental of the System One and PureFlow SL dialysate preparation 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 kidney failure or fluid overload. Some of our largest customers in the home market provide outsourced renal dialysis services to some of our customers in the critical care market. Sales of product to both markets are made primarily through dedicated sales forces and distributed directly to the customer, or the patient, with certain products sold through distributors internationally. The results of our international business are included in the System One segment.

The remainder of our operations and financial information, included within the Other category, relates primarily to (1) the manufacturing of dialyzers for sale to Asahi, (2) certain business development activities, including our continuing work on establishing centers of excellence, which are dialysis clinics focused on the provision of home therapy and flexible in-center options, and (3) research and development and general and administrative expenses that are excluded from the segment operating performance measures.

Segment and Market Highlights

Our customers in the System One segment are highly consolidated. DaVita and Fresenius own and operate the two largest chains of dialysis clinics in the U.S. and collectively provide treatment to approximately two-thirds of U.S. dialysis patients. DaVita and Fresenius are our two largest and most significant customers in the System One segment. Direct sales to DaVita represented 32% and 30% of our System One segment revenues for both the three and nine months ended September 30, 2013 and 2012, respectively. Further, DaVita is our largest customer in the home market, with over 40% of our home hemodialysis patients. Direct sales to Fresenius represented 20% and 17% of our System One segment revenues for both the three and nine months ended September 30, 2013 and 2012, respectively. Increased sales to DaVita and Fresenius have driven a large portion of our historical revenue growth and will be important to future growth. If the purchasing patterns of either of these customers adversely change, including in response to our initiative to establish dialysis centers of excellence, our business could be negatively affected.

On May 15, 2013, we entered into a Second Amended and Restated National Service Provider Agreement (“HHD Agreement”) with DaVita. The HHD Agreement is effective as of March 1, 2013 and covers use of our products for home hemodialysis in the U.S. by DaVita. The HHD Agreement continues, in all material respects, the terms of our First Amended and Restated National Service Provider Agreement with DaVita dated July 22, 2010 with pricing for our products subject to System One home patient growth targets. The term of the HHD Agreement extends through December 31, 2015, and thereafter automatically extends on a monthly basis unless terminated by us or DaVita.

Our In-Center segment revenues are highly concentrated in several significant purchasers. Our two largest distributors are Gambro and Henry Schein. Revenues from Gambro represented 41% and 34% of our In-Center segment revenues for the three months ended September 30, 2013 and 2012, respectively, and represented 40% and 38% of our In-Center segment revenues for the nine months ended September 30, 2013 and 2012, respectively. Revenues from Henry Schein represented 27% and 35% of our In-Center segment revenues for the three months ended September 30, 2013 and 2012, respectively, and 31% and 33% of our In-Center segment revenues for the nine months ended September 30, 2013 and 2012, respectively.

DaVita is also a significant customer in the In-Center segment. Sales of our products through distributors to DaVita accounted for approximately half of In-Center segment revenues for both the three and nine months ended September 30, 2013 and 2012. DaVita has had purchase commitments for our products pursuant to two agreements: one with us for needles and one with Gambro for blood tubing sets. DaVita’s needle purchase agreement with us extends through December 31, 2014. Currently, DaVita’s product supply agreement with Gambro requires DaVita to purchase a significant majority of its blood tubing set requirements from Gambro, and our distribution agreement with Gambro requires Gambro to exclusively supply our blood tubing sets to DaVita. In September 2013, Baxter International, Inc., or Baxter, announced the completion of its acquisition of Gambro. Our distribution agreement with Gambro, which expires in June 2014, survives a Gambro change of control.

We offer certain customers rebates based on sales to specific end users and discounts for early payment. Our revenues are presented net of these rebates and discounts. As of September 30, 2013, we had $1.4 million and $1.8 million reserved against trade accounts receivable for future estimated rebates and discounts for customers in our System One and In-Center segments, respectively. We recorded $1.3 million and $1.1 million during the three months ended September 30, 2013 and 2012, respectively, and $4.5 million and $3.7 million during the nine months ended September 30, 2013 and 2012, respectively, as a reduction of System One segment revenues in connection with rebates and discounts. For the In-Center segment, we recorded $1.4 million and $1.7 million during the three months ended September 30, 2013 and 2012, respectively, and $4.3 million and $4.9 million during the nine months ended September 30, 2013 and 2012, respectively, as a reduction of revenues in connection with rebates and discounts.

Financial Performance

During the three months ended September 30, 2013, we grew our revenues by 9% over the prior year comparable period to $66.9 million and during the nine months ended September 30, 2013 we grew our revenues by 10% over the prior year comparable period to $194.0 million with growth occurring in all markets. We expect to see continued growth in revenues,

particularly in our System One segment revenues, as we expand the number of patients prescribed to use, and centers offering, the System One through existing relationships with service providers, including DaVita and Fresenius, coupled with the annuity nature of our business, as well as the life-sustaining, non-elective nature of dialysis therapy.

Gross profit as a percentage of revenues remained relatively consistent at 38.5% during the nine months ended September 30, 2013 compared to 38.1% during the prior year comparable period. Lower product costs, including the nonrecurrence of costs incurred during 2012 related to the transition of certain blood tubing sets from a contract manufacturer to our own manufacturing plant were partially offset by increased start-up costs related to the new dialyzer plant in Germany which we began to operate in the fourth quarter of 2012. While we expect to improve gross profit as a percentage of revenues for our System One and In-Center segments as a result of various initiatives, including the expansion and rationalization of our manufacturing network, these improvements will continue to be offset in the near-term by associated start-up costs and will be impacted by fluctuations in foreign exchange rates.

We remain focused on growing the business and improving our operating performance. In addition to the revenue growth initiatives described above, we continue to work to reduce our manufacturing costs, leverage our operating structure and invest in our marketing and business development initiatives, including our initiative establishing centers of excellence.

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Revenues

Our revenues for the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands, except percentages):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
System One segment
Home	$	33,666	50	%	$	31,925	52	%	$	97,796	50	%	$	92,171	52	%
Critical Care		10,671	16	%		9,099	15	%		32,207	17	%		28,257	16	%

Total System One segment		44,337	66	%		41,024	67	%		130,003	67	%		120,428	68	%
In-Center segment		21,269	32	%		19,637	32	%		61,207	32	%		55,477	31	%
Other		1,267	2	%		491	1	%		2,769	1	%		1,207	1	%

Total	$	66,873	100	%	$	61,152	100	%	$	193,979	100	%	$	177,112	100	%

In the home market, revenues increased $1.7 million, or 5%, and $5.6 million, or 6%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods, driven by the increase in the number of patients prescribed to use, and centers offering, the System One, partially offset by lower deferred revenue recognized on previously sold System One equipment in the U.S. home market as a result of equipment reaching the end of its related revenue amortization period. These results also reflect a one-time reduction in revenue due to the transition of our UK business to a direct sales model from a distributor relationship in the first quarter of 2013. We have increased both the number of patients at existing centers and centers offering the System One, primarily through our existing relationships with service providers, including DaVita and Fresenius, and through our marketing efforts. Critical care market revenues increased 17% during the three months ended September 30, 2013 and 14% during the nine months ended September 30, 2012 versus the prior year comparable periods driven by higher sales of System One disposables and equipment. Sales of our System One equipment in the critical care market may fluctuate due to timing of sales and the overall capital spending environment. We expect future demand for our products and revenue growth in both the home and critical care markets to be strong as we further penetrate these markets, both in the U.S. and internationally, and leverage the annuity nature of our business. However, this revenue growth will be slightly offset on an ongoing basis by lower deferred revenue recognized on previously sold System One equipment in the U.S. home market as a result of equipment reaching the end of its related revenue amortization period. Furthermore, the U.S. dialysis market is highly consolidated with DaVita and Fresenius providing treatment to approximately two-thirds of U.S. dialysis patients. Our customers in the U.S. home market have a range of treatment options available, including traditional in-center dialysis and peritoneal dialysis. Convincing our customers, in particular DaVita and Fresenius, to make investments in their training infrastructure to expand their offering of home hemodialysis using our System One will be important to continuing our revenue growth in the future. If the purchasing patterns of DaVita or Fresenius adversely change, including in response to our initiative to establish dialysis centers of excellence, our business would be negatively affected, at least in the near term. Additionally, as our international business grows, our System One revenue will be susceptible to fluctuations in equipment sales and changes in inventory levels at our distributors.

In-Center segment revenues increased $1.6 million, or 8%, and $5.7 million, or 10%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods. The increase in revenues was driven by increased end user demand and fluctuations in inventory levels at our distributors. While revenues continue to be susceptible to fluctuations in inventory levels at our distributors, end user demand of both our blood tubing sets and our needle products continues to grow. Future revenues may continue to fluctuate as a result of increased competition and variations in inventory management policies with both our distributors and end users.

Other revenues for the three and nine months ended September 30, 2013 and 2012 relates to dialyzers sold to Asahi.

Gross Profit (Loss)

Our gross profit (loss) (in thousands, except as percentages of revenues) for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,										Nine Months Ended September 30,
	2013					2012					2013					2012
System One segment	$	19,998		45	%	$	18,810		46	%	$	58,708		45	%	$	54,772		45	%
In-Center segment		6,123		29	%		4,978		25	%		17,695		29	%		12,739		23	%

Subtotal		26,121		40	%		23,788		39	%		76,403		40	%		67,511		38	%
Other		(593	)	n/a			(40	)	n/a			(1,788	)	n/a			(62	)	n/a

Gross profit	$	25,528		38	%	$	23,748		39	%	$	74,615		38	%	$	67,449		38	%

Gross profit increased $1.8 million, or 7%, and $7.2 million, or 11%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods.

