sv1za
As filed with the Securities and Exchange Commission on
May 26, 2006.
Registration
No. 333-134187
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1 to
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
NxStage Medical, Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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3845
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04-3454702
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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439 South Union Street,
5th Floor
Lawrence, Massachusetts
01843
(978) 687-4700
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
Jeffrey H. Burbank
President and Chief Executive
Officer
439 South Union Street,
5th Floor
Lawrence, Massachusetts
01843
(978) 687-4700
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies to:
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Mark G. Borden, Esq.
Susan W. Murley, Esq.
Wilmer Cutler Pickering
Hale and Dorr LLP
60 State Street
Boston, MA 02109
(617) 526-6000
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Winifred L. Swan, Esq.
Senior Vice President and
General Counsel
NxStage Medical, Inc.
439 South Union Street, 5th Floor
Lawrence, MA 01843
(978) 687-4700
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Danielle Carbone, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
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Approximate date of commencement
of proposed sale to the
public: As
soon as practicable after the effective date of this
registration statement.
If any of the securities being
registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities
Act of 1933, as amended, check the following
box. o
If this Form is filed to register
additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same offering. o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective
amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering. o
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to
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Offering Price
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Aggregate Offering
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Amount of
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Securities to be
Registered
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be Registered(1)
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Per Share(2)
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Price(2)
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Registration Fee(3)(4)
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Common Stock, $0.001 par value per
share
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6,438,371
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$10.29
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66,250,838
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$7,136
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(1)
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Includes 825,000 shares of
common stock that may be purchased by the underwriters to cover
over-allotments, if any.
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(2)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c)
under the Securities Act of 1933, as amended.
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(3)
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Calculated pursuant to
Rule 457(c) based on the average of the high and low sales
prices reported in the consolidated reporting system of the
Nasdaq National Market on May 24, 2006.
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(4)
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A registration fee of $8,194 has
been paid previously in connection with this Registration
Statement.
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The registrant hereby amends
this registration statement on such date or dates as may be
necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this
registration statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until this registration statement shall become effective on
such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion
Preliminary Prospectus dated
May 26, 2006
PROSPECTUS
5,613,371 Shares
NxStage Medical, Inc.
Common Stock
We are selling 5,500,000 shares and the selling
stockholders named in this prospectus are selling
113,371 shares. We will not receive any proceeds from the
sale of our shares by the selling stockholders.
Our shares of common stock are quoted on the Nasdaq National
Market under the symbol NXTM. On May 25, 2006,
the last sale price of the shares as quoted on the Nasdaq
National Market was $10.94 per share.
Investing in the common stock involves risks that are
described in the Risk Factors section beginning on
page 8 of this prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to
NxStage
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$
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$
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Proceeds, before expenses, to the
selling stockholders
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$
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$
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The underwriters may also purchase up to an additional
825,000 shares of common stock from us at the public
offering price, less the underwriting discount, within
30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares will be ready for delivery on or
about ,
2006.
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Merrill
Lynch & Co. |
JPMorgan |
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Thomas
Weisel Partners LLC |
JMP
Securities |
The date of this prospectus
is ,
2006.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We, the selling stockholders and the underwriters
have not authorized anyone to provide you with information
different from or in addition to that contained in this
prospectus. If anyone provides you with different or
inconsistent information, you should not rely on it. We and the
selling stockholders are offering to sell, and are seeking
offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. Our business,
financial condition, results of operations and prospects may
have changed since that date.
For investors outside the United States: Neither we, the selling
stockholders nor any of the underwriters have done anything that
would permit this offering or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is
required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating
to this offering and the distribution of this prospectus.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information you should consider before buying shares of our
common stock. You should read the entire prospectus carefully,
especially the risks of investing in shares of our common stock
that we describe under Risk Factors and our
consolidated financial statements and the related notes included
at the end of this prospectus, before deciding to invest in
shares of our common stock. Unless the context requires
otherwise, references to NxStage, we,
our and us in this prospectus refers to
NxStage Medical, Inc. and its subsidiary.
Our
Business
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of end-stage renal
disease, or ESRD, and acute kidney failure. Our primary product,
the NxStage System One, is a small, portable,
easy-to-use
hemodialysis system designed to provide physicians and patients
improved flexibility in how hemodialysis therapy is prescribed
and delivered. Given its design, the System One is particularly
well-suited for home hemodialysis and more frequent, or
daily, dialysis, which clinical literature suggests
provides patients better clinical outcomes and improved quality
of life. The System One is specifically cleared by the United
States Food and Drug Administration, or FDA, for home
hemodialysis as well as hospital and clinic-based dialysis. We
believe the largest market opportunity for our product is the
home hemodialysis market for the treatment of ESRD.
ESRD, which affects approximately 453,000 people in the United
States, is an irreversible, life-threatening loss of kidney
function that is treated predominantly with dialysis. Dialysis
is a kidney replacement therapy that removes toxins and excess
fluids from the bloodstream and, unless the patient receives a
kidney transplant, is required for the remainder of the
patients life. Over 70% of ESRD patients in the United
States rely on life-sustaining dialysis treatment. Hemodialysis,
the most widely prescribed type of dialysis, typically consists
of treatments in a dialysis clinic three times per week, with
each session lasting three to five hours. Approximately 8% of
U.S. ESRD dialysis patients receive some form of dialysis
treatment at home, most of whom treat themselves with peritoneal
dialysis, or PD, although surveys of physicians and healthcare
professionals suggest that a larger proportion of patients could
take responsibility for their own care. We believe there is an
unmet need for a hemodialysis system that allows more frequent
and easily administered therapy at home and have designed our
portable system to address this and other kidney replacement
therapy markets.
Measuring 15x15x18 inches, the System One is the smallest,
commercially available hemodialysis system. It has a
self-contained design and simple user interface making it easy
to operate by a trained patient and his or her trained partner
in any setting prescribed by the patients physician.
Unlike traditional dialysis systems, the System One does not
require any special disinfection or preparation between
treatments, and its operation does not require specialized
electrical or plumbing infrastructure or modifications to the
home. Patients can bring the System One home, plug it into a
conventional electrical outlet and operate it, thereby
eliminating what can be expensive plumbing and electrical
household modifications required by traditional dialysis
systems. Given its compact size and lack of infrastructure
requirements, the System One is truly portable, allowing
patients freedom to travel. We believe these features provide
patients and their physicians new treatment options for ESRD.
We market the System One to dialysis clinics for chronic
hemodialysis treatment, providing clinics with improved access
to the developing home hemodialysis market and the ability to
expand their patient base by adding home-based patients without
adding clinic infrastructure. The clinics in turn provide the
System One to ESRD patients. For each month that a patient is
treated with our System One, we typically bill the clinic for
the rental of the machine and purchase of the related disposable
cartridges and treatment fluids. Clinics receive reimbursement
from Medicare, private insurance and patients for dialysis
treatments. We commenced marketing the System One for chronic
hemodialysis treatment in September 2004. As of May 15,
2006, 556 ESRD patients were using the System One at
104 different dialysis clinics. Substantially all of these
patients are treated at home or are in training to treat
themselves at home.
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Medicare reimburses the same amount for home and in-center
hemodialysis treatments, up to three treatments per week.
Payment for more than three treatments per week is available
with appropriate medical justification. The adoption of our
System One for more frequent therapy for ESRD could be slowed if
Medicare is reluctant or refuses to pay for these additional
treatments.
We also market the System One in the critical care market to
hospitals for treatment of acute kidney failure and for fluid
overload associated with multiple diseases, including congestive
heart failure. It is estimated that there are over 200,000 cases
of acute kidney failure in the United States each year. The
System One provides an effective,
simple-to-operate
alternative to dialysis systems currently used in the hospital
to treat these acute conditions. We commenced marketing the
System One to the critical care market in February 2003. As of
May 15, 2006, 55 hospitals were using the System One
to deliver acute kidney failure and fluid overload therapy.
Our
Solution The NxStage System One
Our primary product, the NxStage System One, is a small,
portable,
easy-to-use
dialysis system which incorporates multiple proprietary
technologies and design features. The System One includes the
following components:
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The NxStage Cycler. A compact, portable
electromechanical device containing pumps, control mechanisms,
safety sensors and remote data capture functionality.
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The NxStage Cartridge. A single-use,
disposable, integrated treatment cartridge that loads simply and
easily into the cycler. The cartridge incorporates a proprietary
volumetric fluid management system and includes a pre-attached
dialyzer.
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Premixed Dialysate. The System One uses
high-purity premixed dialysate for hemodialysis applications.
The volume of fluids used varies with treatment options and
prescription, but typical weekly volumes are similar to the
amount of dialysate used by a patient on PD. Currently, we
supply our premixed dialysate in five liter bags. In March 2006,
we received FDA clearance for the PureFlow SL module, a
proprietary dialysate preparation product used with the System
One, which allows for the automated preparation of dialysate
fluid in the patients home using ordinary tap water and
dialysate concentrate thereby eliminating the need for bagged
fluids. We expect to make this product broadly available to our
customers beginning in July 2006.
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The System One presents a new dialysis treatment alternative for
ESRD, acute kidney failure and fluid overload. Our system is
designed to address the needs of patients, physicians and other
healthcare providers by providing the following benefits:
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Versatility. We have developed the System One
so that the same system can be used in clinical or non-clinical
settings, for either chronic or critical care.
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Portability. The System One, which weighs
approximately 75 pounds and measures 15x15x18 inches,
is flexible enough to use in any environment prescribed by the
physician, including the patients home, dialysis clinic,
intensive care unit, or ICU, and cardiac care unit, or CCU. When
therapy is prescribed in the home, we ship the necessary
supplies directly to the patient. If the patient travels with
the System One, we ship the necessary disposables to the
patients destination.
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Simplicity and convenience. The System One is
designed for simple operation and convenience. It employs a
drop-in cartridge and is operated by an icon-based touch pad
that is simple and intuitive.
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No unique infrastructure requirements. The
System One can plug into any standard grounded outlet. The use
of bagged fluids eliminates the need for a customized water
source at the site of treatment, facilitating therapy in any
setting, especially the ICU and patient travel destinations.
Waste dialysate is discarded to any drain. The PureFlow SL
module also can be plugged into
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any standard grounded outlet and can be hooked up to a sink or
any other standard water line with a simple connection, and no
other special infrastructure requirements are necessary.
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Highly responsive customer support and
service. We offer 24 hour per day, seven day
per week customer support service through a team of experienced
nurses and engineers. Due to the portability of the System One,
we are able to offer an overnight equipment exchange program,
avoiding the need for a large field service organization.
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Designed for safety. With automatic loading
and calibration of all safety systems and simple dialysate
solution preparation, the System One is designed to minimize
operator error, although such errors do still occur. The
cartridge is preconnected to a filter to reduce connection
errors. Our cycler includes redundant safety systems, which
provide further protection to patients undergoing treatment.
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High Fluid Purity. Our fluids, whether bagged
or prepared by the PureFlow SL, meet United States Pharmacopeia,
or USP, standards for fluid purity and exceed the Association
for the Advancement of Medical Instrumentation, or AAMI,
industry standards for dialysate purity. Recent studies have
shown that the use of high purity dialysate, which exceeds AAMI
standards, helps in the reduction of inflammatory disorders
commonly experienced by ESRD patients.
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For the ESRD market, the System One is designed to make home
treatment and more frequent treatment easier and more practical.
Although not performed using our product, clinical studies
suggest that therapy administered five to six times per week,
commonly referred to as daily therapy, better mimics the natural
functioning of the human kidney and can lead to improved
clinical outcomes, including reduction in hypertension, improved
anemia status, reduced reliance on pharmaceuticals, improved
nutritional status, reduced hospitalizations and overall
improvement in quality of life. Other published literature also
supports the clinical and quality of life benefits associated
with home dialysis therapy.
For the critical care market, our System One is designed to
offer clinicians an alternative that simplifies the delivery of
acute kidney replacement therapy and makes longer or continuous
critical care therapies easier to deliver. The ability of our
system to perform hemofiltration, for which the System One is
also FDA cleared, is advantageous, as many clinicians choose to
prescribe this therapy for patients with acute kidney failure.
Our
Strategy
Our goal is to become the leading provider of home hemodialysis
systems, addressing the market opportunity for a hemodialysis
treatment that allows freedom from the regimen of traditional
in-center dialysis and enables patients to improve the quality
of their life. In the critical care market, we intend to become
a leading provider of dialysis systems addressing acute kidney
failure and fluid overload.
To achieve these objectives, we are pursuing the following
business strategies:
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Promote high ESRD patient and physician awareness of the
benefits of the System One. We are increasing our
efforts to actively educate ESRD patients, nurses, technicians
and physicians about the clinical and lifestyle benefits of home
and more frequent hemodialysis and about the ease-of-use and
portability of the System One. Primarily through cooperative
marketing initiatives with our dialysis clinic customers, we are
currently expanding our patient and physician education programs.
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Drive adoption of the System One through a targeted sales and
marketing program focused on selected dialysis clinics and
hospitals in both the ESRD and critical care
markets. We have expanded and intend to continue
to expand our direct sales and marketing force to address our
two markets. In the ESRD market, we target leading dialysis
clinics with experience in home dialysis therapies. In the
critical care market, we intend to continue to target leading
institutions that we believe can benefit from the versatility of
our system to address a number of critical care applications.
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Leverage our existing technology and continue to innovate the
System One. We will continue to invest in
research and development to enhance our existing products. Our
development team integrates skills across the range of
technologies required to innovate dialysis systems, including:
filters, tubing sets, mechanical systems, fluids, software and
electronics.
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Focus on developing operations in the United
States. For the near and intermediate-term, we
are focusing our efforts on the United States market. We believe
there is a substantial opportunity outside the United States for
the System One and plan, over the long term, to pursue
international growth when we have developed the appropriate
scale and infrastructure to expand into other geographic regions.
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Risks
Our business is subject to a number of risks of which you should
be aware before making an investment decision. For a discussion
of factors you should consider before deciding to invest in our
common stock, we refer you to the risks described below and to
Risk Factors.
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We expect to derive substantially all of our future revenues
from the rental or sale of our System One and the sale of our
related products for use with the System One.
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We are in the second year of our commercial launch in the United
States of the System One hemodialysis system to dialysis clinics
for the treatment of ESRD, and our success will depend on our
ability to achieve market acceptance of the System One.
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We cannot accurately predict the size of the home hemodialysis
market, and it may be smaller and slower to develop than we
expect.
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We will require significant capital to build our business, and
our ability to become profitable and to generate positive cash
flow is dependent upon maintaining adequate pricing, lowering
costs of manufacturing and distributing our products efficiently.
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In the ESRD market, our ability to set prices for our products
is limited by existing Medicare reimbursement rates for dialysis
treatment. In addition, the cost of manufacturing the System One
and the related disposables currently exceeds the market price.
We may not be able to achieve a profit margin sufficient to
support our business. We cannot guarantee if and when we will
become profitable, or that we will be able to maintain
profitability. As of March 31, 2006, our accumulated
deficit was $(93.3) million.
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Company
Information
We were incorporated on December 31, 1998, under the name
QB Medical, Inc. In 1999, we changed our name to NxStage
Medical, Inc. Our principal executive offices are located at 439
South Union Street, Lawrence, Massachusetts 01843, and our
telephone number is (978) 687-4700. NxStage and the NxStage
logo are registered trademarks of NxStage. Our website is
located at www.nxstage.com. Information on our website is not
part of this prospectus.
4
THE
OFFERING
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Common stock offered |
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By NxStage |
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5,500,000 shares |
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By the selling stockholders |
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113,371 shares |
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Common stock to be outstanding after this offering |
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26,684,287 shares |
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Use of proceeds |
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We estimate that we will receive net proceeds from this offering
of approximately $55.9 million assuming an offering price
of $10.94 per share, based on the last reported sale price
of our common stock on the Nasdaq National Market on
May 25, 2006, after deducting estimated underwriting
discounts and commissions and offering expenses payable by us
($64.4 million if the underwriters exercise their
over-allotment option in full). We intend to use the net
proceeds of this offering to fund continuing operations,
including the expansion of sales and marketing programs and the
hiring of additional personnel, to finance working capital
needs, including investment in System One field equipment, and
for general corporate purposes. We will not receive any of the
proceeds from the sale of shares by the selling stockholders.
See Use of Proceeds. |
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Risk factors |
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See Risk Factors and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock. |
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Nasdaq National Market symbol |
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NXTM |
The number of shares of our common stock to be outstanding after
the offering is based on 21,184,287 shares of common
stock outstanding as of March 31, 2006. Unless otherwise
indicated, the information contained in this prospectus,
including the information above:
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Excludes 2,723,005 shares of common stock issuable upon the
exercise of stock options outstanding as of March 31, 2006,
with a weighted-average exercise price of $6.46 per share;
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Excludes 169,736 shares of common stock issuable upon
exercise of outstanding warrants as of March 31, 2006, with
a weighted-average exercise price of $7.67 per
share; and
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Excludes 706,522 shares reserved as of March 31, 2006
for future stock option grants and purchases under our equity
compensation plans. See Management Equity
Benefit Plans.
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Except where we state otherwise, the information we present in
this prospectus does not reflect the exercise of the
underwriters overallotment option.
5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following tables present our summary consolidated statements
of operations data for our fiscal years 2003 through 2005 and
for the three months ended March 31, 2005 and
March 31, 2006, and our summary consolidated balance sheet
data as of December 31, 2005 and March 31, 2006. The
financial data for the fiscal years ended December 31,
2003, 2004 and 2005 have been derived from our consolidated
financial statements, which appear elsewhere in this prospectus,
and have been audited by Ernst & Young LLP, an
independent registered public accounting firm, as indicated in
their report. The financial data as of and for the three months
ended March 31, 2005 and March 31, 2006, are derived
from our unaudited consolidated financial statements, which in
the opinion of management contain all adjustments necessary for
a fair presentation of the consolidated financial data.
Operating results for these periods are not necessarily
indicative of the operating results for a full year. You should
read this information in conjunction with our consolidated
financial statements, including the related notes, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
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Three Months Ended
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Years Ended December
31,
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March 31,
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2003
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2004
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2005
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2005
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2006
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(Unaudited)
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(In thousands, except share and
per share amounts)
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Consolidated Statements of
Operations Data:
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Revenues
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$
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286
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$
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1,885
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$
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5,994
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$
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1,034
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$
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3,401
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Cost of revenues
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940
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3,439
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9,585
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1,782
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4,858
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Gross profit (deficit)
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(654
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(1,554
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(3,591
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(748
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(1,457
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Operating expenses:
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Research and development
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4,526
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5,970
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6,305
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1,432
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1,779
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|
Selling and marketing
|
|
|
2,181
|
|
|
|
3,334
|
|
|
|
7,550
|
|
|
|
1,321
|
|
|
|
3,193
|
|
Distribution
|
|
|
33
|
|
|
|
495
|
|
|
|
2,059
|
|
|
|
309
|
|
|
|
1,289
|
|
General and administrative
|
|
|
2,868
|
|
|
|
3,604
|
|
|
|
4,855
|
|
|
|
1,025
|
|
|
|
1,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,608
|
|
|
|
13,403
|
|
|
|
20,769
|
|
|
|
4,087
|
|
|
|
8,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,262
|
)
|
|
|
(14,957
|
)
|
|
|
(24,360
|
)
|
|
|
(4,835
|
)
|
|
|
(9,693
|
)
|
Interest income
|
|
|
146
|
|
|
|
130
|
|
|
|
643
|
|
|
|
72
|
|
|
|
595
|
|
Interest expense
|
|
|
(92
|
)
|
|
|
(15
|
)
|
|
|
(763
|
)
|
|
|
(146
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,208
|
)
|
|
$
|
(14,842
|
)
|
|
$
|
(24,480
|
)
|
|
$
|
(4,909
|
)
|
|
$
|
(9,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share
|
|
$
|
(4.10
|
)
|
|
$
|
(5.81
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share
calculations
|
|
|
2,489,688
|
|
|
|
2,555,605
|
|
|
|
5,680,566
|
|
|
|
2,566,399
|
|
|
|
21,182,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
The summary consolidated balance sheet data as of March 31,
2006 is presented on an actual basis and as adjusted basis to
reflect the sale of shares of common stock offered by us in this
offering at an assumed offering price of $10.94 per share, based
on the last reported sale price of our common stock on the
Nasdaq National Market on May 25, 2006 after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
As of March 31,
2006
|
|
|
|
2005
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
short-term investments
|
|
$
|
61,223
|
|
|
$
|
49,728
|
|
|
$
|
105,617
|
|
Working capital
|
|
|
62,100
|
|
|
|
50,059
|
|
|
|
105,948
|
|
Total assets
|
|
|
76,431
|
|
|
|
70,463
|
|
|
|
126,352
|
|
Long-term liabilities
|
|
|
2,106
|
|
|
|
1,690
|
|
|
|
1,690
|
|
Accumulated deficit
|
|
|
(84,011
|
)
|
|
|
(93,266
|
)
|
|
|
(93,266
|
)
|
Total stockholders equity
|
|
|
67,354
|
|
|
|
58,645
|
|
|
|
114,534
|
|
|
|
|
(1) |
|
This data does not reflect the impact of our $20.0 million
equipment line of credit that we entered into in May 2006. Under
the line of credit agreement, $8.0 million is currently
available with an additional $2.0 million available through
December 31, 2006 and a further $10.0 million
available through December 31, 2007. The availability of
the line of credit is subject to a number of covenants,
including maintaining certain levels of liquidity, adding
specified numbers of patients and operating within net loss
parameters. We are also required to maintain operating and/or
investment accounts with the lender in an amount at least equal
to the outstanding debt obligation. Concurrent with the signing
of the line of credit, we repaid outstanding debt and accrued
interest of approximately $3.4 million. All borrowings are
secured by substantially all of our assets. |
7
RISK
FACTORS
This offering involves a high degree of risk. You should
carefully consider the risks and uncertainties described below
and the other information in this prospectus, including the
consolidated financial statements and the related notes included
at the end of this prospectus, before deciding to invest in
shares of our common stock. If any of the following risks or
uncertainties actually occurs, our business, prospects,
financial condition and operating results would likely suffer,
possibly materially. In that event, the market price of our
common stock could decline and you could lose all or part of
your investment.
Risks
Related to our Business
We expect
to derive substantially all of our future revenues from the
rental or sale of our System One and the sale of our related
disposable products used with the System One.
Since our inception, we have devoted substantially all of our
efforts to the development of the System One and the related
products used with the System One. We commenced marketing the
System One and the related disposable products to the critical
care market in February 2003. We commenced marketing the System
One for chronic hemodialysis treatment in September 2004. We
expect that the rental or sale of the System One and the sale of
related products will account for substantially all of our
revenues for the foreseeable future. Most of our related
products cannot be used with any other dialysis systems and,
therefore, we will derive little or no revenues from related
products unless we sell or otherwise place the System One. To
the extent that the System One is not a successful product or is
withdrawn from the market for any reason, we do not have other
products in development that could replace revenues from the
System One.
We cannot
accurately predict the size of the home hemodialysis market, and
it may be smaller or slower to develop than we expect.
Although home hemodialysis treatment options are available,
adoption has been limited. The most widely adopted form of
dialysis therapy used in a setting other than a dialysis clinic
is peritoneal dialysis. Based on the most recently available
data from the United States Renal Data System, or USRDS, the
number of patients receiving peritoneal dialysis was
approximately 26,000 in 2003, representing approximately 8% of
all patients receiving dialysis treatment for ESRD in the United
States. Very few ESRD patients receive hemodialysis treatment
outside of the clinic setting; USRDS data indicates
approximately 1,300 patients were receiving home-based
hemodialysis in 2003. Because the adoption of home hemodialysis
has been limited to date, the number of patients who desire to,
and are capable of, administering their own hemodialysis
treatment with a system such as the System One is unknown and
there is limited data upon which to make estimates. Our
long-term growth will depend on the number of patients who adopt
home-based hemodialysis and how quickly they adopt it, and we do
not know whether the number of home-based dialysis patients will
be greater or fewer than the number of patients performing
peritoneal dialysis or how many peritoneal dialysis patients
will switch to home-based hemodialysis. We received our home use
clearance for the System One from the FDA in June 2005 and we
will need to devote significant resources to developing the
market. We cannot be certain that this market will develop, how
quickly it will develop or how large it will be.
We will
require significant capital to build our business, and financing
may not be available to us on reasonable terms, if at
all.
We believe that the chronic care market is the largest market
opportunity for our System One hemodialysis system. We typically
bill the dialysis clinic for the rental of the equipment and the
sale of the related disposable cartridges and treatment fluids.
As a result, we expect that we will generate revenues and cash
flow from the use of the System One over time rather than
upfront from the sale of the System One equipment, and we will
need significant amounts of working capital to manufacture
System One equipment for rental to dialysis clinics.
We only recently began marketing our System One to dialysis
clinics for the treatment of ESRD, and we have not achieved
widespread market acceptance of our product. We may not be able
to generate sufficient cash flow to meet our capital needs. If
our existing resources are insufficient to satisfy our liquidity
requirements, we may need to sell additional equity or debt
securities. Any sale of additional equity or
8
issuance of debt securities may result in additional dilution to
our stockholders, and we cannot be certain that additional
public or private financing will be available in amounts or on
terms acceptable to us, or at all. If we are unable to obtain
this additional financing, we may be required to delay, reduce
the scope of, or eliminate one or more aspects of our business
strategy, which could harm the growth of our business.
We have
limited operating experience, a history of net losses and an
accumulated deficit of $(93.3) million at March 31,
2006. We cannot guarantee if, when and the extent that we will
become profitable, or that we will be able to maintain
profitability once it is achieved.
Since inception, we have incurred losses every quarter and, at
March 31, 2006, we had an accumulated deficit of
approximately $(93.3) million. We expect to incur
increasing operating expenses as we continue to grow our
business. Additionally, in the chronic care market, the cost of
manufacturing the System One and related disposables currently
exceeds the market price. We cannot provide assurance that we
will be able to lower the cost of manufacturing the System One
and related disposables below the current chronic care market
price, that we will achieve profitability, when we will become
profitable, the sustainability of profitability should it occur,
or the extent to which we will be profitable. Our ability to
become profitable is dependent in part upon achieving a
sufficient scale of operations, obtaining better purchasing
terms and prices, achieving efficiencies in manufacturing
overhead costs, implementing design and process improvements to
lower our costs of manufacturing our products and achieving
efficient distribution of our products.
Our new PureFlow SL module, which we plan to commercially launch
in the chronic care market beginning in July 2006, is an
important part of our cost reduction plans. Any delay in our
plans to launch the PureFlow SL module, or any failure to gain
rapid market acceptance of the PureFlow SL module, including
converting our base of patients currently using bagged fluid,
could adversely affect our ability to achieve profitability.
We only
recently began marketing our System One hemodialysis system to
dialysis clinics for the treatment of ESRD, and our success will
depend on our ability to achieve market acceptance of our System
One.
We only recently began marketing our System One for the
treatment of ESRD. Our products have limited product and brand
recognition and have only been used at a limited number of
dialysis clinics and hospitals. In the chronic care market, we
will have to convince four distinct constituencies involved in
the choice of dialysis therapy, namely operators of dialysis
clinics, nephrologists, dialysis nurses and patients, that our
system provides an effective alternative to other existing
dialysis equipment. Each of these constituencies will use
different considerations in reaching their decision. Lack of
acceptance by any of these constituencies will make it difficult
for us to grow our business. We may have difficulty gaining
widespread or rapid acceptance of the System One for a number of
reasons including:
|
|
|
|
|
the failure by us to demonstrate to patients, operators of
dialysis clinics, nephrologists, dialysis nurses and others that
our product is equivalent or superior to existing therapy
options or, that the cost or risk associated with use of our
product is not greater than available alternatives;
|
|
|
|
competition from products sold by companies with longer
operating histories and greater financial resources, more
recognizable brand names and better established distribution
networks and relationships with dialysis clinics;
|
|
|
|
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, safer, easier to use or less expensive than ours;
|
|
|
|
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 continued availability of satisfactory reimbursement from
healthcare payors, including Medicare.
|
9
Current
Medicare reimbursement rates limit the price at which we can
market the System One, and adverse changes to reimbursement
could affect the adoption of the System One.
Our ability to attain profitability will be driven in part by
our ability to set or maintain adequate pricing for our System
One. As a result of legislation passed by the U.S. Congress
more than 30 years ago, Medicare provides comprehensive and
well-established reimbursement in the United States for ESRD.
With over 80% of U.S. ESRD patients covered by Medicare,
the reimbursement rate is an important factor in a potential
customers decision to use the System One and limits the
fee for which we can rent the System One and sell the related
disposable cartridges and treatment fluids. Current CMS rules
limit the number of hemodialysis treatments paid for by Medicare
to three times a week, unless there is medical justification for
additional treatments. Most patients using the System One in the
home treat themselves, with the help of a partner, up to six
times per week. To the extent that Medicare contractors elect
not to pay for the additional treatments, adoption of the System
One may be slowed. Changes in Medicare reimbursement rates could
negatively affect demand for our products and the prices we
charge for them.
As we
continue to commercialize the System One and related products,
we may have difficulty managing our growth and expanding our
operations successfully.
As the commercial launch of the System One continues, we will
need to expand our regulatory, manufacturing, sales and
marketing and on-going development capabilities or contract with
other organizations to provide these capabilities for us. As our
operations expand, we expect that we will need to manage
additional relationships with various partners, suppliers,
manufacturers and other organizations. Our ability to manage our
operations and growth requires us to continue to improve our
operational, 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.
We
compete against other dialysis equipment manufacturers with much
greater financial resources and better established products and
customer relationships, which may make it difficult for us to
penetrate the market and achieve significant sales of our
products.
Our System One competes directly against equipment produced by
Fresenius Medical Care AG, Baxter Healthcare Corporation, Gambro
AB, and others, each of which markets one or more FDA-cleared
medical devices for the treatment of acute or chronic kidney
failure. Each of these competitors offers products that have
been in use for a longer time than our products and are more
widely recognized by physicians, patients and providers. In
addition, Aksys, Ltd. sells a hemodialysis machine, which is
also specifically cleared by the FDA for home use. Most of our
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, in the case of Fresenius, own and operate a chain of
dialysis clinics. Most of these companies manufacture additional
complementary products enabling them to offer a bundle of
products and have established sales forces and distribution
channels that may afford them a significant competitive
advantage.
The market for our products is competitive, subject to change
and affected by new product introductions and other market
activities of industry participants, including increased
consolidation of ownership of clinics by large dialysis chains.
If we are successful, our competitors are likely to develop
products that offer features and functionality similar to our
System One. Improvements in existing competitive products or the
introduction of new competitive products may make it more
difficult for us to compete for sales, particularly if those
competitive products demonstrate better safety, convenience or
effectiveness or are offered at lower prices than our System
One. Our ability to successfully market 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
10
technological advances, it will be difficult for us to penetrate
the market and achieve significant sales of our products.
The two
largest dialysis clinic chains in the United States are
affiliated with, or have contractual arrangements with, other
dialysis equipment manufacturers, which may present a barrier to
adoption of the System One at these chains.
Fresenius and DaVita own and operate the two largest chains of
dialysis clinics in the United States. Fresenius controls
approximately 33% of the U.S. dialysis clinics, after the
completion of its acquisition of Renal Care Group and assuming
the completion of the recently announced sale of 100 clinics to
National Renal Institutes. Fresenius is also the largest
worldwide manufacturer of dialysis systems. DaVita controls
approximately 27% of the U.S. dialysis clinics, and has
entered into a preferred supplier agreement with Gambro pursuant
to which Gambro will provide a significant majority of
DaVitas dialysis equipment and supplies for a period of at
least 10 years. Each of Fresenius and DaVita may choose to
offer to patients in their dialysis clinics only the dialysis
equipment manufactured by them or their affiliates, to offer the
equipment they contractually agreed to offer or to otherwise
limit access to the equipment manufactured by competitors. We
are presently renting the System One to several DaVita dialysis
clinics under a two-year contract with DaVita that expires on
March 16, 2007. Revenues from DaVita clinics represented
13% of our revenues during the three months ended March 31,
2006. We cannot be sure that DaVita will continue to rent the
System One from us or that any future decision by DaVita to stop
or limit the use of the System One would not adversely affect
our business.
If kidney
transplantation becomes a viable treatment option for more
patients with ESRD, the market for our System One may be
limited.
While kidney transplantation is the treatment of choice for most
ESRD patients, it is not currently a viable treatment for most
patients due to the limited number of donor kidneys, the high
incidence of kidney transplant rejection and the higher surgical
risk associated with older ESRD patients. According to the most
recent USRDS data, in 2003 approximately 16,000 patients
received kidney transplants in the United States. The
development of new medications designed to reduce the incidence
of kidney transplant rejection, progress in using kidneys
harvested from genetically engineered animals as a source of
transplants or any other advances in kidney transplantation
could limit the market for our System One.
If we are
unable to convince hospitals and healthcare providers of the
benefits of our products for the treatment of acute kidney
failure and fluid overload, we may not be successful in
penetrating the critical care market.
We sell the System One for use in the treatment of acute kidney
failure and fluid overload associated with, among other
conditions, congestive heart failure. Physicians currently treat
most acute kidney failure patients using conventional
hemodialysis systems or dialysis systems designed specifically
for use in the ICU. We will need to convince hospitals and
healthcare providers that using the System One is as effective
as using conventional hemodialysis systems or ICU specific
dialysis systems for treating acute kidney failure and that it
provides advantages over conventional systems or other ICU
specific systems because of its significantly smaller size and
ease of operation.
Fluid overload resulting from congestive heart failure is most
often treated with a variety of drugs rather than with
ultrafiltration because ultrafiltration is a less well-known,
less studied treatment option and as a result, there is a lack
of clinical evidence to support its effectiveness. Because the
System One would be used to deliver ultrafiltration, we will
need to convince hospitals, healthcare providers and third-party
payors that ultrafiltration using the System One is as effective
and cost-efficient as existing treatments for fluid overload
resulting from congestive heart failure.
We are
subject to the risk of costly and damaging product liability
claims and may not be able to maintain sufficient product
liability insurance to cover claims against us.
If our System One is found to have caused or contributed to
injuries or deaths, we could be held liable for substantial
damages. Claims of this nature may also adversely affect our
reputation, which could
11
damage our position in the market. As is the case with a number
of other medical device companies, it is likely that product
liability claims will be brought against us. Since their
introduction into the market, our products have been subject to
two voluntary recalls and one voluntary product withdrawal. Our
first voluntary recall occurred in February 2001 in Canada and
related to a software glitch that we detected in our predecessor
system, which could have increased the likelihood of a clotted
filter during treatment. There were no patient injuries
associated with this recall, and the software glitch was
remedied with a subsequent software release. The second
voluntary recall occurred in April 2004 in the United States
relating to pinhole-sized dialysate leaks in our cartridge. The
leaks were readily observable and required a cartridge
replacement to continue treatment. There were no patient
injuries associated with this recall; we subsequently switched
suppliers and instituted additional testing requirements to
minimize the chance for pinhole-sized leaks in our cartridges.
The voluntary market withdrawal occurred in the United States in
May 2002 when we suspended sales of our predecessor system while
we addressed issues involving limited instances of contaminated
hemofiltration fluids compounded by a pharmacy and supplied by a
third-party. Six patients exposed to contaminated fluids
reported fevers
and/or
chills, with no lasting clinical effect. We subsequently
modified our cartridge to allow for an additional filter to
remove contaminants from fluids used with our product. Our
products may be subject to further recalls or withdrawals, which
could increase the likelihood of product liability claims. We
have also received several reports of operator error from both
patients in the home hemodialysis setting and nurses in the
critical care setting. We have sought to address many potential
sources of operator error with product design changes to
simplify the operator process. In addition, we have made
improvements in our training materials and product labeling.