Gross profit for the System One segment increased $1.2 million, or 6%, and $3.9 million, or 7%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods, due to increased revenues. Gross profit for the System One segment for both the three and nine months ended September 30, 2013 was negatively impacted by costs associated with the start-up of the new dialyzer plant in Germany.

Gross profit for the In-Center segment increased $1.1 million, or 23%, and $5.0 million, or 39%, and increased as an overall percentage of revenues for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods, due to contractual price improvements and lower product manufacturing costs, including the nonrecurrence of costs incurred during 2012 associated with the transition of certain blood tubing sets from a contract manufacturer to our own manufacturing plant.

The Other category relates to the manufacturing of dialyzers for sale to Asahi, which should provide us with long term cost efficiencies through increased dialyzer production volumes, as well as costs associated with establishing our dialysis centers of excellence.

We expect gross profit as a percentage of revenues for our System One and In-Center segments will improve in the long-term as we work to lower costs in three general areas. First, we expect to introduce additional process improvements and product design changes that have inherently lower costs than the costs associated with our current products. Second, we anticipate that increased volume, rationalization and consolidation of our manufacturing operations, rationalization of our supply chain, and realization of economies of scale will lead to lower costs and better purchasing terms and prices. Finally, we expect to continue to improve product reliability, which would reduce unit service costs. Our cost reduction plans and potential improvements in our gross profit as a percentage of revenues may be offset in the near-term due to five general factors. First, we manufacture a large majority of our products internationally and purchase products from foreign companies in other than U.S. dollars and, therefore, our product costs fluctuate due to changes in foreign currency exchange rates. Any unfavorable fluctuations in foreign exchange rates versus the U.S. dollar would negatively impact our gross profit as a percentage of revenues. Second, we expect that we will continue to incur higher transportation costs driven in large part by increased prices from carriers and changes in fuel prices. Third, we may see an increase in the cost of certain raw materials, particularly resin. Fourth, higher relative sales of lower margin products and certain pricing strategies could have a negative impact on gross profit as a percentage of revenues. Finally, changes in our manufacturing operations, in an effort to drive long-term gross margin improvement, will require us to incur additional costs in the short-term.

Selling and Marketing

Our selling and marketing expenses (in thousands, except as percentages of revenues) for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
System One segment	$	9,731	22	%	$	8,414	21	%	$	27,601	21	%	$	25,039	21	%
In-Center segment		1,332	6	%		1,408	7	%		3,937	6	%		4,063	7	%
Other		1,311	n/a			346	n/a			3,248	n/a			904	n/a

Total Selling and marketing	$	12,374	19	%	$	10,168	17	%	$	34,786	18	%	$	30,006	17	%

Selling and marketing expenses increased $2.2 million, or 22%, and $4.8 million, or 16%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods. Selling and marketing expenses for the System One segment increased due to increased personnel and personnel-related costs and increased marketing costs. Selling and marketing expenses for our Other category relates to personnel and other costs related to business development activities for our initiative establishing dialysis centers of excellence. We anticipate that selling and marketing expenses will continue to increase as we broaden our marketing and business development initiatives, including with respect to our centers of excellence initiative, increase public awareness of the System One in the home market and support growth in international markets.

Research and Development

Our research and development expenses (in thousands, except as percentages of revenues) for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
Research and development	$	4,450	7	%	$	4,274	7	%	$	13,924	7	%	$	12,421	7	%

Research and development expenses increased $0.2 million, or 4%, and $1.5 million, or 12%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods. The increase was primarily due to increased personnel and personnel-related costs and increased project related spending partially offset by the recognition of $0.7 million during 2013 of a tax incentive received from the Massachusetts Life Sciences Center. For the near term, we expect research and development expenses will increase as we seek to further develop and enhance our System One, invest in our peritoneal dialysis product development program and expand our product portfolio.

Distribution

Our distribution expenses (in thousands, except as percentages of revenues) for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
System One segment	$	4,749	11	%	$	4,066	10	%	$	13,463	10	%	$	12,017	10	%
In-Center segment		577	3	%		665	3	%		1,808	3	%		1,828	3	%

Total Distribution	$	5,326	8	%	$	4,731	8	%	$	15,271	8	%	$	13,845	8	%

Distribution expenses increased $0.6 million, or 13%, for the three months ended September 30, 2013 and $1.4 million, or 10%, for the nine months ended September 30, 2013 versus the prior year comparable periods, but remained relatively consistent as a percentage of revenues. Increased costs due to higher volumes and expanded delivery services in the System One segment were offset by distribution network efficiencies. We expect that distribution expenses will increase at a rate consistent with revenues due to expanded delivery services partially offset by expected efficiencies and improved reliability of System One equipment. However, these favorable impacts may be offset by overall increases in fuel costs and carrier pricing.

General and Administrative

Our general and administrative expenses (in thousands, except as percentages of revenues) for the three and nine months ended September 30, 2013 and 2012 were as follows:


	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
General and administrative	$	7,791	12	%	$	6,921	11	%	$	23,854	12	%	$	20,473	12	%

General and administrative expenses increased $0.9 million, or 13%, and $3.4 million, or 17%, for the three and nine months ended September 30, 2013, respectively, versus the prior year comparable periods. The increase in general and administrative expenses was primarily the result of the medical device excise tax assessed on nearly all of our products sold in the U.S, beginning in 2013, increased professional service fees and other related infrastructure costs. Over time we expect general and administrative expenses will decrease as a percentage of revenues as we continue to leverage our existing infrastructure.

Other Expense

Interest expense increased $0.1 million and decreased $2.2 million for the three and nine months ended September 30, 2013 versus the prior year comparable periods. In May 2012, we repaid our term loan with Asahi through the issuance of shares of our common stock.

The change in other expense, net during both periods is derived primarily by foreign currency gains and losses.

Provision for (Benefit from) Income Taxes

Liquidity and Capital Resources

We have operated at a loss since our inception in 1998. As of September 30, 2013, our accumulated deficit was $358.4 million and we had cash and cash equivalents of $83.2 million, with nearly all of that cash located in the U.S., and working capital of $110.3 million.

Over the past several years, we have improved our cash flows from operating activities as we worked towards our long term goal of sustained positive cash flows from operating activities. However, we expect that over the next several quarters improvements to our cash flows from operating activities will be offset by our investments in our centers of excellence initiative. We believe, based on current projections and the current nature of our business, that we have the resources required to fund our ongoing operating requirements for our System One and In-Center Segments, which include selling and marketing activities to increase public awareness in the System One, and research and development activities to develop new products and enhance our existing products. As we continue to evaluate growing centers of excellence opportunities and other strategic opportunities that could present from time to time, we may choose to access the credit or capital market to provide additional liquidity.

Our ongoing cash requirements include funding normal working capital requirements including inventory and field equipment assets. Field equipment assets include System One equipment rented to customers in the home market and our “service pool” of equipment, which is equipment owned and maintained by us that is swapped for equipment owned or rented by our customers that needs repair or maintenance. While a majority of our home market customers have committed to purchase, rather than rent, the significant majority of their future System One equipment requirements thereby reducing our working capital cash requirements, there can be no assurance that we will be able to continue to expand or sustain this level of equipment placements that are purchased rather than rented. Additionally, any excess rental or service swap equipment would increase our working capital requirements.

We have a $15.0 million revolving line of credit with Silicon Valley Bank, or SVB, that expires in March 2014. The line of credit imposes certain financial covenants, contains certain customary events of default and is secured by all or substantially all of our assets. At September 30, 2013, we were not in compliance with a certain financial covenant. We obtained a waiver for this financial covenant from SVB for the third quarter of 2013 and a revision of the covenant such that we expect to be in compliance with all covenants, as revised, under the facility going forward. There were no outstanding borrowings against the credit commitment at September 30, 2013, and we had $15.0 million of the credit commitment available for borrowing.

We entered into two mortgages collateralized by a manufacturing facility in Italy that we acquired in May 2013 totaling $1.1 million with interest rates of 6.0% and 2.0% payable over a 10 year period.

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 $2.0 million at September 30, 2013 for costs associated with these plans. The expense recorded in connection with these plans was not significant during 2013 or 2012.

The following table sets forth the components of our cash flows for the periods indicated (in thousands):


	Nine Months Ended September 30,
	2013			2012
Net cash (used in) provided by operating activities	$	(14,899	)	$	570
Net cash used in investing activities		(12,601	)		(5,952	)
Net cash provided by financing activities		4,181			5,008
Foreign exchange effect on cash and cash equivalents		39			144

Net cash flow	$	(23,280	)	$	(230	)

Net cash (used in) provided by operating activities. Net cash (used in) provided by operating activities decreased by $15.5 million during the nine months ended September 30, 2013, versus the prior year comparable period driven by higher net loss and lower cash flow from operating activities adjusted for non cash costs and higher working capital requirements including increased inventory requirements to support our new product offerings and lower accrued expenses. We expect working capital to fluctuate from quarter to quarter due to various factors including inventory requirements and timing of payments from our customers and to our vendors.

Deferred revenues decreased $5.7 million and $3.4 million during the nine months ended September 30, 2013 and 2012, respectively, driven by an increase in amortization of deferred revenues into revenues of $0.1 million from $13.9 million during the nine months ended September 30, 2012 to $14.0 million during the nine months ended September 30, 2013 as a result of a higher number of rentals in 2013 and a lower rate of rental conversions in 2013 compared to 2012.

Non-cash transfers from inventory to field equipment for the placement of units with our customers decreased $1.1 million during the nine months ended September 30, 2013 versus the prior year comparable period. Non-cash transfers from field equipment to deferred costs of revenues decreased $1.3 million during the nine months ended September 30, 2013 versus the prior year comparable period. These activities fluctuate due to the timing of home patient additions, efficiencies in our customers’ utilization of purchased equipment and equipment levels required for our service pool.

Net cash used in investing activities. For each of the periods above, net cash used in investing activities reflected purchases of property and equipment, primarily for our manufacturing facilities as a result of our efforts to rationalize, consolidate and expand our manufacturing operations, along with purchases of equipment for research and development and information technology. The increase of $4.4 million in purchases of property and equipment was driven by the acquisition of a manufacturing facility in Italy coupled with capital improvements to and expansion of certain of our manufacturing facilities to accommodate the continued growth and product demand in both of our reportable segments, and the build-out of our centers of excellence. Net cash used in investing activities during the nine months ended September 30, 2013 also includes $2.2 million of cash paid to Kimal in connection with our acquisition of substantially all of the System One assets of Kimal on April 2, 2013.

Net cash provided by financing activities. During the nine months ended September 30, 2013 and 2012 we received $3.0 million and $5.5 million, respectively, of proceeds from stock option and stock purchase plans. Proceeds from stock option and purchase plans is subject to fluctuation based on the number of options exercised and, to a lesser extent, the weighted-average exercise price. Additionally, cash provided from the issuance of debt during the nine months ended September 30, 2013 reflects financing the acquisition of a manufacturing facility in Italy. Cash inflows during the nine months ended September 30, 2012 were reduced by $0.5 million of cash used to repurchase shares of our common stock that were surrendered by Asahi to satisfy the required minimum withholding taxes due when we repaid our term loan with Asahi through the issuance of shares of our common stock.

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.

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 30, 2013 are described in Note 2 to the condensed consolidated financial statements included in our 2012 Form 10-K and updated as necessary in Note 2 to the condensed consolidated financial statements included in this Quarterly Report. The critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three and nine months ended September 30, 2013 are consistent with those described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2012 Form 10-K.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to the consolidated financial statements included in our 2012 Form 10-K and updated as necessary in Note 2 to the condensed consolidated financial statements included in this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks in the normal course of our business, including changes in interest rates and exchange rates. A discussion of market risk affecting us is included in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our 2012 Form 10-K. Other than an increase in the notional amount of our outstanding foreign exchange forward contracts which are designated as cash flow hedges and are used to reduce our exposure to foreign exchange rate fluctuations on our Peso denominated expenses, there have been no material changes to our market risks or to our management of such risks during the nine months ended September 30, 2013.

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, 2013. 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 SEC’s 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 company’s 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, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective to achieve their stated purpose.

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 three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to Note 10, Commitments and Contingencies to our condensed consolidated financial statements included within this report, which is incorporated into this item by reference.

Item 1A. Risk Factors

In addition to the factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, the following are some of the important factors that could materially and adversely affect our business, financial condition, results of operations and common stock price and 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 sale or rental of our System One and the related products used with the System One and a limited number of other products.

We expect that in 2013 and in the foreseeable future, we are likely 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, including blood tubing sets and needles. To the extent that any of our primary products are not commercially successful or are withdrawn from the market for any reason, our revenues will be adversely impacted.

We cannot accurately predict the size of the home dialysis 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 dialysis market. However, this market is presently very small and adoption of 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 U.S. Renal Data System, or USRDS, approximately 8% of U.S. ESRD dialysis patients receive some form of dialysis treatment at home with either peritoneal dialysis or home hemodialysis. Because the adoption of home hemodialysis has been limited to date, the number of patients and their partners who desire to, and are capable of, administering hemodialysis treatment with a system such as the System One is unknown and there is limited data upon which to make estimates. In addition, many dialysis clinics do not presently have the infrastructure in place to support home hemodialysis and most do not have the infrastructure in place to support a significant home hemodialysis patient population. Our long-term growth will depend on the number of patients who adopt home 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 therapy.

Because nearly all our home hemodialysis patients are also receiving more frequent dialysis, meaning dialysis delivered more than three 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 costs associated with providing more frequent dialysis versus conventional three-times per week dialysis, market acceptance will be impacted,

especially for U.S. Medicare patients, by whether dialysis clinics obtain adequate reimbursement for additional dialysis treatments provided in excess of three times a week. A study presented by the UM-KECC at the 2011 American Society of Nephrology meeting showed that in 2009 the average number of Medicare payments per month for home hemodialysis was approximately 1.5 times that of in-center hemodialysis (17.3 vs. 11.6, respectively). The total number of treatments paid varied across Medicare Administrative Contractors and Fiscal Intermediaries. There was a positive correlation between number of paid treatments per month and home hemodialysis utilization in a given jurisdiction. However, some customers may not receive or pursue additional reimbursement in all cases and providing medical justification for treatments beyond three times per week increases administrative burden. Although access to home and/or more frequent hemodialysis continues to grow, we believe that current Medicare reimbursement policies lead to adoption rates lower than rates commensurate with the percentage of patients experts believe can competently perform and medically benefit from this therapy. We believe that more predictable Medicare reimbursement for more frequent dialysis with less administrative burden, including improving Medicare reimbursement for home hemodialysis training, would allow adoption of more frequent home hemodialysis at rates more consistent with what are deemed to be appropriate by the expert medical community.

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. We saw the impact of such regulations in 2008, when the Centers for Medicare and Medicaid Services, or CMS, released new Conditions for Coverage applicable to our customers. These Conditions for Coverage imposed 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.

We are in a developing market and we will need to continue to devote significant resources to developing the home market. We cannot be certain that this market will develop, how quickly it will develop or how large it will be.

Current Medicare reimbursement rates, at three times per week, limit the price at which we can market our home products, and adverse changes to reimbursement would likely negatively affect the adoption or continued sale of our home products.

As a result of legislation passed by the U.S. Congress more than 30 years ago, Medicare provides broad and well-established reimbursement in the U.S. for ESRD. Effective January 1, 2011, CMS implemented a new prospective payment system for dialysis treatment. Under the new ESRD prospective payment system, CMS makes a single bundled payment to the dialysis facility for each dialysis treatment that covers all renal dialysis services and home dialysis and includes certain drugs (including erythropoiesis stimulating agents, or ESAs, iron, and Vitamin D). This payment system replaced the former system which paid facilities a composite rate for a defined set of items and services, while paying separately for drugs, laboratory tests, and other services that were not included in the composite rate. With a vast majority of U.S. ESRD patients covered by Medicare, the Medicare reimbursement rate is an important factor in a potential customer’s decision to use the System One or our other products and limits the fees for which we can sell or rent our products. Additionally, current CMS rules limit the number of hemodialysis treatments paid for by Medicare to three times a week, unless there is medical justification provided by the dialysis facility based on information from the patient’s 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 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 pursuant to local coverage determinations or on a case-by-case basis, based on documentation provided by our customers. If more frequent therapy is prescribed, a clinic’s 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 clinic’s patients.

Medicare has moved from using Fiscal Intermediaries to process Medicare claims to using Medicare Administrative Contractors and is further consolidating the jurisdictions covered by those contractors. This change in the reviewing entity for Medicare claims could lead to a change in whether a customer receives Medicare reimbursement for additional treatments. If an adverse change to historical payment practices occurs, market adoption of our System One in the home market may be impaired.

Based on an analysis of historical Medicare payment files by the UM-KECC, those delivering more frequent dialysis at home receive reimbursement, on average, for 1.5 times the number of treatments per month versus conventional dialysis, although this amount varies by jurisdiction. This variance arises from Medicare Administrative Contractor/Fiscal Intermediary policies, as well as from varying center billing practices. Currently, only 3 of the Medicare Administrative Contractors have formal Local Coverage Determinations (LCDs); the majority do not have a formal policy and thus review claims on a case-by-case basis. As there is no consistent national standard for obtaining medical justification, a clinic’s decision as to how much it is willing to spend on home dialysis equipment and services will be at least partly dependent on the level of confidence the center has in the predictability of receiving reimbursement from Medicare for additional treatments per week based on submitted claims for medical justification.

Although access to home and/or more frequent hemodialysis continues to grow, we believe that current Medicare reimbursement policies lead to adoption rates lower than rates commensurate with the percentage of patients experts believe can perform and medically benefit from this therapy. We believe more predictable Medicare reimbursement with less administrative burden, including improving Medicare reimbursement for home hemodialysis training, would allow adoption of home hemodialysis at rates more consistent with what are deemed to be appropriate by the expert medical community. There is no assurance that these changes will be forthcoming.

A stated goal of the new ESRD prospective payment system was to encourage home dialysis. To date, it has not had a positive impact on the adoption of home and/or more frequent hemodialysis or the price for which we can sell our products. However, the prospective payment system has had a significant positive impact on the adoption of peritoneal dialysis as evidenced by the significantly increased training rates for peritoneal dialysis. We believe this increased focus on peritoneal dialysis growth and peritoneal dialysis training has been to the detriment of home hemodialysis training rates, as home training resources, including home training nurses in particular, have been more devoted to peritoneal dialysis training, leaving less time for home hemodialysis training.