However, instances of operator error cannot be eliminated and
could also increase the likelihood of product liability claims.
Although we maintain insurance, including product liability
insurance, we cannot provide assurance that any claim that may
be brought against us will not result in court judgments or
settlements in amounts that are in excess of the limits of our
insurance coverage. Our insurance policies also have various
exclusions, and we may be subject to a product liability claim
for which we have no coverage. We will have to pay any amounts
awarded by a court or negotiated in a settlement that exceed our
coverage limitations or that are not covered by our insurance.
Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability
insurance rates or the inability to secure additional insurance
coverage in the future. A product liability claim, whether
meritorious or not, could be time consuming, distracting and
expensive to defend and could result in a diversion of
management and financial resources away from our primary
business, in which case our business may suffer.
We have
had limited sales, marketing, customer service and distribution
experience. We need to expand our sales and marketing, customer
service and distribution infrastructures to be successful in
penetrating the dialysis market.
We currently market and sell the System One through our own
sales force, and we have had limited experience in sales,
marketing and distribution of dialysis products. As of
March 31, 2006, we had 73 employees in our sales, marketing
and distribution organization, including 25 direct sales
representatives. We plan to expand our sales, marketing,
customer service and distribution infrastructures. We cannot
provide assurance that we will be able to attract experienced
personnel to our early-stage company and build an adequate sales
and marketing, customer service and distribution staff or that
the cost will not be prohibitive.
We face
risks associated with having international manufacturing
operations, and if we are unable to manage these risks
effectively, our business could suffer.
In addition to our operations in Lawrence, Massachusetts, we
operate a manufacturing facility in Rosdorf, Germany and we
purchase components and supplies from foreign vendors. We are
subject to a number of risks and challenges that specifically
relate to these international operations, and we may not be
successful if we are unable to meet and overcome these
challenges. These risks include fluctuations in foreign currency
exchange rates that may increase the U.S. dollar cost of
the disposables we purchase from foreign third-party suppliers,
costs associated with sourcing and shipping goods
internationally, difficulty managing
12
operations in multiple locations and local regulations that may
restrict or impair our ability to conduct our operations.
Risks
Related to the Regulatory Environment
We are
subject to significant regulation, primarily by the FDA. We
cannot market or commercially distribute our products without
obtaining and maintaining necessary regulatory clearances or
approvals.
Our System One and related products, including the disposables
required for its use, are all medical devices subject to
extensive regulation in the United States, and in foreign
markets we may wish to enter. To market a medical device in the
United States, approval or clearance by the FDA is required,
either through the pre-market approval process or the 510(k)
clearance process. We have obtained the FDA clearances necessary
to sell our current products under the 510(k) clearance process.
Medical devices may only be promoted and sold for the
indications for which they are approved or cleared. In addition,
even if the FDA has approved or cleared a product, it can take
action affecting such product approvals or clearances if serious
safety or other problems develop in the marketplace. We may be
required to obtain 510(k) clearances or pre-market approvals for
additional products, product modifications, or for new
indications for the System One. We cannot provide assurance that
such clearances or approvals would be forthcoming, or, if
forthcoming, what the timing and expense of obtaining such
clearances or approvals might be. Delays in obtaining clearances
or approvals could adversely affect our ability to introduce new
products or modifications to our existing products in a timely
manner, which would delay or prevent commercial sales of our
products.
Modifications
to our marketed devices may require new regulatory clearances or
pre-market approvals, or may require us to cease marketing or
recall the modified devices until clearances or approvals are
obtained.
Any modifications to a 510(k) cleared device that could
significantly affect its safety or effectiveness, or would
constitute a major change in its intended use, requires the
submission of another 510(k) pre-market notification to address
the change. Although in the first instance we may determine that
a change does not rise to a level of significance that would
require us to make a pre-market notification submission, the FDA
may disagree with us and can require us to submit a 510(k) for a
significant change in the labeling, technology, performance
specifications or materials or major change or modification in
intended use, despite a documented rationale for not submitting
a pre-market notification. We have modified various aspects of
the System One and have filed and received clearance from the
FDA with respect to some of the changes in the design of our
products. If the FDA requires us to submit a 510(k) for any
modification to a previously cleared device, or in the future a
device that has received 510(k) clearance, we may be required to
cease marketing the device, recall it, and not resume marketing
until we obtain clearance from the FDA for the modified version
of the device. Also, we may be subject to regulatory fines,
penalties
and/or other
sanctions authorized by the Federal Food, Drug, and Cosmetic
Act. In the future, we intend to introduce new products and
enhancements and improvements to existing products. We cannot
provide assurance that the FDA will clear any new product or
product changes for marketing or what the timing of such
clearances might be. In addition, new products or significantly
modified marketed products could be found to be not
substantially equivalent and classified as products requiring
the FDAs approval of a pre-market approval application, or
PMA, before commercial distribution would be permissible. PMAs
usually require substantially more data than 510(k) submissions
and their review and approval or denial typically takes
significantly longer than a 510(k) decision of substantial
equivalence. Also, PMA products require approval supplements for
any change that affects safety and effectiveness before the
modified device may be marketed. Delays in our receipt of
regulatory clearance or approval will cause delays in our
ability to sell our products, which will have a negative effect
on our revenues growth.
Even if
we obtain the necessary FDA clearances or approvals, if we or
our suppliers fail to comply with ongoing regulatory
requirements our products could be subject to restrictions or
withdrawal from the market.
We are subject to the Medical Device Reporting, or MDR,
regulations that require us to report to the FDA if our products
may have caused or contributed to patient death or serious
injury, or if our device
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malfunctions and a recurrence of the malfunction would likely
result in a death or serious injury. We must also file reports
of device corrections and removals and adhere to the FDAs
rules on labeling and promotion. Our failure to comply with
these or other applicable regulatory requirements could result
in enforcement action by the FDA, which may include any of the
following:
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untitled letters, warning letters, fines, injunctions and civil
penalties;
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administrative detention, which is the detention by the FDA of
medical devices believed to be adulterated or misbranded;
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customer notification, or orders for repair, replacement or
refund;
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voluntary or mandatory recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusal to review pre-market notification or pre-market approval
submissions;
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rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
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criminal prosecution.
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Our
products are subject to market withdrawals or product recalls
after receiving FDA clearance or approval, and market
withdrawals and product recalls could cause the price of our
stock to decline and expose us to product liability or other
claims or could otherwise harm our reputation and financial
results.
Complex medical devices, such as the System One, can experience
performance problems in the field that require review and
possible corrective action by us or the product manufacturer. We
cannot provide assurance that component failures, manufacturing
errors, design defects
and/or
labeling inadequacies, which could result in an unsafe condition
or injury to the operator or the patient will not occur. These
could lead to a government mandated or voluntary recall by us.
The FDA has the authority to require the recall of our products
in the event a product presents a reasonable probability that it
would cause serious adverse health consequences or death.
Similar regulatory agencies in other countries have similar
authority to recall devices because of material deficiencies or
defects in design or manufacture that could endanger health. We
believe that the FDA would request that we initiate a voluntary
recall if a product was defective or presented a risk of injury
or gross deception. Any recall would divert management attention
and financial resources, could cause the price of our stock to
decline and expose us to product liability or other claims and
harm our reputation with customers. A recall involving the
System One could be particularly harmful to our business and
financial results, because the System One is our only product.
If we or
our contract manufacturers fail to comply with FDAs
Quality System regulations, our manufacturing operations could
be interrupted, and our product sales and operating results
could suffer.
Our finished goods manufacturing processes, and those of some of
our contract manufacturers, are required to comply with the
FDAs Quality System regulations, or QSRs, which cover the
procedures and documentation of the design, testing, production,
control, quality assurance, labeling, packaging, sterilization,
storage and shipping of our devices. The FDA enforces its QSRs
through periodic unannounced inspections of manufacturing
facilities. We and our contract manufacturers have been, and
anticipate in the future being, subject to such inspections. Our
U.S. manufacturing facility has previously had three FDA
QSR inspections. The first resulted in one observation, which
was rectified during the inspection and required no further
response from us. Our last two inspections, including our most
recent inspection in March 2006, resulted in no observations. We
cannot provide assurance that any future inspections would have
the same result. If one of our manufacturing facilities or those
of any of our contract manufacturers fails to take satisfactory
corrective action in response to an adverse QSR inspection, FDA
could take enforcement action, including issuing a public
warning letter, shutting down our manufacturing operations,
embargoing the import of components from outside of the United
States, recalling our products, refusing to approve new
marketing applications, instituting
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legal proceedings to detain or seize products or imposing civil
or criminal penalties or other sanctions, any of which could
cause our business and operating results to suffer.
Changes
in reimbursement for treatment for ESRD could affect the
adoption of our System One and the level of our future product
revenues.
In the United States, all patients who suffer from ESRD,
regardless of age, are eligible for coverage under Medicare,
after a requisite coordination period if other insurance is
available. As a result, more than 80% of patients with ESRD are
covered by Medicare. Although we rent and sell our products to
hospitals, dialysis centers and other healthcare providers and
not directly to patients, the reimbursement rate for ESRD
treatments is an important factor in a potential customers
decision to purchase the System One. The dialysis centers that
purchase our product rely on adequate third-party payor coverage
and reimbursement to maintain their ESRD facilities. There is
some regional variation in the composite rate for dialysis
services, but the national average rate is currently
approximately $149 per treatment for independent clinics
and $154 per treatment for hospital-based dialysis facilities,
which is intended to cover most items and services related to
the treatment of ESRD, but does not include payment for
physician services or separately billable laboratory services or
drugs. Changes in Medicare reimbursement rates could negatively
affect demand for our products and the prices we charge for them.
Most ESRD patients who use our product for dialysis therapy in
the home treat themselves six times per week. CMS rules,
however, limit the number of hemodialysis treatments paid for by
Medicare to three a week, unless there is medical justification
for the additional treatments. The determination of medical
justification must be made at the local Medicare contractor
level on a
case-by-case
basis. If daily therapy is prescribed, a clinics decision
as to how much it is willing to spend on dialysis equipment and
services will be at least partly dependent on whether Medicare
will reimburse more than three treatments per week for the
clinics patients.
Unlike Medicare reimbursement for ESRD, Medicare only reimburses
healthcare providers for acute kidney failure and fluid overload
treatment if the patient is otherwise eligible for Medicare,
based on age or disability. Medicare and many other third party
payors and private insurers reimburse these treatments provided
to hospital inpatients under a traditional diagnosis related
group system. Under this system, reimbursement is determined
based on a patients primary diagnosis and is intended to
cover all costs of treating the patient. The presence of acute
kidney failure or fluid overload increases the severity of the
primary diagnosis and, accordingly, may increase the amount
reimbursed. For care of these patients to be cost-effective,
hospitals must manage the longer hospitalization stays and
significantly more nursing time typically necessary for patients
with acute kidney failure and fluid overload. If we are unable
to convince hospitals that our System One provides a
cost-effective treatment alternative under this diagnosis
related group reimbursement system, they may not purchase our
product.
Legislative
or regulatory reform of the healthcare system may affect our
ability to sell our products profitably.
In both the United States and foreign countries, there have been
legislative and regulatory proposals to change the healthcare
system in ways that could affect our ability to sell our
products profitably. The federal government and some states have
enacted healthcare reform legislation, and further federal and
state proposals are likely. We cannot predict the exact form
this legislation may take, the probability of passage, and the
ultimate effect on us. Our business could be adversely affected
by future healthcare reforms or changes in Medicare.
Failure
to obtain regulatory approval in foreign jurisdictions would
prevent us from marketing our products outside the United
States.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future to market our products in other markets. In order
to market our products in the European Union or other foreign
jurisdictions, we must obtain separate regulatory approvals and
comply with numerous and varying regulatory requirements. The
approval procedure varies from country to country and can
involve additional testing. The time required to obtain approval
abroad may be longer than the time
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required to obtain FDA clearance. The foreign regulatory
approval process includes many of the risks associated with
obtaining FDA clearance and we may not obtain foreign regulatory
approvals on a timely basis, if at all. FDA clearance does not
ensure approval by regulatory authorities in other countries,
and approval by one foreign regulatory authority does not ensure
approval by regulatory authorities in other foreign countries.
We may not be able to file for regulatory approvals and may not
receive necessary approvals to commercialize our products in any
market outside the United States, which could negatively affect
our overall market penetration.
We
currently have obligations under our contracts with dialysis
clinics to protect the privacy of patient health
information.
In the course of performing our business we obtain, from time to
time, confidential patient health information. For example, we
learn patient names and addresses when we ship our System One
supplies to home hemodialysis patients. We may learn patient
names and be exposed to confidential patient health information
when we provide training on System One operations to our
customers staff. Our home hemodialysis patients may also
call our customer service representatives directly and, during
the call, disclose confidential patient health information.
U.S. Federal and state laws protect the confidentiality of
certain patient health information, in particular individually
identifiable information, and restrict the use and disclosure of
that information. At the federal level, the Department of Health
and Human Services promulgated health information and privacy
and security rules under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. At this time, we are not a
HIPAA covered entity and consequently are not directly subject
to HIPAA. However, we have entered into several business
associate agreements with covered entities that contain
commitments to protect the privacy and security of
patients health information and, in some instances,
require that we indemnify the covered entity for any claim,
liability, damage, cost or expense arising out of or in
connection with a breach of the agreement by NxStage. If we were
to violate one of these agreements, we could lose customers and
be exposed to liability
and/or our
reputation and business could be harmed. In addition, conduct by
a person that is not a covered entity could potentially be
prosecuted under aiding and abetting or conspiracy laws if there
is an improper disclosure or misuse of patient information.
Many state laws apply to the use and disclosure of health
information, which could affect the manner in which we conduct
our business. Such laws are not necessarily preempted by HIPAA,
in particular those laws that afford greater protection to the
individual than does HIPAA. Such state laws typically have their
own penalty provisions, which could be applied in the event of
an unlawful action affecting health information.
We are
subject to federal and state laws prohibiting
kickbacks and false and fraudulent claims which, if
violated, could subject us to substantial penalties.
Additionally, any challenges to or investigation into our
practices under these laws could cause adverse publicity and be
costly to respond to, and thus could harm our
business.
The Medicare/ Medicaid anti-kickback laws, and several similar
state laws, prohibit payments that are intended to induce
physicians or others either to refer patients or to acquire or
arrange for or recommend the acquisition of healthcare products
or services. These laws affect our sales, marketing and other
promotional activities by limiting the kinds of financial
arrangements, including sales programs, we may have with
hospitals, physicians or other potential purchasers or users of
medical devices. In particular, these laws influence, among
other things, how we structure our sales and rental offerings,
including discount practices, customer support, education and
training programs and physician consulting and other service
arrangements. Although we seek to structure such arrangements in
compliance with applicable requirements, these laws are broadly
written, and it is often difficult to determine precisely how
these laws will be applied in specific circumstances. If one of
our sales representatives were to offer an inappropriate
inducement to purchase our System One to a customer, we could be
subject to a claim under the Medicare/ Medicaid anti-kickback
laws.
Other federal and state laws generally prohibit individuals or
entities from knowingly presenting, or causing to be presented,
claims for payments from Medicare, Medicaid or other third-party
payors that are false or fraudulent, or for items or services
that were not provided as claimed. Although we do not submit
claims directly to payors, manufacturers can be held liable
under these laws if they are deemed to cause the
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submission of false or fraudulent claims by providing inaccurate
billing or coding information to customers, or through certain
other activities. In providing billing and coding information to
customers, we make every effort to ensure that the billing and
coding information furnished is accurate and that treating
physicians understand that they are responsible for all billing
and prescribing decisions, including the decision as to whether
to order dialysis services more frequently than three times per
week. Nevertheless, we cannot provide assurance that the
government will regard any billing errors that may be made as
inadvertent or that the government will not examine our role in
providing information to our customers concerning the benefits
of daily therapy. Anti-kickback and false claims laws prescribe
civil, criminal and administrative penalties for noncompliance,
which can be substantial. Moreover, an unsuccessful challenge or
investigation into our practices could cause adverse publicity,
and be costly to respond to, and thus could harm our business
and results of operations.
Foreign
governments tend to impose strict price controls, which may
adversely affect our future profitability.
Although we have not initiated any marketing efforts in
jurisdictions outside of the United States and Canada, we intend
in the future to market our products in other markets. In some
foreign countries, particularly in the European Union, the
pricing of medical devices is subject to governmental control.
In these countries, pricing negotiations with governmental
authorities can take considerable time after the receipt of
marketing approval for a product. To obtain reimbursement or
pricing approval in some countries, we may be required to supply
data that compares the cost-effectiveness of the System One to
other available therapies. If reimbursement of our products is
unavailable or limited in scope or amount, or if pricing is set
at unsatisfactory levels, it may not be profitable to sell our
products outside of the United States, which would negatively
affect the long-term growth of our business.
Our
business activities involve the use of hazardous materials,
which require compliance with environmental and occupational
safety laws regulating the use of such materials. If we violate
these laws, we could be subject to significant fines,
liabilities or other adverse consequences.
Our research and development programs as well as our
manufacturing operations involve the controlled use of hazardous
materials. Accordingly, we are subject to federal, state and
local laws governing the use, handling and disposal of these
materials. Although we believe that our safety procedures for
handling and disposing of these materials comply in all material
respects with the standards prescribed by state and federal
regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the
event of an accident or failure to comply with environmental
laws, we could be held liable for resulting damages, and any
such liability could exceed our insurance coverage.
Risks
Related to Operations
We depend
on the services of our senior executives and certain key
engineering, scientific, clinical and marketing personnel, the
loss of whom could negatively affect our business.
Our success depends upon the skills, experience and efforts of
our senior executives and other key personnel, including our
chief executive officer, certain members of our engineering
staff, our marketing executives and managers and our clinical
educators. Much of our corporate expertise is concentrated in
relatively few employees, the loss of which for any reason could
negatively affect our business. Competition for our highly
skilled employees is intense and we cannot prevent the
resignation of any employee. On May 16, 2006, we announced
that David Gill, our Chief Financial Officer, plans to resign as
an officer and employee of NxStage at the end of July 2006.
Although we have initiated a search, we do not know how long it
will take to recruit successfully a new Chief Financial Officer.
We have agreements with all of our executive officers that
contain non-competition provisions that may prevent a former
employee of ours from working for a competitor for a period of
time; however, these clauses may not be enforceable, or
enforceable only in part, or the company may choose not to seek
enforcement. We do not maintain key man life
insurance on any of our senior executives, other than our chief
executive officer.
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We obtain
some of the components, subassemblies and completed products
included in the System One from a single source or a limited
group of manufacturers or suppliers, and the partial or complete
loss of one of these manufacturers or suppliers could cause
significant production delays, an inability to meet customer
demand and a substantial loss in revenues.
We depend on single source suppliers for some of the components
and subassemblies we use in the System One. KMC Systems, Inc. is
our only contract manufacturer of the System One cycler; B.
Braun Medizintechnologie GmbH is our only supplier of
bicarbonate-based dialysate used with the System One; Membrana
GmbH is our only supplier of the fiber used in our filters; PISA
is a primary supplier of lactate-based dialysate and Medisystems
Corporation is our primary supplier of our disposable cartridge
and several cartridge components. We also obtain certain other
components included in the System One from other single source
suppliers or a limited group of suppliers. Medisystems is a
related party to NxStage. David Utterberg, the chief executive
officer and sole stockholder of Medisystems, is a member of our
board of directors and as of March 31, 2006, held
approximately 9.4% of our common stock. Our dependence on single
source suppliers of components, subassemblies and finished goods
exposes us to several risks, including disruptions in supply,
price increases, late deliveries, or an inability to meet
customer demand. This could lead to customer dissatisfaction,
damage to our reputation, or cause customers to switch 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 weekly access to the System One
and related disposables.
Finding alternative sources for these components and
subassemblies would be difficult in many cases and may entail a
significant amount of time and disruption. In some cases, we
would need to change the components or subassemblies if we
sourced them from an alternative supplier. This, in turn, could
require a redesign of our System One and, potentially, further
FDA clearance or approval of any modification, thereby causing
further costs and delays.
We do not
have long-term supply contracts with many of our third-party
suppliers.
We purchase components and subassemblies from third-party
suppliers, including some of our single source suppliers,
through purchase orders and do not have long-term supply
contracts with many of these third-party suppliers. Many of our
third-party suppliers, therefore, are not obligated to perform
services or supply products to us for any specific period, in
any specific quantity or at any specific price, except as may be
provided in a particular purchase order. We do not maintain
large volumes of inventory from most of these suppliers. If we
inaccurately forecast demand for components or subassemblies,
our ability to manufacture and commercialize the System One
could be delayed and our competitive position and reputation
could be harmed. In addition, if we fail to effectively manage
our relationships with these suppliers, we may be required to
change suppliers which would be time consuming and disruptive.
Risks
Related to Intellectual Property
If we are
unable to protect our intellectual property and prevent its use
by third parties, we will lose a significant competitive
advantage.
We rely on patent protection, as well as a combination of
copyright, trade secret and trademark laws to protect our
proprietary technology and prevent others from duplicating our
products. However, these means may afford only limited
protection and may not:
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prevent our competitors from duplicating our products;
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prevent our competitors from gaining access to our proprietary
information and technology; or
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permit us to gain or maintain a competitive advantage.
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Any of our patents may be challenged, invalidated, circumvented
or rendered unenforceable. We cannot provide assurance that we
will be successful should one or more of our patents be
challenged for any reason. If our patent claims are rendered
invalid or unenforceable, or narrowed in scope, the patent
coverage afforded our products could be impaired, which could
make our products less competitive.
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As of March 31, 2006, we had 51 pending patent
applications, including foreign, international and
U.S. applications, and 21 U.S. and international issued
patents. We cannot specify which of these patents individually
or as a group will permit us to gain or maintain a competitive
advantage. We cannot provide assurance that any pending or
future patent applications we hold will result in an issued
patent or that if patents are issued to us, that such patents
will provide meaningful protection against competitors or
against competitive technologies. The issuance of a patent is
not conclusive as to its validity or enforceability. The United
States federal courts or equivalent national courts or patent
offices elsewhere may invalidate our patents or find them
unenforceable. Competitors may also be able to design around our
patents. Our patents and patent applications cover particular
aspects of our products. Other parties may develop and obtain
patent protection for more effective technologies, designs or
methods for treating kidney failure. If these developments were
to occur, it would likely have an adverse effect on our sales.
The laws of foreign countries may not protect our intellectual
property rights effectively or to the same extent as the laws of
the United States. If our intellectual property rights are not
adequately protected, we may not be able to commercialize our
technologies, products or services and our competitors could
commercialize similar technologies, which could result in a
decrease in our revenues and market share.
Our
products could infringe the intellectual property rights of
others, which may lead to litigation that could itself be
costly, could result in the payment of substantial damages or
royalties,
and/or
prevent us from using technology that is essential to our
products.
The medical device industry in general has been characterized by
extensive litigation and administrative proceedings regarding
patent infringement and intellectual property rights. Products
to provide kidney replacement therapy have been available in the
market for more than 30 years and our competitors hold a
significant number of patents relating to kidney replacement
devices, therapies, products and supplies. Although no third
party has threatened or alleged that our products or methods
infringe their patents or other intellectual property rights, we
cannot provide assurance that our products or methods do not
infringe the patents or other intellectual property rights of
third parties. If our business is successful, the possibility
may increase that others will assert infringement claims against
us.
Infringement and other intellectual property claims and
proceedings brought against us, whether successful or not, could
result in substantial costs and harm to our reputation. Such
claims and proceedings can also distract and divert management
and key personnel from other tasks important to the success of
the business. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
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cease selling or using any of our products that incorporate the
asserted intellectual property, which would adversely affect our
revenues;
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pay substantial damages for past use of the asserted
intellectual property;
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obtain a license from the holder of the asserted intellectual
property, which license may not be available on reasonable
terms, if at all and which could reduce profitability; and
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redesign or rename, in the case of trademark claims, our
products to avoid infringing the intellectual property rights of
third parties, which may not be possible and could be costly and
time-consuming if it is possible to do so.
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Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology and processes, we
also rely in part on confidentiality agreements with our
corporate partners, employees, consultants, outside scientific
collaborators and sponsored researchers, advisors and others.
These agreements may not effectively prevent disclosure of
confidential information and trade secrets and may not provide
an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently
discover or reverse engineer trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such party.
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Costly and time consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could
adversely affect our competitive position.
We may be
subject to damages resulting from claims that our employees or
we have wrongfully used or disclosed alleged trade secrets of
other companies.
Many of our employees were previously employed at other medical
device companies focused on the development of dialysis
products, including our competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in
addition to paying monetary damages, we may lose valuable
intellectual property rights. Even if we are successful in
defending against these claims, litigation could result in
substantial costs, damage to our reputation and be a distraction
to management.
Risks
Related to our Common Stock and this Offering
Our stock
price is likely to be volatile, and the market price of our
common stock may drop.
The market price of our common stock could be subject to
significant fluctuations. Market prices for securities of early
stage companies have historically been particularly volatile. As
a result of this volatility, you may not be able to sell your
common stock at or above the price you paid for the stock. Some
of the factors that may cause the market price of our common
stock to fluctuate include:
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timing of market acceptance of our products;
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timing of achieving profitability and positive cash flow from
operations;
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changes in estimates of our financial results or recommendations
by securities analysts or the failure to meet or exceed
securities analysts expectations;
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actual or anticipated variations in our quarterly operating
results;
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reports by officials or health or medical authorities, the
general media or the FDA regarding the potential benefits of the
System One or of similar dialysis products distributed by other
companies or of daily or home dialysis;
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announcements by the FDA of non-clearance or non-approval of our
products, or delays in the FDA or other foreign regulatory
agency review process;
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product recalls;
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regulatory developments in the United States and foreign
countries;
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changes in third-party healthcare reimbursements, particularly a
decline in the level of Medicare reimbursement for dialysis
treatments;
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litigation involving our company or our general industry or both;
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announcements of technical innovations or new products by us or
our competitors;
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developments or disputes concerning our patents or other
proprietary rights;
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our ability to manufacture and supply our products to commercial
standards;
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significant acquisitions, strategic partnerships, joint ventures
or capital commitments by us or our competitors;
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departures of key personnel; and
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investors general perception of our company, our products,
the economy and general market conditions.
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The stock markets in general have experienced substantial
volatility that has often been unrelated to the operating
performance of individual companies. These broad market
fluctuations may adversely affect the trading price of our
common stock.
In the past, following periods of volatility in the market price
of a companys securities, stockholders have often
instituted class action securities litigation against those
companies. Such litigation, if instituted, could result in
substantial costs and diversion of management attention and
resources, which could significantly harm our profitability and
reputation.
Anti-takeover
provisions in our restated certificate of incorporation and
amended and restated bylaws and under Delaware law could make an
acquisition of us more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.
Provisions in our restated certificate of incorporation and our
amended and restated bylaws may delay or prevent an acquisition
of us. In addition, these provisions may frustrate or prevent
attempts by our stockholders to replace or remove members of our
board of directors. Because our board of directors is
responsible for appointing the members of our management team,
these provisions could in turn affect any attempt by our
stockholders to replace current members of our management team.
These provisions include:
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a prohibition on actions by our stockholders by written consent;
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the ability of our board of directors to issue preferred stock
without stockholder approval, which could be used to institute a
poison pill that would work to dilute the stock
ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board
of directors;
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advance notice requirements for nominations of directors or
stockholder proposals; and
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the requirement that board vacancies be filled by a majority of
our directors then in office.
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In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination
is approved in a prescribed manner. These provisions would apply
even if the offer may be considered beneficial by some
stockholders.
If there
are substantial sales of our common stock in the market by our
existing stockholders, our stock price could decline.
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly. We have
21,184,287 shares of common stock outstanding as of
March 31, 2006. Shares held by our affiliates may only be
sold in compliance with the volume limitations of Rule 144.
These volume limitations restrict the number of shares that may
be sold by an affiliate in any three-month period to the greater
of 1% of the number of shares then outstanding, which
approximates 211,843 shares, or the average weekly trading
volume of our common stock during the four calendar weeks
preceding the filing of a notice on Form 144 with respect
to the sale. In connection with this offering, officers,
directors and stockholders holding an aggregate of approximately
14,800,000 shares of our common stock and rights to acquire an
additional 1,900,000 shares have agreed, with exceptions, not to
sell or transfer any common stock until 90 days after the
date of this prospectus. Upon expiration or termination of these
lock-up
agreements, all of these shares of common stock will be freely
tradeable, subject in some cases to the volume limitations and
other applicable conditions of Rule 144.
Subject to certain conditions, holders of an aggregate of
approximately 13,432,652 shares of common stock have rights
with respect to the registration of these shares of common stock
with the Securities and Exchange Commission, or SEC. If we
register their shares of common stock following the expiration
of the
lock-up
agreements, they can sell those shares in the public market.
21
As of March 31, 2006, 3,429,527 shares of common stock
are authorized for issuance under our stock incentive plan,
employee stock purchase plan and outstanding stock options. As
of March 31, 2006, 2,723,005 shares were subject to
outstanding options, of which 1,797,193 were exercisable and
which can be freely sold in the public market upon issuance,
subject to the
lock-up
agreements referred to above and the restrictions imposed on our
affiliates under Rule 144.
Our costs
have increased significantly as a result of operating as a
public company, and our management is required to devote
substantial time to comply with public company
regulations.
As a public company, we incur significant legal, accounting and
other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, as well as new rules subsequently implemented by the SEC
and the Nasdaq National Market, have imposed various new
requirements on public companies, including changes in corporate
governance practices. Our management and other personnel now
need to devote a substantial amount of time to these new
requirements. Moreover, these rules and regulations increase our
legal and financial compliance costs and make some activities
more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal controls for
financial reporting and disclosure controls and procedures. In
particular, commencing in fiscal 2006, we must perform system
and process evaluation and testing of our internal controls over
financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness
of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our compliance
with Section 404 will require that we incur substantial
accounting expense and expend significant management efforts. If
we are not able to comply with the requirements of
Section 404 in a timely manner, or if we or our independent
registered public accounting firm identify deficiencies in our
internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline
and we could be subject to sanctions or investigations by the
Nasdaq National Market, SEC or other regulatory authorities.
We do not
anticipate paying cash dividends, and accordingly stockholders
must rely on stock appreciation for any return on their
investment in us.
We anticipate that we will retain our earnings for future growth
and therefore do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our
common stock will provide a return to investors. Investors
seeking cash dividends should not invest in our common stock.
Management
will have broad discretion in the use of the net proceeds from
this offering and may not use them effectively or in a manner
that differs from the uses described in the
prospectus.
Although we intend to use the net proceeds of this offering to,
among other things, finance working capital needs, including
investment in System One field equipment and in sales and
marketing programs, expand our manufacturing capabilities and
fund continuing operations, we cannot specify with certainty the
particular uses of the net proceeds that we will receive from
this offering. We will have broad discretion in the application
of the net proceeds, including for any of the purposes described
in the Use of Proceeds section of this prospectus.
However, our plans may change and we could use the net proceeds
in ways with which stockholders do not agree, or for corporate
purposes that may not result in a significant or any return on
your investment. Pending their use, we may invest the net
proceeds from this offering in a manner that does not produce
income or that loses value.
If you
purchase our common stock in this offering, you will experience
immediate and substantial dilution in the book value of your
shares.
The offering price is substantially higher than the net tangible
book value per share of our common stock. Investors purchasing
common stock in this offering will pay a price per share that
substantially exceeds the book value of our tangible assets
after subtracting our liabilities. As a result, investors
purchasing common stock in this offering will incur immediate
dilution of $6.65 per share, assuming an offering price of
$10.94 per share, based on the last reported sale price of
our common stock on the Nasdaq National Market on May 25,
22
2006. Further, investors purchasing common stock in this
offering will contribute approximately 27.8% of the total amount
invested by stockholders since our inception, but will own only
approximately 20.6% of the shares of common stock outstanding.
This dilution is due to our existing investors having purchased
shares prior to this offering for substantially less than the
price offered to the public in this offering, as well as the
exercise of stock options granted to our employees with exercise
prices lower than the price offered to the public in this
offering. As of March 31, 2006, options to purchase
2,723,005 shares of common stock at a weighted-average
exercise price of $6.46 per share were outstanding, and
warrants to purchase and common stock totaling
169,736 shares with a weighted-average exercise price of
$7.67, were outstanding. The exercise of any of these options or
warrants would result in additional dilution. As a result of
this dilution, investors purchasing stock in this offering may
receive significantly less than the purchase price paid in this
offering in the event of liquidation.
Our
executive officers, directors and current and principal
stockholders own a large percentage of our voting common stock
and could limit new stockholders influence on corporate
decisions or could delay or prevent a change in corporate
control.
After this offering, our directors, executive officers and
current holders of more than 5% of our outstanding common stock,
together with their affiliates and related persons, will
beneficially own, in the aggregate, approximately 48.0% of our
outstanding common stock, or 46.6% if the underwriters exercise
their overallotment option in full. As a result, these
stockholders, if acting together, will have the ability to
determine the outcome of all matters submitted to our
stockholders for approval, including the election and removal of
directors and any merger, consolidation or sale of all or
substantially all of our assets and other extraordinary
transactions. The interests of this group of stockholders may
not always coincide with our corporate interests or the
interests of other stockholders, and they may act in a manner
with which you may not agree or that may not be in the best
interests of other stockholders. This concentration of ownership
may have the effect of:
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delaying, deferring or preventing a change in control of our
company;
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entrenching our management and/or board;
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impeding a merger, consolidation, takeover or other business
combination involving our company; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
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23
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenues, projected costs, prospects and plans
and objectives of management are forward-looking statements. The
words anticipates, believes,
estimates, expects, intends,
may, plans, projects,
will, would and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
We have based these forward-looking statements on our current
expectations and projections about future events. Although we
believe that the expectations underlying any of our
forward-looking statements are reasonable, these expectations
may prove to be incorrect and all of these statements are
subject to risks and uncertainties. Should one or more of these
risks and uncertainties materialize, or should underlying
assumptions, projections or expectations prove incorrect, actual
results, performance or financial condition may vary materially
and adversely from those anticipated, estimated or expected. We
have identified below some important factors that could cause
our forward-looking statements to differ materially from actual
results, performance or financial conditions:
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failure of the home hemodialysis market to expand or expand at
the rate we expect;
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our inability to grow our customer base and increase the
adoption rate of home hemodialysis;
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our inability to adequately grow our operations and attain
sufficient operating scale;
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our inability to obtain adequate profit margins;
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changes in Medicare dialysis reimbursement policies, the
composite rate or the reimbursement policies or rates of other
governmental or private payors;
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regulatory action by the FDA and changes in, or our failure to
comply with, government regulations;
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our inability to achieve product development milestones or the
introduction of technical innovations or new products by our
competitors;
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our inability to effectively protect our intellectual property
and not infringe on the intellectual property of others;
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our inability to raise sufficient capital when necessary;
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loss of any significant suppliers, especially sole-source
suppliers;
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loss of key personnel;
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liability resulting from litigation; and
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other factors discussed elsewhere in this prospectus.
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We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking
statements. We have included important factors in the cautionary
statements included in this prospectus, particularly in the
section entitled Risk Factors that we believe could
cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking
statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or
investments we may make. We do not assume any obligation to
update any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required
by law.