As part of the American Taxpayer Relief Act of 2012 Congress delayed CMS’s plan to expand the prospective payment system’s single bundled payment to include oral medications until 2016 and further instructed CMS to recalculate the base payment rate under the ESRD PPS for services furnished on or after January 1, 2014, to account for changes in utilization of renal dialysis drugs since the ESRD PPS was implemented. As a result of this statute, CMS has released a proposed rule calling for a 9.4% reduction to the base payment rate for 2014. This proposed rule was subject to public comments; it is uncertain what the final reduction will be and whether this reduction will be implemented in 2014 or phased in over time. The Final rule will likely be published later in 2013. This change could affect the adoption of home and/or more frequent hemodialysis in the future, particularly if NxStage customers are distracted in efforts to address any revenue shortfalls, or choose to redirect home training resources toward other center activities.

Beginning April 1, 2013, Medicare payments for all items and services, including dialysis services, were reduced by 2% under the automatic spending reductions (known as “sequestration”) required by U.S. federal legislation. These cuts adversely impact Medicare payment for all dialysis treatments and could affect adoption for home dialysis and/or more frequent hemodialysis.

We have a history of net losses and an accumulated deficit of $358 million at September 30, 2013. We cannot guarantee if, when and the extent to which we will become profitable, or that we will be able to maintain profitability if it is achieved.

Since inception, we have incurred negative operating margins and losses every quarter. At September 30, 2013, we had an accumulated deficit of approximately $358 million. We expect our operating expenses to continue to increase as we grow and expand our business. While we have achieved positive gross profit for our products, in aggregate, since the fourth quarter of 2007, we cannot provide assurance that our gross profit as a percentage of revenues will improve or, if it does improve, the rate at which it will improve. We cannot provide assurance that we will achieve profitability, when we will become profitable, the sustainability of profitability, should it occur, or the extent to which we will be profitable.

Our customers in the System One and In-Center segments are highly consolidated with concentrated buying power.

Fresenius and DaVita own and operate the two largest chains of dialysis clinics in the U.S. Collectively, these entities provide treatment to approximately two-thirds of U.S. dialysis patients, and this percentage may continue to grow with further market consolidation. For example, DaVita acquired DSI Renal, Inc. in September 2011 and Fresenius acquired Liberty Dialysis Holdings, Inc., the holding company for Liberty Dialysis and Renal Advantage, in February 2012. With less than one-third of U.S. dialysis patients cared for by independent dialysis clinics, our market adoption, at least within the U.S., would be more constrained without the presence of both DaVita and Fresenius as customers.

Additionally, Fresenius is not only a dialysis service provider, it is also the leading manufacturer of dialysis equipment worldwide. In February 2011, Fresenius obtained clearance for its 2008K At Home hemodialysis system for use in home chronic therapy. DaVita does not manufacture dialysis equipment, but has certain dialysis supply purchase obligations to Gambro, a dialysis equipment manufacturer, under a product supply agreement. Fresenius may choose to offer its dialysis patients only the dialysis equipment Fresenius manufactures, including its 2008K system. DaVita may choose to offer their dialysis patients the equipment it contractually agreed to offer in its agreement with Gambro. Fresenius and DaVita may also choose to otherwise limit access to the equipment manufactured by competitors. DaVita is our most significant customer, and we expect it to continue to be, at least for the foreseeable future. Fresenius is our second largest customer in the System One segment. Our agreements with DaVita, Fresenius and other large home market customers are intended to support the continued expansion of patient access to home hemodialysis with the System One, but like all our agreements with home market customers, our agreements with DaVita, Fresenius and other large customers are not requirements contracts and they contain no minimum purchase volumes. Our home market agreement with DaVita expires at the end of 2015 and our home market agreement with Fresenius expires at the end of 2013, and there can be no assurance that we will renew or extend these agreements on similar terms, if at all, before their expiration. We have no assurance that our sales to DaVita, Fresenius or other

large customers will continue to grow, and we cannot predict what impact Fresenius’ 2008K system will have on our sales to Fresenius in the home market or our overall performance in the home market going forward. Given the significance of DaVita and Fresenius as customers in the home market, any adverse change in either customer’s ordering or clinical practices, as might be the case in periodic contract negotiations or in response to the development of our dialysis centers of excellence, would have a significant adverse impact on our home market revenues, especially in the near term.

DaVita is a key customer for our System One and In-Center product lines. The partial or complete loss of DaVita as a customer would materially impair our financial results, at least in the near term.

DaVita is our most significant customer. Sales through distributors to DaVita of products accounted for approximately half of In-Center segment revenues for the three months ended September 30, 2013. Direct sales to DaVita represented 32% of our System One segment revenues during the same period. Further, DaVita is our largest customer in the home market, with over 40% of our home hemodialysis patients. Although we expect that DaVita will continue to be a significant customer in the home market, we cannot be certain that DaVita will continue to purchase and/or rent the System One or add additional System One patients in the future. Our home market agreement with DaVita expires at the end of 2015 and our needle purchase agreement with DaVita extends through the end of 2014.

We have a distribution agreement in the U.S. with Gambro, pursuant to which Gambro will exclusively supply our blood tubing sets to DaVita. In September 2013, Baxter International, Inc. announced the completion of its acquisition of Gambro. Our U.S. distribution agreement with Gambro continues through June 2014 and survives Gambro’s change of control. However, it is unclear what impact, if any, Baxter’s acquisition of Gambro may have with respect to this distribution relationship thereafter. The partial or complete loss of DaVita as a customer for any of these product lines would adversely affect our business, at least in the near term.

We face additional risks from the acquisition or development of new lines of business, including in connection with our development of centers of excellence.

In connection with our evaluation of growth opportunities, it is possible that we may in the future acquire or develop a new line of business or products. For example, we recently established a NxStage owned dialysis center as part of our centers of excellence initiative. These centers are dialysis clinics focused on the provision of home therapy and flexible in-center options. The first such center, located outside of St. Louis, Missouri, opened during the third quarter of 2013, and we have plans to open a number of additional centers through early next year. We will evaluate our progress with these initial centers and, depending on our success, we may expand the number of centers in succeeding periods. There are substantial risks and uncertainties associated with any change in business lines or strategy, particularly in instances where our customers may perceive the new activity or business line to be in direct competition with their business, which could, in turn, lead them to stop or reduce their purchases of products from us. In addition to the external risks any such new businesses or strategies may represent, we may face internal risks relating to developing knowledge of and experience in the new business, recruiting professionals, as well as business execution risks. New strategies and businesses may also require significant investment and involvement of our senior management, which will take away from the time they ordinarily spend on the remainder of our business. Failure to manage these risks in the development and implementation of new businesses or strategies successfully could materially and adversely affect our business, results of operations and financial condition.

Our centers of excellence initiative introduces significant new risks to our business.

In addition to implicating some of the same business and regulatory risks as are applicable to our medical products business (including in particular risks related to Medicare reimbursement rates), and related risks (such as product liability), establishing our centers of excellence (COEs), which are dialysis clinics focused on the provision of home therapy and flexible in-center options, requires that we comply with complex regulatory requirements applicable to this new business. As health care providers and participants in federal health care programs, our COEs will be subject to extensive government regulations, including Medicare and Medicaid payment rules, anti-kickback and related laws prohibiting payments and other remuneration intended to influence the referral of health care business or selection of a provider, antitrust laws, prohibitions on submitting false claims for government reimbursement, laws regarding the use and disclosure of patient health information, and laws regarding the storage and administration of pharmaceuticals. Violations of such laws and regulations may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors, or pay additional damages and interest, if we are found to have submitted improper claims for reimbursement to the government. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect our business.

We have a Loan and Security Agreement with Silicon Valley Bank the terms of which may restrict our current and future operations, and which could affect our ability to respond to changes in our business and to manage our operations.

We have an agreement with Silicon Valley Bank for a $15.0 million revolving line of credit that expires in March 2014. The agreement is secured by all or substantially all of our assets. Pursuant to the agreement, we are subject to certain financial covenants relating to liquidity requirements and adjusted EBITDA. The agreement contains events of default customary for transactions of this type, including nonpayment, misrepresentation, breach of covenants, material adverse effect and bankruptcy. As of the date hereof, we do not have an outstanding balance under the revolving line of credit. However, were we to draw on the line of credit, in the event we fail to satisfy our covenants, or otherwise go into default, Silicon Valley Bank has a number of remedies, including sale of our assets and acceleration of all outstanding indebtedness. Certain of these remedies would likely have a material adverse effect on our business.

We compete against other dialysis equipment manufacturers with much greater financial resources and established products and customer relationships, which may make it difficult for us to penetrate the market and achieve significant sales of our products. Our competitors may also introduce new products or features that could impair the competitiveness of our own product portfolio.

Our System One is currently the only portable system specifically indicated for use in the home market in the U.S. However, there is one other product on the market with a home clearance, and a number of other products that are under development and may be released in the next several years, that are, or will be, competitive to our System One in the home market. In 2011, Fresenius, our second largest customer in the System One segment, with nearly all of those sales in the home market, obtained clearance for its 2008K At Home hemodialysis system for use in home chronic therapy. More recently, Fresenius announced that it is seeking clearance for its sorbent technology within the critical care setting. Fresenius is also seeking clearance for its Portable Artificial Kidney, or PAK, to market in the U.S. for in-center use. Baxter has a research and development collaboration with DEKA Research and Development Corporation and HHD, LLC for the development of a new home hemodialysis system. Baxter has commented that they have completed two clinical studies intended to support CE marking for this system in the EU later in 2013. Baxter has indicated that it hopes to file for regulatory approval in the U.S. in 2014 for a home hemodialysis nocturnal indication. Other small companies are also working to develop products for this market. We are unable to predict when, if ever, any of these products may attain regulatory clearance and appear in the market, or how successful they may be should they be introduced, but if additional viable products are introduced to the home market, it could adversely affect our sales and growth. We are also unable to predict what impact the Fresenius home hemodialysis systems will have on our sales to Fresenius or our overall home market performance.