24
USE OF
PROCEEDS
We estimate that net proceeds to us from this offering of
approximately $55.9 million, assuming an offering price of
$10.94 per share, based on the last reported sale price of
our common stock on the Nasdaq National Market on May 15,
2006, and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by us. If the
underwriters overallotment option is exercised in full, we
estimate that net proceeds to us of approximately
$64.4 million. We will not receive any of the proceeds from
the sale of shares by the selling stockholders.
We currently estimate that of the net proceeds of this offering
we will spend:
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approximately $30.0 million to fund continuing operations,
including the expansion of sales and marketing programs and the
hiring of additional personnel; and
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approximately $20.0 million to finance working capital
needs, including investment in System One field equipment.
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We intend to use any remaining proceeds for general corporate
purposes.
This expected use of the net proceeds that we receive in this
offering represents our current intentions based upon our
present plans and business condition. The amounts and timing of
our actual expenditures will depend upon numerous factors,
including the success of our ongoing commercial efforts.
Pending the application of the net proceeds of the offering to
us as described above, we intend to invest the net proceeds of
this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND
POLICY
We have never declared or paid any dividends on our common
stock. We currently intend to retain any future earnings to
finance our research and development efforts, the development of
our proprietary technologies and the expansion of our business
and do not intend to declare or pay cash dividends on our
capital stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our
board of directors and will depend upon a number of factors,
including our results of operations, financial condition, future
prospects, contractual restrictions, restrictions imposed by
applicable law and other factors our board of directors deems
relevant.
PRICE
RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market
under the symbol NXTM since October 27, 2005.
Prior to that date, there was no public market for our common
stock. The following table sets forth, for the periods
indicated, the intra-day high and low sale prices of our common
stock, as reported by the Nasdaq National Market.
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High
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Low
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2005
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Fourth quarter (from
October 27, 2005 through December 31, 2005)
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$
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14.80
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$
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9.00
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2006
|
|
|
|
|
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First quarter
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$
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15.17
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$
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11.50
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Second quarter (through
May 25, 2006)
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$
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13.33
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$
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10.01
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On May 25, 2006, the last reported sale price of our common
stock on the Nasdaq National Market was $10.94. As of
May 25, 2006, there were 21,316,131 shares of our
common stock outstanding held by 120 holders of record.
25
CAPITALIZATION
The following table sets forth our unaudited capitalization as
of March 31, 2006:
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on an actual basis; and
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on an as adjusted basis to give effect to the sale by us of
5,500,000 shares of common stock in this offering assuming
an offering price of $10.94 per share, based on the last
reported sale price of our common stock on the Nasdaq National
Market on May 25, 2006, after deducting the estimated
underwriting discounts and commissions and offering expenses
payable by us.
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You should read this information together with our consolidated
financial statements and the related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus.
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March 31, 2006
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Actual
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As Adjusted
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|
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(Unaudited)
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Current portion of long-term debt
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$
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1,542,600
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$
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1,542,600
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Long-term debt, less current
portion
|
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1,236,342
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|
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1,236,342
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Stockholders equity:
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Undesignated preferred stock,
$0.001 par
value authorized 5,000,000 shares;
no shares issued and outstanding, actual and as adjusted
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Common stock, $0.001 par
value authorized 100,000,000 shares;
issued and outstanding 21,184,287 shares
actual; 26,684,287 shares as adjusted
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21,184
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26,684
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Additional paid-in capital
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151,914,501
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|
207,798,146
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Accumulated deficit
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(93,265,639
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)
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(93,265,639
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)
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Accumulated other comprehensive
loss
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(25,537
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)
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|
(25,537
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)
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|
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|
|
|
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Total stockholders equity
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|
58,644,509
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|
|
|
114,533,654
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Total capitalization
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$
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61,423,451
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$
|
117,312,596
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26
DILUTION
If you invest in our common stock, your interest will be
immediately diluted to the extent of the difference between the
assumed public offering price per share of our common stock and
the as adjusted net tangible book value per share of our common
stock after this offering. The net tangible book value of our
common stock as of March 31, 2006 was $58.6 million,
or $2.77 per share of common stock outstanding. Net
tangible book value per share represents the amount of
stockholders equity divided by 21,184,287 shares of
common stock outstanding at that date. Dilution per share to new
investors represents the difference between the amount per share
paid by purchasers of common stock in this offering and the as
adjusted net tangible book value per share of common stock
immediately after completion of this offering.
After giving effect to the receipt of net proceeds of
$55.9 million from the sale of the 5,500,000 shares of
common stock in this offering assuming a public offering price
of $10.94 per share, based on the last reported sale price
of our common stock on the Nasdaq National Market on
May 25, 2006, less estimated underwriting discounts and
commissions and offering expenses payable by us, our as adjusted
net tangible book value as of March 31, 2006 would have
been $114.5 million, or approximately $4.29 per share.
This represents an immediate increase in net tangible book value
of $1.52 per share to existing stockholders and an
immediate dilution in net tangible book value of $6.65 per
share to purchasers of common stock in this offering, as
illustrated in the following table:
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Assumed offering price per share
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$
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10.94
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Net tangible book value per share
as of March 31, 2006
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2.77
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Increase in net tangible book
value per share attributable to this offering
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1.52
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As adjusted net tangible book
value per share at March 31, 2006 after giving effect to
this offering
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4.29
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Dilution per share to new investors
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$
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6.65
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Assuming the exercise in full of the underwriters
overallotment option, our as adjusted net tangible book value at
March 31, 2006 would have been approximately $4.47 per
share, representing an immediate increase in the as adjusted net
tangible book value of $1.70 per share to our existing
stockholders and an immediate dilution in net tangible book
value of $6.47 per share to new investors.
The foregoing tables and calculations are based on shares of our
common stock outstanding as of March 31, 2006 and exclude:
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2,723,005 shares of common stock issuable upon exercise of
outstanding stock options at March 31, 2006 with a
weighted-average exercise price of $6.46 per share;
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169,736 shares of common stock issuable upon exercise of
outstanding warrants at a weighted-average exercise price of
$7.67 per share; and
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|
706,522 shares reserved as of March 31, 2006 for
future stock option grants and purchases under our equity
compensation plans. See Management Equity
Benefit Plans.
|
To the extent that outstanding warrants and options are
exercised in the future, there will be further dilution to new
investors. To the extent all of such outstanding options and
warrants had been exercised as of March 31, 2006, net
tangible book value per share after this offering would have
been $4.51 and total dilution per share to new investors would
have been $6.43.
27
SELECTED
CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data
for the periods presented. You should read the following
financial information together with the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the notes to those consolidated
financial statements appearing elsewhere in this prospectus. The
selected consolidated statements of operations data for the
fiscal years ended December 31, 2003, 2004 and 2005, and
the selected consolidated balance sheet data as of
December 31, 2004 and 2005 are derived from the
consolidated financial statements, which are included elsewhere
in this prospectus, and have been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
indicated in their report. The selected consolidated statements
of operations data for the years ended December 31, 2001
and 2002, and the consolidated balance sheet data at
December 31, 2001, 2002 and 2003 are derived from our
audited consolidated financial statements not included in this
prospectus. The selected consolidated financial data as of
March 31, 2006 and for the periods ended March 31,
2005 and March 31, 2006, are derived from our unaudited
consolidated financial statements. The unaudited consolidated
financial statements have been prepared on the same basis as our
audited financial statements (except with respect to the
adoption of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, effective
January 1, 2006) and include, in the opinion of management,
all adjustments, consisting of only normal recurring
adjustments, that management considers necessary for the fair
presentation of the financial information set forth in those
statements. Reclassifications have been made to our results from
prior years to conform to our current presentation. Historical
results are not necessarily indicative of the results to be
expected in future periods.
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|
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|
|
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Years Ended December
31,
|
|
|
March 31,
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|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(Unaudited)
|
|
|
|
(In thousands, except for share
and per share amounts)
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|
|
|
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Consolidated Statements of
Operations Data:
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|
|
|
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|
|
|
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|
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|
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|
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|
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Revenues
|
|
$
|
|
|
|
$
|
30
|
|
|
$
|
286
|
|
|
$
|
1,885
|
|
|
$
|
5,994
|
|
|
$
|
1,034
|
|
|
$
|
3,401
|
|
Cost of revenues
|
|
|
|
|
|
|
404
|
|
|
|
940
|
|
|
|
3,439
|
|
|
|
9,585
|
|
|
|
1,782
|
|
|
|
4,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
|
|
|
|
(374
|
)
|
|
|
(654
|
)
|
|
|
(1,554
|
)
|
|
|
(3,591
|
)
|
|
|
(748
|
)
|
|
|
(1,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,669
|
|
|
|
5,913
|
|
|
|
4,526
|
|
|
|
5,970
|
|
|
|
6,305
|
|
|
|
1,432
|
|
|
|
1,779
|
|
Selling and marketing
|
|
|
1,908
|
|
|
|
2,286
|
|
|
|
2,181
|
|
|
|
3,334
|
|
|
|
7,550
|
|
|
|
1,321
|
|
|
|
3,193
|
|
Distribution
|
|
|
|
|
|
|
6
|
|
|
|
33
|
|
|
|
495
|
|
|
|
2,059
|
|
|
|
309
|
|
|
|
1,289
|
|
General and administrative
|
|
|
2,219
|
|
|
|
2,554
|
|
|
|
2,868
|
|
|
|
3,604
|
|
|
|
4,855
|
|
|
|
1,025
|
|
|
|
1,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,796
|
|
|
|
10,759
|
|
|
|
9,608
|
|
|
|
13,403
|
|
|
|
20,769
|
|
|
|
4,087
|
|
|
|
8,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,796
|
)
|
|
|
(11,133
|
)
|
|
|
(10,262
|
)
|
|
|
(14,957
|
)
|
|
|
(24,360
|
)
|
|
|
(4,835
|
)
|
|
|
(9,693
|
)
|
Interest income (expense), net
|
|
|
(447
|
)
|
|
|
153
|
|
|
|
54
|
|
|
|
115
|
|
|
|
(120
|
)
|
|
|
(74
|
)
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,243
|
)
|
|
$
|
(10,980
|
)
|
|
$
|
(10,208
|
)
|
|
$
|
(14,842
|
)
|
|
$
|
(24,480
|
)
|
|
$
|
(4,909
|
)
|
|
$
|
(9,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share basic and diluted
|
|
$
|
(5.63
|
)
|
|
$
|
(4.66
|
)
|
|
$
|
(4.10
|
)
|
|
$
|
(5.81
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding basic and diluted
|
|
|
2,176,356
|
|
|
|
2,355,527
|
|
|
|
2,489,688
|
|
|
|
2,555,605
|
|
|
|
5,680,566
|
|
|
|
2,566,399
|
|
|
|
21,182,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
March 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term
investments and marketable securities
|
|
$
|
17,640
|
|
|
$
|
4,028
|
|
|
$
|
8,881
|
|
|
$
|
18,134
|
|
|
$
|
61,223
|
|
|
$
|
49,728
|
|
Working capital
|
|
|
16,329
|
|
|
|
5,235
|
|
|
|
11,115
|
|
|
|
19,205
|
|
|
|
62,100
|
|
|
|
50,059
|
|
Total assets
|
|
|
19,306
|
|
|
|
7,983
|
|
|
|
13,613
|
|
|
|
25,455
|
|
|
|
76,431
|
|
|
|
70,463
|
|
Long-term liabilities
|
|
|
282
|
|
|
|
146
|
|
|
|
30
|
|
|
|
3,006
|
|
|
|
2,106
|
|
|
|
1,690
|
|
Redeemable convertible preferred
stock
|
|
|
40,006
|
|
|
|
40,006
|
|
|
|
55,946
|
|
|
|
75,946
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(23,388
|
)
|
|
|
(34,368
|
)
|
|
|
(44,623
|
)
|
|
|
(59,496
|
)
|
|
|
(84,011
|
)
|
|
|
(93,266
|
)
|
Total stockholders equity
(deficit)
|
|
|
(22,427
|
)
|
|
|
(33,271
|
)
|
|
|
(43,478
|
)
|
|
|
(57,400
|
)
|
|
|
67,354
|
|
|
|
58,645
|
|
29
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
financial condition and results of operations together with our
consolidated financial statements and related notes appearing
elsewhere in this prospectus. Some of the information contained
in this discussion and analysis or set forth elsewhere in this
prospectus, including information with respect to our plans and
strategy for our business and related financing, includes
forward-looking statements that involve risks and uncertainties.
You should review the Risk Factors section of this
prospectus for a discussion of important factors that could
cause actual results to differ materially from the results
described in or implied by the forward-looking statements
contained in the following discussion and analysis.
Overview
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of ESRD, acute
kidney failure and fluid overload. Our primary product, the
NxStage System One, is a small, portable,
easy-to-use
hemodialysis system designed to provide physicians and patients
improved flexibility in how hemodialysis therapy is prescribed
and delivered. We believe the largest market opportunity for our
product is the home hemodialysis market for the treatment of
ESRD.
From our inception in 1998 until 2002 our operations consisted
primarily of
start-up
activities, including designing and developing the System One,
recruiting personnel and raising capital. Historically, research
and development costs have been our single largest operating
expense. However, with the launch of the System One in the home
chronic care market, selling and marketing costs became our
largest operating expense in 2005 and this trend continued
during the three months ended March 31, 2006 as we expanded
our United States sales force to penetrate our markets and grow
revenues.
Our overall strategy since inception has been to (a) design
and develop new products for the treatment of kidney failure,
(b) establish that the products are safe, effective and
cleared for use in the United States, (c) further enhance
the product design through field experience from a limited
number of customers, (d) establish reliable manufacturing
and sources of supply, (e) execute a market launch in both
the chronic and critical care markets and establish the System
One as a preferred system for the treatment of kidney failure,
(f) obtain the capital necessary to finance our working
capital needs and build our business and (g) achieve
profitability. The evolution of NxStage, and the allocation of
our resources since we were founded, reflects this plan. We
believe we have largely completed steps (a) through (d),
and we plan to continue to pursue the other strategic objectives
described above.
We sell our products in two markets: the chronic care market and
the critical care market. We define the chronic care market as
the market devoted to the treatment of patients with ESRD and
the critical care market as the market devoted to the treatment
of hospital-based patients with acute kidney failure or fluid
overload. We offer a different configuration of the System One
for each market. The FDA has cleared both configurations for
hemodialysis, hemofiltration and ultrafiltration. Our products
may be used by our customers to treat patients suffering from
either condition, although the site of care, the method of
delivering care and the duration of care are sufficiently
different that we have separate sales and marketing efforts
dedicated to each market.
We received clearance from the FDA in July 2003 to market the
System One for treatment of renal failure and fluid overload
using hemodialysis as well as hemofiltration and
ultrafiltration. In the first quarter of 2003, we initiated
sales of the System One in the critical care market to hospitals
and medical centers in the United States. In late 2003, we
initiated sales of the System One in the chronic care market and
commenced full commercial introduction in the chronic care
market in September 2004 in the United States. At the time of
these early marketing efforts, our System One was cleared by the
FDA under a general indication statement, allowing physicians to
prescribe the System One for hemofiltration, hemodialysis and/or
ultrafiltration at the location, time and frequency they
considered in the best interests of their patients. Our
indication did not include a specific home clearance, and we
were not able to promote the System One for home use at that
time. In order to be able to specifically promote the System One
for home use, the FDA required that we
30
conduct a clinical study, referred to as an investigational
device exemption study, or IDE, comparing center-based and
home-based therapy with the System One. After submitting the
results of that study to the FDA, together with an application
for a specific home indication for the System One, the FDA
cleared our System One in June 2005 for hemodialysis in the home.
During the three months ended March 31, 2006, we received
clearance from the FDA to market our PureFlow SL module as an
alternative to the bagged fluid currently used with our System
One. This accessory to the System One prepares high purity
dialysate, which meets and exceeds dialysis industry standards
for purity, from ordinary tap water in the dialysis
patients home. This product is designed to help patients
with ESRD more conveniently and effectively manage their home
hemodialysis therapy by eliminating the need to store and hang
bagged fluids. Instead, our PureFlow SL module automatically
produces a batch of dialysate fluid ready for use with the
System One. We expect to commercially launch this product
beginning in July 2006. We expect that our chronic care home
patients will predominantly use our PureFlow SL module at home
and will use bagged fluid for travel and outside of the home.
Bagged fluids will continue to be used in the critical care
market.
Medicare provides comprehensive and well-established
reimbursement in the United States for ESRD. Reimbursement
claims for the System One therapy are typically submitted by the
dialysis clinic or hospital to Medicare and other third-party
payors using established billing codes for dialysis treatment
or, in the critical care setting, based on the patients
primary diagnosis. Expanding Medicare reimbursement over time to
cover more frequent therapy may be critical to our market
penetration and revenue growth in the future.
Our System One is produced through internal and outsourced
manufacturing. We purchase many of the components and
subassemblies included in the System One, as well as the
disposable cartridges used in the System One, from third-party
manufacturers, some of which are single source suppliers. In
addition to outsourcing with third-party manufacturers, we
assemble, package and label disposable cartridges in our leased
facility in Lawrence, Massachusetts. NxStage GmbH & Co.
KG, our wholly-owned German subsidiary, is the sole manufacturer
of the dialyzing filter that is a component of the disposable
cartridge used in the System One.
We market the System One through a direct sales force in the
United States primarily to dialysis clinics and hospitals and we
expect revenues to continue to increase in the near future. Our
revenues were $3.4 million for the three months ended
March 31, 2006, a 229% increase from revenues of
$1.0 million in the three months ended March 31, 2005.
We have increased the number of sales representatives in our
combined sales force from 10 at March 31, 2005 to 20 at
December 31, 2005, and to 25 at March 31, 2006. We
expect to add additional sales and marketing personnel as needed
for the remainder of 2006. As of March 31, 2006,
459 ESRD patients were using the System One at 97 dialysis
clinics, compared to 82 ESRD patients at 19 dialysis
clinics as of March 31, 2005, and compared to 292 ESRD
patients at 70 dialysis clinics as of December 31,
2005. In addition, as of March 31, 2006, 54 hospitals
were using the System One for critical care therapy, compared to
25 and 50 hospitals as of March 31, 2005 and
December 31, 2005, respectively.