Our System One in the critical care market competes against Gambro, of which Baxter recently announced its acquisition, Fresenius, B. Braun and others. Our product lines in the in-center market compete directly against products produced by Fresenius, Gambro, Nipro, B. Braun, Baxter, JMS CO., LTD and others.

Our competitors in each of our markets sell one or more FDA-cleared medical devices for the treatment of acute or chronic kidney failure. Each of these competitors offers products that have been in use for a longer time than our System One and are more widely recognized by physicians, patients and providers. These competitors have significantly more financial and human resources, more established sales, service and customer support infrastructures and spend more on product development and marketing than we do. Many of our competitors also have established relationships with the providers of dialysis therapy and, Fresenius owns and operates a chain of dialysis clinics. The product lines of most of these companies are broader than ours, enabling them to offer a broader bundle of products and have established sales forces and distribution channels that may afford them a significant competitive advantage. Further consolidation within the highly competitive dialysis industry, including through Baxter’s acquisition of Gambro, may exacerbate these risks.

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.

Our ability to successfully market our products could also be adversely affected by pharmacological and technological advances in preventing the progression of ESRD and/or in the treatment of acute kidney failure or fluid overload. If we are unable to compete effectively against existing and future competitors and existing and future alternative treatments and pharmacological and technological advances, it will be difficult for us to penetrate the market and achieve significant sales of our products.

Our continued growth is dependent on our development and successful commercialization of new and improved products.

Our future success will depend in part on our timely development and introduction of new and improved products that address changing market requirements. To the extent that we fail to introduce new and innovative products, including without limitation the next generation System One, or incremental product improvements, we may lose revenues or market share to our competitors, which may be difficult to regain. Our inability, for technological, regulatory or other reasons, to successfully develop and introduce new or improved products could reduce our growth rate or otherwise damage our business. We cannot assure you that our developments will keep pace with the marketplace or that our new or improved products will adequately meet the requirements of the marketplace.

The success and growth of our business will depend upon our ability to achieve expanded market acceptance of our System One.

In the home market, we have to convince five distinct constituencies involved in the choice of dialysis therapy, namely operators of dialysis clinics, nephrologists, dialysis nurses, patients and payors (private payors and Medicare), 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 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.

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 kidney failure and fluid overload. Physicians currently treat most acute kidney failure patients using conventional hemodialysis systems or dialysis systems designed specifically for use in the intensive care unit, or ICU. We will need to convince hospitals and healthcare providers that using the System One is as effective as using conventional hemodialysis systems or ICU-specific dialysis systems for treating acute kidney failure or fluid overload and that it provides advantages over conventional systems or other ICU-specific systems because of its significantly smaller size, ease of operation and clinical flexibility. In addition, the impact of tightened credit markets on hospitals could impair the manner in which we sell products in the critical care market. Hospitals facing pressure to reduce capital spending may choose to delay capital equipment purchases or seek alternative financing options.

Our business and results of operations may be negatively impacted by general economic and financial market conditions and such conditions may increase other risks that affect our business.

Global macro-economic conditions and the world’s financial markets continue to experience some degree of turmoil, resulting in reductions in available credit, foreign currency fluctuations and volatility in the valuations of securities generally. In general, we believe demand for our products in the home and in-center market will not be substantially affected by the changing market conditions as regular dialysis is a life-sustaining, non-elective therapy. However, hospitals or clinics facing pressure to reduce capital spending may choose to rent equipment rather than purchase it outright, or to enter into other less-capital intensive purchase structures with us, which may, in turn, have a negative impact on our cash flows. Uncertainty in the general economic environment and governmental spending on public health programs may also lead to a reduction in hospital days (particularly those due to elective procedures) and delays in capital purchases, both of which can negatively impact our critical care business. Our ability to sell products internationally is particularly vulnerable to adverse impacts from global

macro economic conditions. Government funded hospitals in various international markets may seek to defer capital purchases or tenders. Distributors with reduced access to capital may be less willing to purchase our equipment outright, impairing our ability to sell our products. Furthermore, unfavorable changes in foreign exchange rates versus the U.S. dollar would increase our product costs which would negatively impact our gross profit and gross profit as a percentage of revenues.

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, and in foreign countries, for comprehensive reforms affecting the payment for, the availability of and reimbursement for healthcare services in the U.S. and other countries. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs.

In March 2010, the U.S. Congress adopted and President Obama signed into law comprehensive health care reform legislation through the passage of the Patient Protection and Affordable Care Act (Pub. L. No. 111-148) and the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152). Among other initiatives, these laws impose an excise tax on domestic sales of certain medical devices after December 31, 2012. This legislation also applies a productivity adjustment to the Medicare payment rates for dialysis facilities that could cause variable annual decreases in annual adjustments to payment rates as of 2012. Our profitability has been negatively impacted due to the medical device excise tax assessed on nearly all of our products sold in the U.S. since the beginning of 2013. The productivity adjustments may impact our revenues when the amount of the adjustments is announced, however, we cannot predict with any certainty the effect such legislation will have on us. Additional healthcare reforms in the U.S. may have a material adverse effect on our financial condition and results of operations.

The governments of foreign countries are actively pursuing similar actions intended to reduce costs related to provision of healthcare. The results of these actions may also have a material adverse effect on our financial condition and results of operations.

As our business continues to grow, we may have difficulty managing our growth and expanding our operations successfully.

As our business continues to grow, we will need to expand our manufacturing, sales and marketing and on-going development capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various partners, suppliers, manufacturers and other organizations. Our ability to manage our operations and growth requires us to continue to improve our information technology infrastructure, operational, financial and management controls and reporting systems and procedures. Such growth could place a strain on our administrative and 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. Also, if demand for our products continues to grow we may not be able to increase our manufacturing capacity fast enough to meet customer demand.

If we are unable to maintain strong product reliability for our products, our ability to maintain or grow our business and achieve profitability could be impaired. Transition of supply or manufacturing locations of products can also lead to product quality and reliability issues which could impair our ability to maintain or grow our business and achieve profitability.

Product reliability issues associated with any of our product lines could lead to decreases in customer satisfaction and our ability to grow or maintain our revenues and could negatively impact our reputation. Further, any unfavorable changes in product reliability would result in increased service and distribution costs which negatively impacts our gross profit and operating profit and increases our working capital requirements. We continue to work to maintain strong product reliability for all products. If we are unable to maintain strong product reliability for our existing products, our ability to achieve our growth objectives as well as profitability could be significantly impaired.

We also need to establish strong product reliability for all new products we offer. With new products, we are more exposed to risks relating to product quality and reliability until the manufacturing processes for these new products mature. We also choose from time to time to transition the manufacturing and supply of products and components to different suppliers or locations. As we make these changes, we are more exposed to risks relating to product quality and reliability until the manufacturing processes mature. Like all transitions of this nature, they could also lead us to incur additional costs in the near-term, which would negatively impact our gross profits in the near-term.

We have a significant amount of System One field equipment, and our inability to effectively manage this asset could negatively impact our working capital requirements and future profitability.

Because our home market relies upon an equipment service swap model and, for some of our customers, an equipment rental model, our ability to manage System One equipment is important to minimizing our working capital requirements. Both factors require that we maintain a significant level of field equipment of our System One and PureFlow SL hardware. In

addition, our gross margins may be negatively impacted if we have excess equipment deployed, and unused, in the field. If we are unable to successfully track, service and redeploy equipment, we could (1) incur increased costs, (2) realize increased cash requirements and/or (3) have material write-offs of equipment. This would negatively impact our working capital requirements and future profitability.

If kidney transplantation becomes a viable treatment option for more patients with ESRD, or if medical or other solutions for renal replacement become viable, the market for our products may be limited.

While kidney transplantation is the treatment of choice for most ESRD patients, it is not currently a viable treatment for most patients due to the limited number of donor kidneys, the high incidence of kidney transplant rejection and the higher surgical risk associated with older ESRD patients. 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 and COE services. The development of viable medical, pharmaceutical, or other solutions for renal replacement or prolonging kidney life may also limit the market for our products and COE services.

We are currently party to litigation and could be subject to additional litigation claims from time to time.

On February 28, 2012 a civil complaint was filed against us in the US District Court for the District of Massachusetts by Gambro Renal Products, Inc., or Gambro (Case No. 1:12cv 10370-PBS). The complaint alleges that we violated Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a) and Massachusetts General Laws Chapter 93A by making false and misleading statements about our and Gambro’s allegedly competing products in the critical care market in commercial and promotional activities. The complaint also alleges that we wrongfully interfered with contractual and advantageous relationships of Gambro’s critical care business. Gambro seeks compensatory and treble damages, disgorgement of profits and injunctive relief. We believe the suit is without merit and intend to defend the claim vigorously.

From time to time, we are also threatened with individual actions involving our business, including without limitation, products liability claims. 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. Any claims made against us could adversely affect our reputation, which could damage our position in the market. Claims can also be time consuming, distracting, and expensive to defend and could result in a diversion of management and financial resources away from our primary business, in which case our business may suffer.

We maintain insurance at levels deemed adequate by management; however, future claims could exceed our applicable insurance coverage.