The following table sets forth the amount and percentage of
revenues derived from each market for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2003
|
|
|
|
|
|
2004
|
|
|
|
|
|
2005
|
|
|
|
|
|
2005
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Critical care
|
|
$
|
268,576
|
|
|
|
93.9
|
%
|
|
$
|
1,332,053
|
|
|
|
70.7
|
%
|
|
$
|
2,829,960
|
|
|
|
47.2
|
%
|
|
$
|
661,769
|
|
|
|
64.0
|
%
|
|
$
|
1,583,597
|
|
|
|
46.6
|
%
|
Chronic care
|
|
|
17,378
|
|
|
|
6.1
|
%
|
|
|
552,516
|
|
|
|
29.3
|
%
|
|
|
3,163,779
|
|
|
|
52.8
|
%
|
|
|
372,023
|
|
|
|
36.0
|
%
|
|
|
1,817,125
|
|
|
|
53.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
285,954
|
|
|
|
100
|
%
|
|
$
|
1,884,569
|
|
|
|
100
|
%
|
|
$
|
5,993,739
|
|
|
|
100
|
%
|
|
$
|
1,033,792
|
|
|
|
100
|
%
|
|
$
|
3,400,722
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not been profitable since inception, and we expect to
incur net losses for the foreseeable future as we expand our
sales efforts and grow our operations. Our accumulated deficit
at March 31, 2006 was $(93.3) million. Our goal is to
increase our sales volume and revenues to gain scale of
operation and to drive
31
product cost reductions, which we believe, when combined with
other design improvements, will allow us to reach profitability.
We expect our revenues in the chronic care market to increase
faster than those in the critical care market and believe they
will continue to represent the majority of our revenues.
Statement
of Operations Components
Revenues
Our products consist of the NxStage System One cycler, an
electromechanical device used to circulate the patients
blood during therapy; a single-use, disposable cartridge, which
contains a preattached dialyzer, and dialysate fluid used in our
therapy, sold either in premixed bags or prepared with our
PureFlow SL module. We distribute our products in two markets:
the chronic care market and the critical care market. We define
the chronic care market as the market devoted to the treatment
of ESRD patients in the home and the critical care market as the
market devoted to the treatment of hospital-based patients with
acute kidney failure or fluid overload. We offer a different
configuration of the System One for each market. The FDA has
cleared both configurations for hemodialysis, hemofiltration and
ultrafiltration. Our products may be used by our customers to
treat patients suffering from either condition, although the
site of care, the method of delivering care and the duration of
care are sufficiently different that we have separate marketing
and sales efforts dedicated to each market.
We derive our revenues from the sale and rental of equipment and
the sale of the related disposable cartridges and treatment
fluids. In the critical care market, we generally sell the
System One and disposables to hospital customers. In the chronic
care market, customers generally rent the machine and then
purchase the related disposable cartridges and treatment fluids
based on a specific patient prescription. We generally recognize
revenues when a product has been delivered to our customer, or,
in the chronic care market, on a monthly basis in accordance
with a contract under which we supply the use of a cycler and
the amount of disposables needed to perform a set number of
dialysis therapy sessions during a month.
Our contracts with dialysis centers for ESRD patients include
terms providing for the sale of disposable products to
accommodate up to 26 treatments a month per patient and the
monthly rental of a System One cycler with our PureFlow SL
module. These contracts typically have a term of one year and
are cancelable at any time by the dialysis clinic with
30 days notice. Under the contract, if home
hemodialysis is prescribed, supplies are shipped directly to
patient homes and paid for by the treating dialysis clinic. We
also include vacation delivery terms, providing for the free
shipment of products to a designated vacation destination. We
derive an insignificant amount of revenues from the sale of
ancillary products, such as extra lengths of tubing. We do not
currently derive any revenues from service contracts. Over time,
as more chronic patients are treated with the System One and
more systems are placed in patient homes under monthly
agreements that provide for the rental of the machine and the
purchase of the related disposable cartridges and treatment
fluids, we expect that a recurring revenue stream will become a
meaningful component of our revenues.
Cost
of Revenues
Cost of revenues consists primarily of direct product costs,
including material and labor required to manufacture our
products, depreciation and maintenance of System One cyclers
that we rent to customers, production overhead and the cost of
purchasing system components from vendors which we then resell
to our customers. It also includes the cost of inspecting,
servicing and repairing equipment prior to sale or during the
warranty period and stock-based compensation. The cost of our
products depends on several factors, including the efficiency of
our manufacturing operations, the cost at which we can obtain
products from third party suppliers and the design of the
products.
We are currently operating at negative gross profit as we are
building a base of recurring revenues. We expect the cost of
revenues as a percentage of revenues to decline over time for
two general reasons. First, we anticipate that increased sales
volume will lead to better purchasing terms, prices and
efficiencies in indirect manufacturing overhead costs. For
example, during the three months ended March 31, 2006, we
have transitioned our purchases of dialysate to a new lower cost
vendor. Second, we have plans to introduce several
32
process and product design changes that have inherently lower
cost than our current products. In addition, we plan to
commercially launch the PureFlow SL module beginning in July
2006, which we believe will reduce our cost of revenues and
distribution costs by reducing the volume of dialysate fluid
that we currently manufacture and ship to customers. We expect
that, over time, unit cost of revenues will become less than
unit revenues as we expand the scale of our operations.
Operating
Expenses
Research and Development. Research and
development expenses consist primarily of salary, benefits and
stock-based compensation for research and development personnel,
supplies, materials and expenses associated with product design
and development, clinical studies, regulatory submissions,
reporting and compliance and expenses incurred for outside
consultants or firms who furnish services related to these
activities. We expect research and development expenses will
continue to increase in the foreseeable future as we seek to
further enhance our System One and related products, but not as
rapidly as other expense categories as we have substantially
completed basic development of the System One.
Selling and Marketing. Selling and marketing
expenses consist primarily of salary, benefits and stock-based
compensation for sales and marketing personnel, travel,
promotional and marketing materials and other expenses
associated with providing clinical training to our customers.
Included in selling and marketing are the costs of clinical
educators, usually nurses, we employ to teach our customers
about our products and prepare our customers to instruct their
patients in the operation of the System One. We anticipate that
selling and marketing expenses will continue to increase as we
broaden our marketing initiatives in the chronic care market to
increase public awareness of the System One and as we add
additional sales and marketing personnel.
Distribution. Distribution expenses include
salary, benefits and stock-based compensation for distribution
personnel and the cost of delivering our products to our
customers, or our customers patients, depending on the
market and the specific agreement with our customers. We use
common carriers and freight companies to deliver our products
and we do not operate our own delivery service. Also included in
this category are the expenses of shipping products from
customers back to our service center for repair if the product
is under warranty, and the related expense of shipping a
replacement product back to our customers. We expect that
distribution expenses will increase at a lower rate than
revenues, due to expected efficiencies gained from increased
business volume and the expected launch of our Pure Flow SL
module.
General and Administrative. General and
administrative expenses consist primarily of salary and benefits
and stock-based compensation for our executive management,
legal, and finance and accounting staff, fees of outside legal
counsel, fees for our annual audit and tax services, and general
expenses to operate the business, including insurance and other
corporate-related expenses. Rent and utilities are initially
included in general and administrative expense and, within the
same operating period are allocated to operating expenses based
on personnel and square footage usage. We expect that general
and administrative expenses will increase in the near term as we
add support structure for our growing business.
33
Results
of Operations
The following table presents, for the periods indicated,
information expressed as a percentage of revenues. This
information has been derived from our consolidated statements of
operations included elsewhere in this prospectus. You should not
draw any conclusions about our future results from the results
of operations for any period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
329
|
|
|
|
183
|
|
|
|
160
|
|
|
|
172
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(229
|
)
|
|
|
(83
|
)
|
|
|
(60
|
)
|
|
|
(72
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,583
|
|
|
|
317
|
|
|
|
105
|
|
|
|
139
|
|
|
|
52
|
|
Selling and marketing
|
|
|
763
|
|
|
|
177
|
|
|
|
126
|
|
|
|
128
|
|
|
|
94
|
|
Distribution
|
|
|
11
|
|
|
|
26
|
|
|
|
34
|
|
|
|
30
|
|
|
|
38
|
|
General and administrative
|
|
|
1,003
|
|
|
|
191
|
|
|
|
81
|
|
|
|
99
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,360
|
|
|
|
711
|
|
|
|
346
|
|
|
|
396
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,589
|
)
|
|
|
(794
|
)
|
|
|
(406
|
)
|
|
|
(468
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
51
|
|
|
|
7
|
|
|
|
11
|
|
|
|
7
|
|
|
|
18
|
|
Interest expense
|
|
|
(32
|
)
|
|
|
(1
|
)
|
|
|
(13
|
)
|
|
|
(14
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,570
|
)%
|
|
|
(788
|
)%
|
|
|
(408
|
)%
|
|
|
(475
|
)%
|
|
|
(272
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Three Months Ended March 31, 2005 to Three Months Ended
March 31, 2006
Revenues
Our revenues for the three month periods ended March 31,
2005 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
Revenues
|
|
$
|
1,034
|
|
|
$
|
3,401
|
|
|
$
|
2,367
|
|
|
229%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to increased sales and
rentals of the System One in both the critical care and chronic
care markets, primarily as a result of increased sales and
marketing efforts as we continue our commercial launch of the
System One. Revenues in the chronic market increased to
$1.8 million in the three months ended March 31, 2006
compared to $0.4 million in the three months ended
March 31, 2005, an increase of 388%, while revenues in the
critical care market increased 139% to $1.6 million in the
three months ended March 31, 2006, compared to
$0.7 million in the three months ended March 31, 2005.
34
Cost of
Revenues and Gross Profit (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
Cost of revenues
|
|
$
|
1,782
|
|
|
$
|
4,858
|
|
|
$
|
3,076
|
|
|
173%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
$
|
(748
|
)
|
|
$
|
(1,457
|
)
|
|
$
|
709
|
|
|
95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
(72.4
|
)%
|
|
|
(42.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in absolute cost of revenues was attributable to
our increased revenues. We added 167 net patients during the
three months ended March 31, 2006 and 37 during the three
months ended March 31, 2005, which resulted in a
$2.2 million increase in cost of revenues. A 63% larger
employee base resulted in additional salaries, health benefits
and payroll taxes of $0.3 million during the three months
ended March 31, 2006 compared to the same period in 2005.
In addition, inbound freight costs to support our higher
production volume increased $0.2 million during the first
quarter of 2006 compared to the same period in 2005. We are
currently operating at negative gross profit as we are building
a base of recurring revenues. We expect the cost of revenues as
a percentage of revenues to decline over time as increased sales
volume should lead to better purchasing terms and prices, and
efficiencies in indirect manufacturing overhead costs. We expect
that over time unit cost of revenues will become less than unit
revenues as we build the scale of our operations.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
Research and development
|
|
$
|
1,432
|
|
|
$
|
1,779
|
|
|
$
|
347
|
|
|
24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a
percentage of revenues
|
|
|
139
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was
attributable to increased salary, benefits and payroll taxes of
$166,000 as a result of increased headcount, approximately
$28,000 of stock-based compensation (no comparable charge in
2005) and $190,000 of development costs associated with our
PureFlow SL module. We expect research and development expenses
will continue to increase in the foreseeable future as we seek
to further enhance our System One and related products, but not
as rapidly as other expense categories as we have substantially
completed basic development of the System One. We expect
research and development expenses to continue to decline as a
percentage of revenues.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
Selling and marketing
|
|
$
|
1,321
|
|
|
$
|
3,193
|
|
|
$
|
1,872
|
|
|
142%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a
percentage of revenues
|
|
|
128
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was the result of
several factors. Approximately $1.2 million of the increase
was due to higher salary and benefits resulting from increased
headcount, stock-based compensation amounted to $112,000 (no
comparable charge in 2005), approximately $348,000 of the
increase related to higher travel expenses and the balance of
the increase was due to a general higher level of
35
sales and marketing activity in both the chronic and critical
care markets. We increased our sales force from 10 sales
representatives as of March 31, 2005, to 25 sales
representatives as of March 31, 2006. We anticipate that
selling and marketing expenses will continue to increase in
absolute dollars as we broaden our marketing initiatives to
increase public awareness of the System One in the chronic care
market and as we add additional sales and marketing personnel.
Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
Distribution
|
|
$
|
309
|
|
|
$
|
1,289
|
|
|
$
|
980
|
|
|
317%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of
revenues
|
|
|
30
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses was due to increased
volume of shipments of disposable products to a growing number
of patients in the chronic care market. We expect that
distribution expenses will increase at a lower rate than
revenues in the later half of 2006 due to expected shipping
efficiencies gained from increased business volume and density
of customers, the reduction of higher cost deliveries associated
with bagged fluid due to the commercial launch of our PureFlow
SL module scheduled to begin in July 2006 and the use of an
outsourced logistics provider located in the central part of the
continental United States.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
|
Percentage
|
|
|
2005
|
|
|
2006
|
|
|
Increase
|
|
|
Increase
|
|
|
(Unaudited)
|
|
|
(In thousands, except
percentages)
|
|
General and administrative
|
|
$
|
1,025
|
|
|
$
|
1,975
|
|
|
$
|
950
|
|
|
93%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a
percentage of revenues
|
|
|
99
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily due to an increase in salary and benefits as a result
of the addition of three employees to headcount, approximately
$342,000 of stock-based compensation recorded in the three
months ended March 31, 2006 (no comparable charge in 2005),
and approximately $392,000 of legal and corporate expenses
incurred as a result of operating as a public company. We expect
that general and administrative expenses will continue to
increase in the near term as we add support structure for our
growing business and as a result of costs related to operating a
public company.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit, commercial paper and money
market accounts. For the three months ended March 31, 2006,
interest income increased to $595,000 from $72,000 in the same
period in 2005 primarily due to increased cash and investment
balances after our initial public offering and higher interest
rates during the three months ended March 31, 2006.
Interest expense relates to a debt agreement signed in December
2004. Interest expense increased slightly from $146,000 to
$158,000 in the three months ended March 31, 2006 compared
to the three months ended March 31, 2005.
36
Comparison
of Years Ended December 31, 2004 and 2005
Revenues
Our revenues for 2004 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Revenues
|
|
$
|
1,885
|
|
|
$
|
5,994
|
|
|
$
|
4,109
|
|
|
|
218
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to increased sales and
rentals of the System One in both the chronic and critical care
markets, primarily as a result of increased sales and marketing
efforts as we continue our commercial launch of the System One.
Revenues in the chronic market increased to $3.2 million in
2005 from $0.6 million in 2004, an increase of 473%, while
revenues in the critical care market increased 112% to
$2.8 million in 2005, compared to $1.3 million in 2004.
Cost of
Revenues and Gross Profit (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Cost of revenues
|
|
$
|
3,439
|
|
|
$
|
9,585
|
|
|
$
|
6,146
|
|
|
|
179
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
$
|
(1,554
|
)
|
|
$
|
(3,591
|
)
|
|
$
|
2,037
|
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
(82.4
|
)%
|
|
|
(59.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenues was attributable to our
increased revenues. Contributing to the 2005 negative gross
margin was a lower of cost or market valuation allowance in the
amount of $0.3 million relating to disposable cartridge and
fluid inventory designated for the chronic market, as well as
service costs of approximately $0.5 million to upgrade 100
older cyclers to meet the specifications of our current product
generation. We are currently operating at negative gross profit
as we are building a base of recurring revenues. We expect the
cost of revenues as a percentage of revenues to decline over
time as increased sales volume should lead to efficiencies in
production, better purchasing terms and reduced material costs,
and as we introduce product design changes to lower the
manufacturing cost of our current products. We expect that over
time unit cost of revenues will become less than unit revenues
as we build the scale of our operations.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Research and development
|
|
$
|
5,970
|
|
|
$
|
6,305
|
|
|
$
|
335
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a
percentage of revenues
|
|
|
317
|
%
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was
attributable to increased salary and benefits of approximately
$840,000 as a result of increased headcount and development
costs associated with our PureFlow SL module, partially
offset by a decrease of approximately $520,000 in clinical trial
expenses due to the completion of the IDE home trial for System
One in 2004. We expect research and development expenses will
continue to increase in the foreseeable future as we seek to
further enhance our System One and related products, but not as
rapidly as other expense categories as we have substantially
completed basic development of the System One. We expect
research and development expenses to continue to decline as a
percentage of revenues.
37
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Selling and marketing
|
|
$
|
3,334
|
|
|
$
|
7,550
|
|
|
$
|
4,216
|
|
|
|
126
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a
percentage of revenues
|
|
|
177
|
%
|
|
|
126
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was the result of
several factors. Approximately $2.7 million of the increase
was due to higher salary and benefits resulting from increased
headcount, approximately $0.8 million of the increase
related to higher travel expenses and the balance of the
increase was due to a generally higher level of sales and
marketing activity in both the chronic and critical care
markets. We increased our sales force from six sales
representatives as of December 31, 2004, to 20 sales
representatives as of December 31, 2005. We anticipate that
selling and marketing expenses will continue to increase in
absolute dollars as we broaden our marketing initiatives,
particularly in the chronic market, to increase public awareness
of the System One and as we add additional sales and marketing
personnel.
Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Distribution
|
|
$
|
495
|
|
|
$
|
2,059
|
|
|
$
|
1,564
|
|
|
|
316
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of
revenues
|
|
|
26
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses was due to increased
volume of shipments of disposable products to a growing number
of patients in the chronic market. We expect that distribution
expenses will increase at a lower rate than revenues due to
expected efficiencies from increased business volume and the use
of an outsourced logistics provider located in the central part
of the continental United States.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2004
|
|
|
2005
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
General and administrative
|
|
$
|
3,604
|
|
|
$
|
4,855
|
|
|
$
|
1,251
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a
percentage of revenues
|
|
|
191
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
primarily due to an increase in salary and benefits as a result
of the addition of four employees to headcount as well as the
adoption of a management bonus plan in 2005. We expect that
general and administrative expenses will continue to increase in
the near term as we add support structure for our growing
business and as a result of costs related to operating a public
company.