We maintain insurance for property and general liability, directors’ and officers’ liability, product liability, malpractice related to our centers of excellence, workers compensation, and other coverage in amounts and on terms deemed adequate by management based on our expectations for future claims. Future claims, however, may be brought against us that result in court judgments or settlements that exceed the limits of our insurance coverage. In addition, our insurance policies have various exclusions, and we may be subject to a 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 any insurance.

We face risks associated with having international operations, and if we are unable to manage these risks effectively, our business could suffer.

We operate manufacturing facilities in Germany, Italy and Mexico. We also purchase components, products and supplies from foreign vendors. We are subject to a number of risks and challenges that specifically relate to these international operations, and we may not be successful if we are unable to meet and overcome these challenges. Significant risks relate to foreign currency, in particular the Euro, Peso, Yen and Thai Baht. To mitigate our foreign currency exposure we engage in hedging transactions on Peso denominated expenses. To the extent we fail to control our exchange rate risk, our gross profit as a percentage of revenues and profitability could suffer and our ability to maintain mutually beneficial and profitable relationships with foreign vendors could be impaired. In addition to these risks, through our international operations, we are exposed to costs and challenges associated with sourcing and shipping goods internationally and importing and exporting goods, difficulty managing operations in multiple locations, local regulations that may restrict or impair our ability to conduct our operations and increased compliance costs, health issues, such as pandemic disease risk, and natural disasters, such as flooding, hurricanes and earthquakes, which could disrupt our manufacturing and logistical and import activities. For example, the earthquakes experienced in northern Italy during the second quarter of 2012 resulted in the temporary suspension of manufacturing within our facility in Italy. Although supply to our customers was not interrupted in that instance, future events may disrupt the supply of products at any of our facilities or third party facilities, increase our product costs, and impair our product quality or reliability, at least in the near term. Our risks associated with our international operations may increase where we sell our products and services directly rather than through distributors, such as in the United Kingdom. Furthermore, in certain locations, such as Mexico, we are also exposed to risks associated with local instability, including threats of increased violence, which could lead to disruptions in supply at our manufacturing facilities or key vendors.

We obtain some of our raw materials, components and finished goods from a single source or a limited group of suppliers. We also obtain sterilization services from a single supplier. We also manufacture certain of our products at only one manufacturing facility. The partial or complete loss of one of these suppliers could cause significant production delays, an inability to meet customer demand, and a substantial loss in revenues.

We depend upon a number of single-source suppliers for certain of our raw materials, components and finished goods, including the fiber used in our System One filters, our needles, premixed dialysate and sterile bags, as well as sterilization services. Some of our most critical single-source supply relationships are with Membrana, Kawasumi and Laboratorios PiSA. Our dependence upon these and other single-source suppliers of raw materials, components, finished goods and sterilization services, as well as our dependence on our manufacturing facilities, exposes us to several risks, including disruptions in supply, price increases, late deliveries, and an inability to meet customer demand. This could lead to customer dissatisfaction, damage to our reputation, or customers switching to competitive products. Any interruption in supply could be particularly damaging to our customers using the System One to treat chronic ESRD and who need access to the System One and related disposables to continue their therapy.

Finding alternative sources for these raw materials, components, finished goods and sterilization services would be difficult and in many cases entail a significant amount of time, disruption and cost. Although we believe our supply chain has sufficient inventory of raw materials, components and finished goods to withstand a temporary disruption in supply from any single source supplier or manufacturing location, any permanent or long-term disruption in supply from any single source supplier or manufacturing location could lead to supply delays or interruptions which would damage our business, at least in the near term.

Membrana is our sole supplier of the fiber used in our filters for System One products. We are contractually prevented from obtaining an alternative source of fiber for our System One products. Our relationship with Asahi could afford us back-up supply in the event of an inability to supply by Membrana, however, switching to Asahi fiber at this time would likely entail significant delays and difficulties. We do not have the regulatory approvals necessary to use Asahi fiber in our System One cartridge in the U.S. Additionally, the performance of Asahi fiber in our System One has not yet been validated.

Kawasumi is our only supplier of needles that we sell to our customers. Kawasumi’s contractual obligation to supply needles to us expires in February 2017, with opportunities to extend the term beyond that date. Our supply chain maintains a limited extra supply of needles to mitigate against the risk of intermittent shortfalls in needle supply, at least in the near-term. However, any significant interruption in Kawasumi’s ability to supply products to us would impair our business, at least in the near term.

Laboratorios PiSA is our only supplier of premixed dialysate. Our supply agreement with Laboratorios PiSA extends through December 2019, with opportunities to extend the term beyond that date. We have committed to purchase from Laboratorios PiSA a minimum quantity of premixed dialysate over the term of the agreement, which we believe is less than our anticipated requirements. While we can purchase premixed dialysate from other qualified suppliers, any significant disruption in Laboratorios PiSA’s ability to supply premixed dialysate to us would impair our business, at least in the near term.

We also have manufacturing facilities in Mexico, Germany and Italy. The loss of any of these facilities due to fire, natural disaster, war, strike, or other cause beyond our control could cause significant production delays, an inability to meet customer demand, and a substantial loss in revenues. We have also consolidated our blood tubing set manufacturing and the manufacturing and service of our System One equipment into a single facility in Tijuana, which has increased the risk associated with any loss or disruption at that facility.

Our In-Center segment relies heavily upon third-party distributors.

We sell the majority of our In-Center segment products through several distributors, which collectively account for substantially all of In-Center revenues, with Gambro and Henry Schein being our most significant distributors. In September 2013, Baxter announced the completion of its acquisition of Gambro. Our U.S. distribution agreement with Gambro continues through June 2014 and survives Gambro’s change of control. However, it is unclear what impact, if any, Baxter’s acquisition of Gambro may have with respect to this distribution relationship thereafter. Our distribution agreement with Henry Schein expires in April 2014, which term shall be automatically extended for additional one year periods until either party provides prior notice of its intent to terminate. The loss of Gambro or Henry Schein as our distributors for any reason could materially adversely affect our business, at least in the near term.

Unless we can demonstrate sufficient product differentiation in our In-Center segment 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 or needle business to competitors in the dialysis industry.

Our blood tubing set and needle businesses have historically been commodities businesses. Our products continue to compete favorably in the dialysis blood tubing set and needle business, but are increasingly subject to pricing pressures, especially given recent market consolidation in the U.S. dialysis services industry, with Fresenius and DaVita collectively controlling approximately two-thirds of the U.S. dialysis services business. Unless we can successfully demonstrate to customers the differentiating features of the Streamline blood tubing set, MasterGuard needle, ButtonHole needle 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 and needle business to competitors in the dialysis industry.

The activities of our business involve the import of finished goods into the U.S. from foreign countries, subject to customs inspections and duties, and the export of components and certain other products from other countries into Germany, Mexico, Thailand and Italy. To a lesser, but increasing degree, our business also involves the export of finished goods from the U.S. to foreign countries. If we misinterpret or violate these laws, or if laws governing our exemption from certain duties change, we could be subject to significant fines, liabilities or other adverse consequences.

We import into the U.S. disposable medical supplies from our manufacturing facilities and vendors located outside the U.S. We have manufacturing facilities in Mexico, Germany and Italy and export various components and assemblies related to those operations. To a lesser, but increasing degree, our business also involves the export of finished goods from the U.S. to foreign countries. The import and export of these items are subject to extensive laws and regulations with which we 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, import holds 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 Generalized 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 success of our business depends on the services of each of our senior executives as well as certain key engineering, scientific, manufacturing, clinical and marketing personnel, the loss of whom could negatively affect the combined businesses.

Our success has always depended upon the skills, experience and efforts of our senior executives and other key personnel, including our research and development and manufacturing executives and managers. Much of our expertise is concentrated in relatively few employees, the loss of whom for any reason could negatively affect our business. Competition for our highly skilled employees is intense and we cannot prevent the future resignation of any employee. We maintain key person insurance for only one of our executives, Jeffrey Burbank, our Chief Executive Officer.

Risks Related to the Regulatory Environment

We are subject to significant regulation, primarily by the FDA. We cannot market or commercially distribute our products without obtaining and maintaining necessary regulatory clearances or approvals.

Our products are medical devices subject to extensive regulation in the U.S. To market a medical device in the U.S., approval or clearance by the FDA is required, either through the pre-market approval process or the 510(k) clearance process. We have obtained the FDA clearance necessary to sell our current products under the 510(k) clearance process. Medical devices may only be promoted and sold for the indications for which they are approved or cleared. In addition, even if the FDA has approved or cleared a product, it can take action affecting such product approvals or clearances if serious safety or other problems develop. We may be required to obtain 510(k) clearances or pre-market approvals for additional products, product modifications, or for new indications of our products. Regulatory pathways for such clearances may be difficult to define and could change. For example, in 2010 we completed an approved IDE study intended to support a home nocturnal indication for the System One. Enrollment started in the first quarter of 2008 and we submitted the associated 510(k) to the FDA in 2010. We met our primary safety and efficacy endpoints for the study; nevertheless, in 2011, the FDA notified us that their standards for what will be required for a home nocturnal clearance may change from what was required in our approved IDE. As a result, the FDA did not clear our 510(k) application for home nocturnal use. In July 2012, the FDA approved a continuation of our IDE study designed to support a nocturnal indication for the System One. We have re-started the trial. After completion of the trial, we will be resubmitting an application for a home nocturnal clearance. We cannot be certain when this clearance will be obtained. We also cannot provide assurance of when this or other clearances or approvals might be issued, if at all. Delays in obtaining clearances or approvals could adversely affect our ability to introduce new products or modifications to our existing products in a timely manner, which would delay or prevent commercial sales of our products. Although the 510(k) regulation has not been formally changed, the FDA has announced that it is intending to implement modifications to the 510(k) process. Any changes in regulatory policies could have an adverse effect on our ability to sell and promote our products and our business as a whole.

The regulatory approval process in foreign markets may differ significantly from the FDA clearance process. For example, in the EU, manufacturers of medical devices are required to demonstrate compliance of their medical devices with the essential requirements provided in the medical devices directives and related guidance. Although conformity assessment procedures are conducted by notified bodies, the decision to affix the CE mark to a medical device and related responsibility and liability for devices marketed in the EU remains with the manufacturer of the devices. Although we take all available measures to ensure compliance with applicable regulatory obligations in the EU extensive forthcoming revisions to current EU medical device legislation may impose additional obligations. We cannot provide assurance that we will be able to comply with any such new obligations imposed on medical devices currently on the EU market within the deadlines imposed by the new legislation. New obligations may also adversely affect our ability to introduce new products onto the EU market in a timely manner. In certain foreign markets, some of our products may be classified as drugs rather than medical devices, requiring that we demonstrate compliance with separate regulations applicable to drug manufacturers and distributors. These complex regulations may impose additional approval, manufacturing, surveillance and reporting requirements. Compliance with these additional requirements may increase our costs of doing business in new foreign markets and delay our entry into such markets.

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 FDA’s 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.

Any substantial changes to a CE marked device may require further conformity assessment of the device by a notified body before the modified device is introduced onto the EU market. “Substantial changes” include the introduction of a new intended purpose for the device, a change in its design or a change in the device quality management system. There is limited guidance to assist us in determining whether a change that we make to a device should be considered substantial. However, as the manufacturer of the medical device we have sole responsibility for determining whether the change constitutes a substantial change. There is a risk that the competent authorities of the EU Member States or our notified body may disagree with our assessment of the changes introduced to our products. The competent authorities of the EU Member States or our notified body may also come to a different conclusion than the FDA concerning any change made to our products. Delays in conduct of any conformity assessment will cause delays in our ability to sell our products in the EU which will have a negative effect on our revenues growth.

Even if we obtain the necessary regulatory 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 death or serious injury. Similar obligations are imposed in foreign countries. We must also file reports of device corrections and removals and adhere to the FDA’s 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.

We must file similar reporting outside of the U.S. where our products are distributed. In addition, in the EU we must comply with a number of regulatory requirements, for products that have been CE marked and placed on the market, relating to:

•

registration of medical devices;

•

pricing and reimbursement of medical devices;

•

establishment of post-marketing surveillance and adverse event reporting procedures;

•

field safety corrective actions, including product recalls and withdrawals;

•

marketing and promotion of medical devices; and

•

interactions with physicians.

Failure to comply with these requirements may result in enforcement measures being taken by the competent authorities of the EU Member States. These can include fines, administrative penalties, compulsory product withdrawals, injunctions and criminal prosecution. Such enforcement measures would have an adverse effect on the marketing of our products in the EU and, consequently, on our business and financial position.

Our products are subject to market withdrawals or product recalls after receiving regulatory 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 or foreign regulatory authorities would request that we initiate a voluntary recall if a product were defective or presented a risk of injury or gross deception. From time to time over our history we have chosen to voluntarily recall certain products but have never had a mandatory government recall. Although we do not believe that any of our recent recalls have had any long term negative effect on our business, we cannot be sure that other recalls would not materially divert management attention and financial resources, cause the price of our stock to decline, expose us to product liability or other claims, or harm our reputation with customers.

If we or our contract manufacturers fail to comply with FDA’s 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 FDA’s 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. Foreign regulatory authorities impose similar obligations. 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. The FDA has inspected our Lawrence, Massachusetts facility and quality system multiple times. In our first inspection, one observation was made, but was rectified during the inspection, requiring no further response from us. Our subsequent inspections, including our most recent inspection in 2013, resulted in no inspectional observations. Medisystems has been inspected by the FDA on multiple occasions, and all inspections resulted in no action indicated. While all of our previous inspections have resulted in no significant observations, we cannot provide assurance that we can maintain a comparable level of regulatory compliance in the future at our facilities, or that future inspections would have the same result.

If one of our manufacturing facilities or those of any of our contract manufacturers fails to take satisfactory corrective action in response to an adverse QSR inspection, the FDA could take enforcement action, including issuing a public warning letter, shutting down our manufacturing operations, embargoing the import of components from outside of the U.S., recalling our products, refusing to approve new marketing applications, instituting legal proceedings to detain or seize products or imposing civil or criminal penalties or other sanctions, any of which could cause our business and operating results to suffer.

We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products in a manner not consistent with our products’ cleared indications for use or with other state or federal laws governing the promotion of our products.

Our promotional materials and other product labeling must comply with FDA and other applicable laws and regulations. If the FDA determines that our promotional materials or other product labeling constitute promotion of an unapproved, or uncleared use, it could request that we modify our materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal penalties. Promotional activities related to our COEs also may be scrutinized. Other federal, state and foreign regulatory agencies, including the U.S. Federal Trade Commission, have issued guidelines and regulations that govern how we promote our products and COE services, including how we use endorsements and testimonials. If our promotional materials or activities are inconsistent with any of these guidelines or regulations, we could be subject to enforcement actions, which could result in significant fines, costs and penalties. Our reputation could also be damaged and the adoption of our products could be impaired.

Medical devices in the EU may be promoted only for the intended purpose for which the devices have been CE marked. Failure to comply with this requirement could lead to the imposition of penalties by the competent authorities of the EU Member States. The penalties could include warnings, orders to discontinue the promotion of the medical device, seizure of the promotional materials and fines. Our promotional materials must also comply with various laws and codes of conduct developed by medical device industry bodies in the EU governing promotional claims, comparative advertising, advertising of medical devices reimbursed by the national health insurance systems and advertising to the general public. If our promotional materials do not comply with these laws and industry codes we could be subject to penalties that could include significant fines. Our reputation could also be damaged and the adoption of our products could be impaired.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products outside the U.S.

In 2009, we began entering into arrangements with distributors to sell the System One and certain of our other products outside of the U.S. We are currently selling the System One in the EU, Australia and other select markets. We are assessing other international markets for the System One as well. Our In-Center products are presently sold in the U.S. 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, the EU, Australia and selected other geographies. 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. In addition, 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 other markets beyond these we are currently in, which could negatively affect our overall market penetration. Additionally, any loss of foreign regulatory approvals, for any reason, could negatively affect our business.

New regulatory requirements can impose additional burdens on us, and our business could be adversely affected if we are unable to timely satisfy all applicable new requirements.

New regulations impacting our product technologies are periodically adopted in the U.S. as well as other countries. These regulations may require us to change our existing product technologies in order to continue marketing our products. This may expose us to increased costs, as well as risks that we may be unable to satisfy the new regulatory requirements. One example of this type of new regulation is found in IEC 60601-1:2005 (3rd edition), which was published in December 2005. In this publication, new standards are listed as general requirements concerning basic product safety and the essential performance of equipment. Some of these new standards became effective on June 1, 2012 in the EU and became effective on June 30, 2013 in the U.S. Our ability to sell or market product in certain foreign jurisdictions could be negatively affected and if we are unable to adhere to this or other regulations. This would have a negative impact on our business.

We have obligations 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 customer’s staff. Our home hemodialysis patients may also call our customer service representatives directly and, during the call, disclose confidential patient health information. We also receive and maintain confidential patient health information in connection with the operation of our dialysis centers of excellence. U.S. federal and state laws protect the confidentiality of certain patient health information, in particular individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Department of Health and Human Services promulgated health information and privacy and security rules under the Health Insurance Portability and Accountability Act of 1996, as amended under the Health Information Technology for Economic and Clinical Health Act, or HIPAA. HIPAA and the rules promulgated thereunder require certain entities, to comply with established standards, including standards regarding the privacy and security of protected health information known as the HIPAA Privacy and Security Rules, and to provide notification following a data breach involving protected health information. We are subject to HIPAA with regard to certain aspects of our business. In addition, many other state and federal laws regulate the use and disclosure of health information, including state medical privacy laws and federal and state consumer protection laws. In many cases, these laws are not necessarily preempted by HIPAA, particularly if they afford greater protection to the individual than does HIPAA. These various laws may be subject to varying interpretations by courts and government agencies creating potentially complex compliance issues for our business. The national legislation of foreign countries includes provisions that impose obligations equivalent to or, in some cases, more extensive than those provided in HIPAA. Complying with these requirements imposes compliance related costs, subjects us to

potential regulatory audits, and could restrict our business operations. If we were to violate any of our legal obligations to safeguard any confidential patient health information or protected health information against improper use and disclosure, we could lose customers and be exposed to liability, including potential civil and criminal penalties under HIPAA, and our reputation and business could be harmed. Concerns or allegations about our practices with regard to the privacy or security of personal health information or other privacy-related matters, even if unfounded or even if we are in compliance with applicable laws, could damage our reputation and harm our business.

We are also subject to laws and regulations in foreign countries covering data privacy and other protection of health and employee information that may be more onerous than corresponding U.S. laws. These regulations may require that we obtain individual consent before we collect or process any personal data, restrict our use or transfer of personal data, impose technical and organizational measures to ensure the security of personal data, and require that we notify regulatory agencies, individuals or the public about any data security breaches. As we expand our international operations, we may be required to expend significant time and resources to put in place additional mechanisms to ensure compliance with multiple data privacy laws. Failure to comply with these laws may result in significant fines and other administrative penalties and harm our business.