Interest
Income and Interest Expense
Interest income is derived primarily from U.S. government
securities, certificates of deposit and money market accounts.
For the year ended December 31, 2005, interest income
increased to $0.6 million from $0.1 million in 2004
primarily due to increased cash and investment balances after
our initial public offering and slightly higher interest rates
in 2005.
38
Interest expense relates to a debt agreement signed in December
2004. Interest expense increased from $15,000 to $763,000, or
approximately $748,000 in 2005 compared to 2004 due to this
indebtedness being outstanding for a full calendar year.
Comparison
of Years Ended December 31, 2003 and 2004
Revenues
Our revenues for 2003 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Revenues
|
|
$
|
286
|
|
|
$
|
1,885
|
|
|
$
|
1,599
|
|
|
|
559
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was attributable to an increase in the
sales and rentals of the System One and sales of the related
disposable cartridges and treatment fluids in the critical care
market in 2004, with 71% of revenues derived from this market.
The remaining 29% of revenues resulted from growth in sales of
the System One in the chronic market, primarily related to our
IDE study that was initiated in late 2003 and continued in 2004
as well as our commercialization efforts in the chronic market
that we commenced in September 2004.
Cost of
Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Cost of revenues
|
|
$
|
940
|
|
|
$
|
3,439
|
|
|
$
|
2,499
|
|
|
|
266
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
(654
|
)
|
|
$
|
(1,554
|
)
|
|
$
|
900
|
|
|
|
138
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
(228.9
|
)%
|
|
|
(82.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in cost of revenues was directly attributable to
the increase in sales volume and to the increased size of our
service department which supported the increase in units sold.
In both 2003 and 2004, cost of revenues exceeded our revenues as
the scale of our operations did not afford opportunities for
unit cost reductions that we expect will be associated with
efficiency gains and improved purchasing terms resulting from
higher unit volume production.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Research and development
|
|
$
|
4,526
|
|
|
$
|
5,970
|
|
|
$
|
1,444
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development as a
percentage of revenues
|
|
|
1,583
|
%
|
|
|
317
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in research and development expenses was
attributable to third-party consulting and other expenses
associated with the two concurrent clinical trials conducted in
2004: (a) an IDE trial related to home use of our system,
and (b) a clinical trial to investigate the effectiveness
of ultrafiltration as a means of addressing fluid overload in
patients suffering from congestive heart failure. Total clinical
expenses amounted to approximately $1.6 million, or 25% of
the total research and development expense in 2004. In addition,
salary and benefits increased as a result of an increase in
research and development headcount from seven employees to 34
employees by year end 2004. A small portion of the increase in
research and development
39
expenses was attributable to the design and development of a new
dialyzer to reduce manufacturing costs for higher volume
production.
Selling
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Selling and marketing
|
|
$
|
2,181
|
|
|
$
|
3,334
|
|
|
$
|
1,153
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing as a
percentage of revenues
|
|
|
763
|
%
|
|
|
177
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and marketing expenses was primarily
attributable to an increase in salary and benefits as a result
of increased headcount in the selling and marketing organization
from 11 employees at December 31, 2003 to 24 employees at
December 31, 2004 to facilitate the commercial launch of
the System One in the chronic market. Expenses per sales
representative increased due to an increase in travel to
customers and potential customers.
Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
Distribution
|
|
$
|
33
|
|
|
$
|
495
|
|
|
$
|
462
|
|
|
|
1,400
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution as a percentage of
revenues
|
|
|
11
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in distribution expenses was attributable to the
increase in units shipped and the sale of associated disposables
in the critical care and chronic markets.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2003
|
|
|
2004
|
|
|
Increase
|
|
|
Increase
|
|
|
|
(In thousands, except
percentages)
|
|
|
General and administrative
|
|
$
|
2,868
|
|
|
$
|
3,604
|
|
|
$
|
736
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative as a
percentage of revenues
|
|
|
1,003
|
%
|
|
|
191
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses was
attributable to an increase of approximately $496,000 in salary
and benefits resulting from an increase in general and
administrative headcount by four employees to 11 employees at
December 31, 2004, as well as an increase of approximately
$270,000 in accounting and legal fees.
Interest
Income and Interest Expense
Interest income decreased by 11% to $130,347 in 2004 from
$146,047 in 2003 due to a decrease in cash and investment
balance in 2004 as compared to 2003. Interest expense decreased
by 84% to $14,542 in 2004 from $91,985 in 2003 as a result of
interest expense associated with warrants issued in 2003 in
connection with obtaining a revolving line of credit.
Liquidity
and Capital Resources
We have operated at a loss since our inception in 1998. As of
March 31, 2006, our accumulated deficit was
$(93.3) million and we had cash, cash equivalents and
short-term investments of approximately $49.7 million. In
December 2004, we obtained $5.0 million of debt financing,
which is repayable monthly
40
with interest over three years through December 2007. In
connection with this debt financing, we granted the lender a
security interest in our assets. On November 1, 2005, we
closed our initial public offering in which we received net
proceeds after deducting underwriting discounts, commissions and
expenses of approximately $56.5 million from the sale and
issuance of 6,325,000 shares of common stock. Prior to the
initial public offering, we had financed our operations
primarily through private sales of redeemable convertible
preferred stock resulting in aggregate net proceeds of
approximately $91.9 million as of December 31, 2005.
In May 2006, we entered into an equipment line of credit of
up to $20.0 million to finance the purchase and placement
of field equipment. Under the line of credit, $8.0 million
is currently available with an additional $2.0 million
available through December 31, 2006 and a further
$10.0 million available through December 31, 2007. The
availability of the line of credit is subject to a number of
covenants, including maintaining certain levels of liquidity,
adding specified numbers of patients and operating within net
loss parameters. We are also required to maintain operating
and/or investment accounts with the lender in an amount at least
equal to the outstanding debt obligation. In addition, the
availability of the last $12.0 million under the line of
credit is subject to a requirement that we raise at least
$40.0 million through the sale of equity securities prior
to January 1, 2007. Borrowings under the line of credit are
secured by all of our assets other than intellectual property
and are payable ratably over a three year period. We used a
portion of the initial proceeds of this line of credit to repay
outstanding debt and accrued interest in the aggregate amount of
approximately $3.4 million.
The following table sets forth the components of our cash flows
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net cash used in operating
activities
|
|
$
|
(10,836
|
)
|
|
$
|
(15,172
|
)
|
|
$
|
(27,348
|
)
|
|
$
|
(5,590
|
)
|
|
$
|
(10,480
|
)
|
Net cash used in investing
activities
|
|
|
(78
|
)
|
|
|
(330
|
)
|
|
|
(1,204
|
)
|
|
|
(531
|
)
|
|
|
(671
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
15,769
|
|
|
|
24,704
|
|
|
|
71,782
|
|
|
|
(227
|
)
|
|
|
(396
|
)
|
Effect of exchange rate changes on
cash
|
|
|
(2
|
)
|
|
|
28
|
|
|
|
(141
|
)
|
|
|
(37
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow
|
|
$
|
4,853
|
|
|
$
|
9,230
|
|
|
$
|
43,089
|
|
|
$
|
(6,385
|
)
|
|
$
|
(11,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities. For
each of the periods above, net cash used in operating activities
was attributable primarily to net losses after adjustment for
non-cash charges, such as depreciation, amortization and
amortization of deferred stock-based compensation. Significant
uses of cash from operations include increased inventory
requirements for production and placements of the System One,
offset by increases in accounts payable and accrued expenses.
Non-cash transfers from inventory to field equipment for the
placement of rental units with our customers represented
$0.1 million, $1.1 million and $4.4 million,
during the years ended December 31, 2003, 2004 and 2005 and
$0.5 million and $2.9 million, respectively, during
the three months ended March 31, 2005 and 2006.
Net Cash Used in Investing Activities. For
each of the periods above, net cash used in investing activities
reflected purchases of property and equipment, primarily for
research and development, information technology, manufacturing
operations and capital improvements to our facilities. Excluded
from these figures is the purchase of $12.5 million of
marketable securities during the year ended December 31,
2004, the sale of marketable securities in the amount of
$7.5 million during the three months ended March 31,
2005 and the purchase of $14.7 million of commercial paper
during the three months ended March 31, 2006.
Net Cash Provided by (Used in) Financing
Activities. Net cash provided by (used in)
financing activities primarily reflected net proceeds from our
initial public offering of approximately $56.5 million in
November 2005, net proceeds from the sale of $16.0 million
of convertible preferred stock in July 2005 and
$0.7 million from the exercise of stock options and
warrants, partially offset by the repayment of $1.4 million
of debt. During 2004, proceeds from debt raised totaled
$5.0 million, offset by $0.3 million of debt
repayment.
41
During 2003 and 2004, net proceeds from the issuance of
convertible preferred stock totaled $15.9 million and
$20.0 million, respectively. During the three months ended
March 31, 2005 and 2006, net cash used in financing
activities reflected the exercise of stock options during the
three months ended March 31, 2006, offset by the repayment
of debt of $0.2 million and $0.4 million, respectively.
The following table summarizes our contractual commitments as of
March 31, 2006 (Unaudited) and the effect those commitments
are expected to have on liquidity and cash flow in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Notes payable(1)
|
|
$
|
3,675
|
|
|
$
|
1,683
|
|
|
$
|
1,992
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
3,403
|
|
|
|
503
|
|
|
|
1,049
|
|
|
|
1,099
|
|
|
|
752
|
|
Purchase obligations(2)
|
|
|
25,766
|
|
|
|
21,222
|
|
|
|
2,200
|
|
|
|
2,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,844
|
|
|
$
|
23,408
|
|
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$
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5,241
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$
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3,443
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$
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752
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(1) |
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Notes payable reflects repayment obligations under a loan
agreement at the stated maturity dates, including a balloon
payment of $650,000 in accrued interest due December 2007. We
repaid the $3.4 million of debt and accrued interest under
this loan in May 2006 concurrent with the closing of the
equipment line of credit we have entered into with Silicon
Valley Bank. Notes payable does not reflect amounts payable to
Silicon Valley Bank under this new line of credit. |
|
(2) |
|
Purchase obligations include purchase commitments for System One
components, primarily for equipment and fluids pursuant to
contractual agreements with several of our suppliers. |
We currently estimate that of the net proceeds from this
offering we will spend (a) approximately $30.0 million
to fund continuing operations, including the expansion of sales
and marketing programs and the hiring of additional personnel
and (b) approximately $20.0 million to finance working
capital needs, including further investment in System One field
equipment. We intend to use any remaining proceeds for general
corporate purposes.
We expect to continue to incur net losses for the foreseeable
future. We believe that our current cash position is sufficient
to support operations at least through 2006. In the longer term,
we plan to fund the working capital needs of our operations with
revenue generated from product placements and sales but these
resources may prove insufficient. If our existing resources are
insufficient to satisfy our liquidity requirements, we may need
to sell additional equity or issue debt securities. Any sale of
additional equity or issuance of debt securities may result in
dilution to our stockholders, and we cannot be certain that
additional public or private financing will be available in
amounts or on terms acceptable to us, or at all. If we are
unable to obtain this additional financing when needed, we may
be required to delay, reduce the scope of, or eliminate one or
more aspects of our business development activities, which could
harm the growth of our business.
Summary
of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make significant estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses. These items are regularly monitored and analyzed by
management for changes in facts and circumstances, and material
changes in these estimates could occur in the future. Changes in
estimates are recorded in the period in which they become known.
We base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ substantially from our
estimates.
A summary of those accounting policies and estimates that we
believe are most critical to fully understanding and evaluating
our financial results is set forth below. This summary should be
read in
42
conjunction with our consolidated financial statements and the
related notes included elsewhere in this prospectus.
Revenue
Recognition
We recognize revenues from product sales and services when
earned in accordance with Staff Accounting Bulletin, or SAB,
No. 104, Revenue Recognition, and Emerging Issues
Task Force, or
EITF, 00-21,
Revenue Arrangements with Multiple Deliverables. Revenues
are recognized when: (a) there is persuasive evidence of an
arrangement, (b) the product has been shipped or services
and supplies have been provided to the customer, (c) the
sales price is fixed or determinable and (d) collection is
reasonably assured. In the critical care market, sales are
structured as direct product sales or as a disposables-based
program in which a customer acquires the equipment through the
purchase of a specific quantity of disposables over a specific
period of time. In the chronic care market, revenues are
realized using the short or long-term rental arrangements.
In the critical care market, we recognize revenues from direct
product sales at the later of the time of shipment or, if
applicable, delivery in accordance with contract terms. For the
chronic care market we recognize revenues derived from short or
long-term rental arrangements on a straight-line basis. These
rental arrangements, which combine the use of a system with a
specified number of disposable products supplied to customers
for a fixed amount per month, are recognized on a monthly basis
in accordance with agreed upon contract terms and pursuant to a
binding customer purchase order and fixed payment terms.
Under a disposables-based program, the customer is granted the
right to use the equipment for a period of time, during which
the customer commits to purchase a minimum number of disposables
at a price that includes a premium above the otherwise average
selling price of the disposables to recover the purchase of the
equipment and provide for a profit. Upon reaching the
contractual minimum purchases, ownership of the equipment
transfers to the customer. Revenues under these arrangements are
recognized over the term of the arrangement as disposables are
delivered.
When we enter into a multiple element arrangement, we allocate
the total fee to all elements of the arrangement based on their
respective fair values. Fair value is determined by the price
charged when each element is sold separately.
We provide for estimated product returns at the time of revenue
recognition. Payments received for products or services prior to
shipment or prior to completion of the related services are
recorded as deferred revenue.
Inventory
Valuation
Inventories are valued at the lower of cost (weighted-average)
or estimated market. We regularly review our inventory
quantities on hand and related cost and record a provision for
excess or obsolete inventory primarily based on an estimated
forecast of product demand for each of our existing product
configurations. We also review our inventory value to determine
if it reflects lower of cost or market, with market determined
based on net realizable value. Appropriate consideration is
given to inventory items sold at negative gross margins and
other factors in evaluating net realizable value. The medical
device industry is characterized by rapid development and
technological advances that could result in obsolescence of
inventory.
Field
Equipment
We amortize field equipment using the straight-line method over
an estimated useful life of five years. We review the estimated
useful life of five years periodically for reasonableness.
Factors considered in determining the reasonable useful life
include industry practice and the typical amortization periods
used for like equipment, the frequency and scope of service
returns, actual equipment disposal rates, and the impact of
planned design improvements. We believe the five year useful
life to be appropriate as of March 31, 2006.
43
Accounting
for Stock-Based Awards
Prior to January 1, 2006, we accounted for stock-based
employee compensation in accordance with Accounting Principles
Board, or APB, Opinion No. 25, Accounting for
Stock Issued to Employees, and related
interpretations. Accordingly, compensation expense was recorded
for stock options awarded to employees and directors to the
extent that the option exercise price was less than the fair
market value of our common stock on the date of grant and where
the number of shares and exercise price were fixed. The
difference between the fair value of our common stock and the
exercise price of the stock option, if any, was recorded as
deferred compensation and was amortized to compensation expense
over the vesting period of the underlying stock option. Prior to
becoming a public company on October 27, 2005, there had
been no public market for our common stock. Absent an objective
measure of the fair value of our common stock, the determination
of fair value required judgment. Our board of directors
periodically estimated the fair value of our common stock in
connection with any issuance of stock options. The fair value of
our common stock was estimated based on factors such as
independent valuations, sales of preferred stock, the
liquidation preference, dividends, voting rights of the various
classes of stock, our financial and operating performance,
progress on development goals, the issuance of patents, the
value of other companies involved in dialysis, general economic
and market conditions and other factors that we believed would
reasonably have a significant bearing on the value of our common
stock.
Prior to January 1, 2006, we followed the disclosure
requirements of Statement of Financial Accounting Standard, or
SFAS No. 123, Accounting for Stock-Based
Compensation, for stock-based awards to employees. All
stock-based awards to non-employees were accounted for at their
fair value in accordance with SFAS No. 123 and related
interpretations. For purposes of the pro forma disclosures
required by SFAS No. 123, stock options granted
subsequent to July 19, 2005, the date of filing our initial
registration statement with the SEC, were valued using the
Black-Scholes option-pricing model. Prior to July 19, 2005,
we used the minimum value method permitted under
SFAS No. 123.
We adopted SFAS No. 123R, Share-Based
Payment, effective January 1, 2006.
SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statement of operations based on their fair
values. In addition, SFAS No. 123R requires the use of
the prospective method for any outstanding stock options that
were previously valued using the minimum value method.
Accordingly, with the adoption of SFAS No. 123R, we
will not recognize the remaining compensation cost for any stock
option awards which had previously been valued using the minimum
value method. In addition, SFAS No. 123R prohibits the
use of pro forma disclosures for stock option awards valued
under the minimum value method (i.e., our pre-July 19, 2005
stock option awards). Stock option awards granted prior to
July 19, 2005, the date on which we filed our preliminary
prospectus for our initial public offering with the SEC, that
are subsequently modified, repurchased or cancelled after
January 1, 2006 shall be subject to the provisions of
SFAS No. 123R.
We use the modified prospective method under
SFAS No. 123R for any stock options granted after
July 19, 2005. The aggregate value of the unvested portion
of stock options issued between July 19, 2005 and
December 31, 2005 totaled $4.4 million as of
December 31, 2005, net of estimated forfeitures. Beginning
in 2006, this aggregate value will be recognized as compensation
expense in our consolidated statement of operations ratably over
the remaining vesting period. The adoption of
SFAS No. 123R resulted in incremental stock-based
compensation expense of $443,350, or $0.02 per basic and diluted
share, for the three months ended March 31, 2006.