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 federal healthcare program Anti-Kickback Statute, and similar state laws, prohibit payments and other forms of remuneration that are intended to induce health care professionals or others either to refer patients or to purchase, lease, order or arrange for or recommend the purchase, lease or order of healthcare products or services. Other laws prohibit remuneration intended to induce patients to select a particular provider of services, including for dialysis. A number of states have enacted laws that require pharmaceutical and medical device companies to monitor and report payments, gifts and other remuneration made to physicians and other health care professionals and health care organizations. In addition, some state statutes, most notably laws in Massachusetts and Vermont, impose outright bans on certain manufacturer gifts to physicians. Some of these laws, referred to as “aggregate spend” or “gift” laws, carry substantial fines if they are violated. The federal Physician Payments Sunshine Act was enacted by Congress in 2010 as part of the comprehensive health care reform legislation, and the implementing regulations, released in February 2013, require us to begin collecting certain data on payments and other transfers of value to physicians and teaching hospitals beginning in August 2013 for public reporting by March 31, 2014. It is widely anticipated that public reporting under the Sunshine Act will result in increased scrutiny of the financial relationships between industry, physicians and teaching hospitals.

These anti-kickback, public reporting and aggregate spend 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, including patients, of medical devices and services. They also impose additional administrative and compliance burdens on us. In particular, these laws influence, among other things, how we structure our sales and rental offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. In our services business, they also affect our arrangements with any joint venture partners in a position to refer patients, our COE medical directors and our patient billing and collection practices. Although we seek to structure such arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how these laws will be applied in specific circumstances. If we were to offer or pay inappropriate inducements to purchase, order or use our products or services, or to refer patients to our COEs, we could be subject to a claim under the federal healthcare program Anti-Kickback Statute or similar state laws. If we fail to comply with particular reporting requirements, we could be subject to penalties under applicable federal or state laws.

Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments to Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Medical device manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers by providing improper financial inducements, or through certain other activities. In providing billing and coding information to customers, we make every effort to ensure that the billing and coding information furnished is accurate and that treating physicians understand that they are responsible for all prescribing decisions, including the decision as to whether to order dialysis services more frequently than three times per week. In addition, our COEs are directly subject to these laws with respect to the reimbursement claims they file with government payors. Potential false or fraudulent claim risk can arise from promoting and billing for services the government deems excessive or not medically necessary, as well as from other billing improprieties and from failure to timely return any identified overpayments. We are making every effort, including adhering strictly to guidelines in any LCDs issued by Medicare Administrative Contractors with jurisdiction over claims from any of our COEs, to ensure that billing by our COEs is proper and that physicians who order COE dialysis services fully document medical need for patients for whom more frequent than thrice weekly therapy is ordered. 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, physicians, and patients concerning the benefits of more frequent therapy. Likewise, our financial relationships with customers, physicians, patients or others in a position to influence the

purchase or use of our products may be subject to government scrutiny or be alleged or found to violate applicable fraud and abuse laws. False claims laws prescribe civil, criminal and administrative penalties for noncompliance, which can be substantial and, given the possibility of exclusion from participation in government health care programs, potentially crippling to the line of business involved. 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.

Increasingly, foreign countries are adopting laws similar in application and consequence to the anti-kickback and false claims laws in the U.S. If we fail to comply with these laws we may face civil or criminal penalties. The negative consequences of any failure to comply with these laws may also harm our ability to operate in foreign countries and have a negative effect on our reputation that discourages third parties from doing business with us.

Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.

Historically, our marketing efforts had been confined nearly exclusively to the U.S. In 2009, we began to market the System One and certain of our other products internationally. In some foreign countries, particularly in the EU, the pricing of medical devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after a device has been CE marked. 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 U.S., which would negatively affect the long-term growth of our business. Furthermore, 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 U.S. Foreign Corrupt Practices Act or UK Anti-Bribery Act could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act which generally prohibits U.S. 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. Through our international activities, we are also subject to the UK Anti-Bribery Act and other similar anti-bribery laws. While we have policies and procedures in place designed to prevent noncompliance, we can make no assurance that our employees or other agents will not engage in prohibited conduct under these laws 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, as well as the laws of foreign countries, governing the use, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials comply in all material respects with the standards prescribed by state and federal regulations or foreign country laws, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or failure to comply with environmental laws, we could be held liable for resulting damages, and any such liability could exceed our insurance coverage.

Risks Related to Operations

Resin is a key input material to the manufacture of our products and System One cartridge. Oil prices affect both the pricing and availability of this material. Escalation of oil prices could affect our ability to obtain sufficient supply of resin at the prices we need to manufacture our products at current rates of profitability.

We currently source resin from a small number of suppliers. Rising oil prices over the last several years have resulted in significant price increases for this material and prices may continue to increase. Our contracts with customers restrict our ability to immediately pass on these price increases, and future pricing to customers may be insufficient 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.

We have labor agreements with our production employees in Italy and in Mexico. We may experience strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices, other collective bargaining disputes, or anti-union behavior in the future. Any such activity would likely cause production delays and negatively affect our ability to deliver our production commitments to customers, which could adversely affect our reputation and cause our combined businesses and operating results to suffer. Additionally, some of our key single source suppliers have labor agreements. We cannot guarantee that we will not have future disruptions, which could adversely affect our reputation and cause our business and operating results to suffer

We do not have long-term supply contracts with many of our third-party suppliers.

We purchase raw materials and components from third-party suppliers, including some single source suppliers, through purchase orders and do not have long-term supply contracts with many of these third-party suppliers. Many of our third-party suppliers are not obligated to perform services or supply products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We do not maintain large volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished goods, our ability to meet customer demand could be delayed or interrupted 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. Although we believe our supply chain has sufficient inventory of raw materials, components and finished goods to withstand a temporary disruption in supply from any single source supplier, any permanent or long-term disruption in supply from any single source supplier could lead to supply delays or interruptions which would damage our business, at least in the near term.

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 may license, may be challenged, invalidated, circumvented or rendered unenforceable. We cannot provide assurance that we will be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded our products could be impaired, which could make our products less competitive.

Our patents may not provide us with a competitive advantage and competitors may be able to design around our patents. We cannot provide assurance that any pending or future patent applications we hold will result in an issued patent or that if patents are issued to us, that such patents will provide meaningful protection against competitors or against competitive technologies. The issuance of a patent is not conclusive as to its validity or enforceability. The U.S. federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents or find them unenforceable. 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 U.S. 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. 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.

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. 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 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, or adverse changes to the purchasing patterns of key 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 more frequent 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 U.S. and foreign countries;

•

changes in third-party healthcare reimbursements, particularly a decline in the level of Medicare reimbursement for dialysis treatments, or the willingness of Medicare contractors to pay for more than three treatments a week where medically justified;

•

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, following periods of volatility in the market price of a company’s 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 a large number of shares of common stock, the market price of our common stock could decline significantly.

At September 30, 2013, subject to certain conditions, holders of an aggregate of approximately 2.5 million shares of our common stock have rights with respect to the registration of these shares of common stock with the Securities and Exchange Commission, or SEC. If we register their shares of common stock, they can more easily sell those shares in the public market.

Outstanding rights to acquire shares of our common stock may result in substantial dilution to our stockholders.

As of September 30, 2013, 7.6 million shares of common stock are authorized for issuance under our stock incentive plan, employee stock purchase plan, outstanding stock options and unvested restricted stock. As of September 30, 2013, 5.2 million shares were subject to outstanding options, of which 3.9 million were exercisable and can be freely sold in the public market upon issuance, subject to the restrictions imposed on our affiliates under Rule 144. The issuance and sale of any of these shares could result in substantial dilution to our stockholders in the form of immediate and substantial dilution in net tangible book value per share.

We may grow through additional acquisitions, which could dilute our existing shareholders and could involve substantial integration risks.

As part of our business strategy, we may acquire other businesses and/or technologies in the future. We may issue equity securities as consideration for future acquisitions that would dilute our existing stockholders, perhaps significantly depending on the terms of the acquisition. We may also incur additional debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business. Acquisitions may involve a number of risks, including:

•

difficulty in transitioning and integrating the operations and personnel of the acquired businesses, including different and complex accounting and financial reporting systems;

•

potential disruption of our ongoing business and distraction of management;

•

potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of our finance, accounting and product distribution systems;

•

difficulty in incorporating acquired technology and rights into our products and technology;

•

unanticipated expenses and delays in completing acquired development projects and technology integration;

•

management of geographically remote units both in the United States and internationally;

•

impairment of relationships with partners and customers;

•

customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;

•

entering markets or types of businesses in which we have limited experience;

•

potential loss of key employees of the acquired company; and

•

inaccurate assumptions of the acquired company’s product quality and/or product reliability.

As a result of these and other risks, we may not realize anticipated benefits from our acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.

Item 6. Exhibits


Exhibit Number		Description

10.1*†		Amendment to Supply Agreement dated as of July 22, 2013 between Medisystems Corporation and Laboratorios PiSA SA de C.V.

10.2*#		Employment Agreement dated as of July 15, 2013 between the Registrant and Matthew W. Towse.

10.3*#		Director compensation policy.

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 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 Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		XBRL Taxonomy Extension Definition Linkbase

101.LAB*		XBRL Taxonomy Extension Label Linkbase

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

*	Filed herewith.

**	Furnished herewith.

†	Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.

#	Management contract or compensatory plan or arrangement.

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/ Matthew W. Towse
		Matthew W. Towse

		Chief Financial Officer (Duly authorized officer and principal financial officer)

November 7, 2013

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company