Management continues to evaluate the use of stock-based equity
awards and may consider other forms of equity-based compensation
arrangements (such as restricted stock units), or reduce the
volume of stock option award grants in the future.
Prospectively, we will use the Black-Scholes option-pricing
model to estimate the fair value of equity-based compensation
awards on the dates of grant. In accordance with Staff
Accounting Bulletin 107, or SAB 107, based upon our
stage of development and the short period of time that our
common stock has been
44
publicly traded on the Nasdaq National Market, we have used the
following assumptions in the Black-Scholes option-pricing model
to estimate the fair value of equity-based compensation awards:
Expected Term the expected term has been
determined using the simplified method for estimating expected
option life of plain-vanilla options. Unless
otherwise determined by the board or the compensation committee,
stock options granted under the 2005 Stock Incentive Plan have a
contractual term of seven years, resulting in an expected term
of 4.75 years calculated under the simplified method.
Risk-Free Interest Rate the risk-free interest
rate for each grant is equal to the U.S. Treasury rate in
effect at the time of grant for instruments with an expected
life similar to the expected option term.
Volatility the objective in estimating expected
volatility is to ascertain the assumption about expected
volatility that marketplace participants would likely use in
determining an exchange price for an option. Because we have no
options that are traded publicly and because of our limited
trading history as a public company, our volatility assumption
has been based upon an analysis of the trading of similar
companies in the medical device and technology industries,
consistent with the methodology used in 2005. We may change our
volatility assumption in the future once we have a sufficient
amount of historical information regarding the volatility of our
share price. For the three months ended March 31, 2006, we
have used a volatility rate assumption of 85% for stock option
grants. We expect to use a volatility rate assumption of 85% for
stock options granted during the remainder of 2006.
We have also estimated expected forfeitures of stock options
upon adoption of SFAS No. 123R. In developing a
forfeiture rate estimate, we have considered our historical
experience, our growing employee base and the limited liquidity
of our common stock. Actual forfeiture activity may differ from
our estimated forfeiture rate.
Accounting
for Income Taxes
We account for federal and state income taxes in accordance with
SFAS No. 109, Accounting for Income
Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured
by the enacted tax rates.
As of December 31, 2005, we had federal and state net
operating loss carryforwards of approximately $79.1 million
and $71.6 million, respectively, available to reduce future
taxable income, if any. The federal net operating loss
carryforwards will expire between 2019 and 2025, while the state
net operating loss carryforwards will expire between 2006 and
2010. We also had combined federal and state research and
development credit carryforwards of $3.3 million at
December 31, 2005, which begin to expire in 2019 if not
utilized. Utilization of the net operating loss carryforwards
may be subject to an annual limitation due to the ownership
percentage change limitations provided by the Internal Revenue
Code Section 382 and similar state provisions. In the event
of a deemed change in control under Internal Revenue Code
Section 382, an annual limitation imposed on the
utilization of net operating losses may result in the expiration
of net operating loss carryforwards.
Due to uncertainty surrounding the realization of deferred tax
assets through future taxable income, we have provided a full
valuation allowance and no benefit has been recognized for the
net operating loss and other deferred tax assets. Accordingly, a
valuation allowance for the full amount of the deferred tax
asset has been established as of December 31, 2005 and 2004
to reflect these uncertainties.
45
Related-Party
Transactions
Medisystems Corporation is our primary supplier of completed
cartridges, tubing and certain other components used in the
System One disposable cartridge. The chief executive officer and
sole stockholder of Medisystems is a member of our board of
directors and owns approximately 9.4% of our outstanding common
stock as of March 31, 2006. We purchased approximately
$41,000, $232,000 and $896,000 of products and components from
Medisystems during the years ended December 31, 2003, 2004
and 2005, respectively. We purchased approximately $126,000 and
$759,000 of goods from Medisystems during the three months ended
March 31, 2005 and 2006, respectively. We anticipate
significantly increasing the amount of products that we purchase
from Medisystems over the next few years. We do not have a
long-term supply agreement with Medisystems, and we purchase
products from Medisystems through purchase orders. We are
currently negotiating a long-term supply agreement with
Medisystems covering components, subassemblies and completed
cartridges, although we cannot be certain that we will enter
into an agreement with Medisystems. We believe that our
purchases from Medisystems have been on terms no less favorable
to us than could be obtained from unaffiliated third parties or
through internal operations.
Off-Balance
Sheet Arrangements
Since inception we have not engaged in any off-balance sheet
financing activities except for leases which are properly
classified as operating leases and disclosed in the
Liquidity and Capital Resources section above.
Recent
Accounting Pronouncements
Refer to Accounting for Stock-Based Awards in the
Summary of Critical Accounting Policies and
Estimates section above for a summary of the impact of
adopting SFAS No. 123R to our consolidated financial
statements during the three months ended March 31, 2006.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Exposure
Our investment portfolio consists primarily of high-grade
commercial paper, high grade corporate bonds and debt
obligations of various governmental agencies. We manage our
investment portfolio in accordance with our investment policy.
The primary objectives of our investment policy are to preserve
principal, maintain a high degree of liquidity to meet operating
needs and obtain competitive returns subject to prevailing
market conditions. Investments are made with an average maturity
of less than six months and a maximum maturity of
12 months. These investments are subject to risk of
default, changes in credit rating and changes in market value.
These investments are also subject to interest rate risk and
will decrease in value if market interest rates increase. Due to
the conservative nature of our investments and relatively short
effective maturities of the debt instruments, we believe
interest rate risk is mitigated. Our investment policy specifies
the credit quality standards for our investments and limits the
amount of exposure from any single issue, issuer or type of
investment.
As of December 31, 2005, we had outstanding debt of
$3.1 million with a fixed interest rate of 7.0%. Movements
in market interest rates could impact the fair value of our
debt. As of December 31, 2005, the carrying amount of our
debt approximated fair value.
Foreign
Currency Exposure
We operate a manufacturing and research facility in Rosdorf,
Germany. We purchase materials for that facility and pay our
employees at that facility in Euros. In addition, we purchase
products for resale in the United States from foreign companies
and have agreed to pay them in currencies other than the
U.S. dollar. As a result, our expenses and cash flows are
subject to fluctuations due to changes in foreign currency
exchange rates. In periods when the U.S. dollar declines in
value as compared to the foreign currencies in which we incur
expenses, our foreign-currency based expenses increase when
translated into U.S. dollars. Although it is possible to do
so, we do not hedge our foreign currency since the exposure has
not been
46
material to our historical operating results. A 10% movement in
the Euro would have had an overall impact to the statement of
operations of approximately $260,000 for 2005, which would have
been less than 0.9% of total annual expenses.
Equity
Security Price Risk
As a matter of policy, we do not invest in marketable equity
securities; therefore, we do not currently have any direct
equity price risk.
47
BUSINESS
Overview
We are a medical device company that develops, manufactures and
markets innovative systems for the treatment of ESRD and acute
kidney failure. Our primary product, the NxStage System One, is
a small, portable,
easy-to-use
hemodialysis system designed to provide physicians and patients
improved flexibility in how hemodialysis therapy is prescribed
and delivered. Given its design, the System One is particularly
well-suited for home hemodialysis and more frequent, or
daily, dialysis, which clinical literature suggests
provides patients better clinical outcomes and improved quality
of life. The System One is specifically cleared by the FDA for
home hemodialysis as well as hospital and clinic-based dialysis.
We believe the largest market opportunity for our product is the
home hemodialysis market for the treatment of ESRD.
ESRD, which affects approximately 453,000 people in the United
States, is an irreversible, life-threatening loss of kidney
function that is treated predominantly with dialysis. Dialysis
is a kidney replacement therapy that removes toxins and excess
fluids from the bloodstream and, unless the patient receives a
kidney transplant, is required for the remainder of the
patients life. Over 70% of ESRD patients in the United
States rely on life-sustaining dialysis treatment. Hemodialysis,
the most widely prescribed type of dialysis, typically consists
of treatments in a dialysis clinic three times per week, with
each session lasting three to five hours. Approximately 8% of
U.S. ESRD dialysis patients receive some form of dialysis
treatment at home, most of whom treat themselves with peritoneal
dialysis, although surveys of physicians and healthcare
professionals suggest that a larger proportion of patients could
take responsibility for their own care. We believe there is an
unmet need for a hemodialysis system that allows more frequent
and easily administered therapy at home and have designed our
system to address this and other kidney replacement markets.
Measuring 15x15x18 inches, the System One is the smallest,
commercially available hemodialysis system. It consists of a
compact, portable and
easy-to-use
cycler, disposable drop-in cartridge and high purity premixed
fluid. The System One has a self-contained design and simple
user interface making it easy to operate by a trained patient
and his or her trained partner in any setting prescribed by the
patients physician. Unlike traditional dialysis systems,
our System One does not require any special disinfection or
preparation between treatments and its operation does not
require specialized electrical or plumbing infrastructure or
modifications to the home. Patients can bring the System One
home, plug it in to a conventional electrical outlet and operate
it, thereby eliminating what can be expensive plumbing and
electrical household modifications required by other traditional
dialysis systems. Given its compact size and lack of
infrastructure requirements, the System One is portable,
allowing patients freedom to travel. We believe these features
provide patients and their physicians new treatment options for
ESRD.
We market the System One to dialysis clinics for chronic
hemodialysis treatment, providing clinics with improved access
to a developing market, the home hemodialysis market, and the
ability to expand their patient base by adding home-based
patients without adding clinic infrastructure. The clinics in
turn provide the System One to ESRD patients. For each month
that a patient is treated with the System One, we typically bill
the clinic for the rental of the machine and purchase of the
related disposable cartridges and treatment fluids. Clinics
receive reimbursement from Medicare, private insurance and
patients for dialysis treatments. We commenced marketing the
System One for chronic hemodialysis treatment in September 2004.
As of May 15, 2006, 556 ESRD patients were using the
System One at 104 different dialysis clinics. Substantially
all of these patients are treated at home or are in training to
treat themselves at home; the remaining patients are doing
therapy in a clinic.
We are not responsible for, and do not provide, patient
training. Training is provided by the patients dialysis
clinic and takes place at the clinic primarily during the
patients prescribed, often daily, two to three hour
treatment sessions. Patient training, which typically takes two
to three weeks, includes basic instruction on ESRD, operation of
the System One and insertion by the patient or their partners of
needles into the patients vascular access site. Clinics
provide testing to patients and their partners at the conclusion
of training to verify skills and an understanding of System One
operation. Training sessions are reimbursed by Medicare, and
there are no costs to the patient associated with this training.
48
Medicare reimburses the same amount for home and in-center
hemodialysis treatments, up to three treatments per week.
Payment for more than three treatments per week is available
with appropriate medical justification. The adoption of our
System One for more frequent therapy for ESRD could be slowed if
Medicare is reluctant or refuses to pay for these additional
treatments.
We also market the System One in the critical care market to
hospitals for treatment of acute kidney failure and fluid
overload associated with multiple diseases, including congestive
heart failure, or CHF. It is estimated that there are over
200,000 cases of acute kidney failure in the United States each
year. The System One provides an effective,
simple-to-operate
alternative to dialysis systems currently used in the hospital
to treat these acute conditions. We commenced marketing the
System One to the critical care market in February 2003. As of
May 15, 2006, 55 hospitals were using the System One
to deliver acute kidney failure and fluid overload therapy.
Market
Opportunity
We focus on two principal markets: ESRD and critical care.
Proper kidney function is critical to survival. A healthy human
kidney removes waste products and excess water from the blood on
a continuous basis. Without properly functioning kidneys, toxins
and fluids build up in the body, leading to progressive
poisoning, electrolyte imbalance and fluid overload. ESRD is
fatal if left untreated.
The prevalence of ESRD, particularly in the United States, has
increased in recent years due to the heightened incidence of
contributing diseases such as diabetes, hypertension and
obesity, overall aging of the population, decreasing mortality
from conditions such as cardiovascular disease, and increasing
use of drugs and other treatments for serious medical conditions
that can cause damage to kidneys. According to the USRDS, the
number of patients in the United States diagnosed with ESRD has
almost doubled in the past decade to approximately
453,000 patients in 2003 from approximately
250,000 patients in 1993. According to the Journal of the
American Society of Nephrology, the ESRD patient population in
the United States is expected to continue to increase at a rate
of 5% annually, reaching approximately 650,000 patients by
2010. Worldwide, the total diagnosed ESRD patient population is
estimated at 1.7 million in 2003.
In order to survive, ESRD patients must either receive dialysis
treatment for the remainder of their lives or obtain a kidney
transplant. Due to the limited number of available organs, as
well as the incidence of organ transplant rejection, over 70% of
ESRD patients rely on dialysis to sustain their lives.
Medicare provides comprehensive and well-established
reimbursement in the United States for ESRD. As a result of
legislation passed more than 30 years ago, ESRD is the only
medical condition for which Medicare coverage is offered to
virtually the entire United States patient population,
regardless of age or financial circumstances. Medicare currently
covers over 80% of the ESRD population in the United States and
is typically the primary payor. When Medicare is the primary
payor, it reimburses 80% of the Medicare composite rate, a
reimbursement rate set by Congress intended to cover nearly all
costs associated with dialysis treatment. Secondary insurance or
the patient covers the remaining 20% of the expenses. There is
some regional variation in the composite rate, but the national
average rate, based on three treatments per week, is currently
approximately $23,244 per patient per year for dialysis
treatments performed at independent clinics and $24,024 per
patient per year for dialysis treatments performed at
hospital-based dialysis facilities. Although Congress has
periodically adjusted the composite rate, changes have been
minimal and infrequent.
Acute Kidney Failure. Acute kidney failure,
the temporary loss of kidney function, frequently occurs in
conjunction with other serious medical conditions, particularly
loss of other organ functions, severe infection, poisoning or
post-surgical trauma. Regardless of the cause, patients
experiencing acute kidney failure require some form of kidney
replacement therapy, and will die if untreated. It is estimated
that there are over 200,000 cases of acute kidney failure
in the United States each year.
49
Fluid Overload for Congestive Heart
Failure. CHF is a common form of heart failure
that typically results in fluid overload, a patients
inability to dispose of fluids, often leading to swelling of the
legs and ankles and congestion in the lungs. Fluid overload can
result in further impairment of heart function, which, in turn,
further reduces the patients ability to remove fluid. If
untreated, fluid overload from CHF will lead to death.
Approximately five million people in the United States suffer
from CHF, and the incidence of CHF is increasing. According to
the American Heart Association, it is estimated that 550,000 new
cases of CHF are diagnosed in the United States annually. There
are approximately one million patients discharged from hospitals
annually for the treatment of fluid overload associated with CHF.
Traditional
Dialysis Treatment Alternatives for ESRD
There are three principal dialysis treatment alternatives for
patients with chronic kidney disease: in-center hemodialysis,
peritoneal dialysis and home hemodialysis.
In-Center Hemodialysis. Hemodialysis,
the most common dialysis treatment for ESRD patients, is a
process by which waste products and excess fluid are removed
from the blood extracorporeally, or outside the body. In
hemodialysis, the patients blood flows through plastic
tubes from the patients vascular access, generally in the
patients forearm, through a dialyzer that acts as an
artificial kidney to separate toxins from the blood. In the
dialyzer, the blood flows through a semi-permeable membrane,
which is surrounded by dialysate solution. Toxins migrate across
this membrane from the blood into the dialysate. The dialysate,
consisting of purified water, small amounts of electrolytes and
other chemicals, carries away the toxins and excess water from
the patient and is disposed. The cleansed blood is returned to
the patient in a continuous process.
Over the past three decades, reimbursement and dialysis center
economics have led to a typical hemodialysis treatment program
requiring the patient to commute to a dialysis center three
times per week for treatment sessions lasting three to five
hours each, excluding travel time. Most dialysis clinics are
outpatient facilities structured to treat more than one patient
at a time. According to the Medicare Payment Advisory
Commission, the average dialysis clinic has 17 hemodialysis
stations. Patients usually are treated in one large room and are
in relatively close proximity to one another. Each station
includes a treatment chair and a large, stationary hemodialysis
machine that is connected to the clinics central water
purification system used to prepare dialysate. In order to
prepare for treatment, a dialysis technician or nurse sets up
the hemodialysis equipment and threads a disposable dialysis
tubing set through the machine. After the tubing set is threaded
through the dialysis machines pumps and sensors, the
technician or nurse connects a filter to the tubing set. The
technician then primes the system with saline to remove air from
the tubing set and filter. After the system is primed, the nurse
or technician inserts needles into the patients vascular
access site, generally the patients forearm, connects the
patient to the tubing set and starts treatment. Treatment lasts
between three and five hours as the dialysis machine cleanses
the patients blood. After treatment, the nurse or
technician disconnects the patient from the tubing and starts to
disinfect the machine before the next patient can begin therapy.
The patients condition is checked after treatment and, if
stable, the patient leaves the center and travels home until his
or her next treatment. At the end of each day, a more extensive
disinfection process of the dialysis equipment is required
because, during treatment, the dialysate used to cleanse a
patients blood comes in direct contact with the machine.
According to the USRDS, approximately 91% of United States ESRD
dialysis patients received hemodialysis treatment in 2003, of
which approximately 99% received treatment in a dialysis center.
Currently, there are approximately 4,500 Medicare-certified
dialysis outpatient facilities in the United States, either
freestanding or hospital-based, each operating under the
supervision of a medical director with a team of licensed
nurses, trained technicians, dieticians and social workers. The
average dialysis center performs approximately 9,000 treatments
per year, or approximately 25 per day, based on three
treatments per week, with Medicare reimbursing approximately
$23,244 per patient per year for dialysis treatments performed
at independent clinics and approximately $24,024 per patient per
year for dialysis treatments performed at hospital-based
dialysis facilities. Although hemodialysis performed in a
dialysis clinic is an effective therapy for many ESRD patients,
it has a number of shortcomings:
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Clinical Limitations of Three Times-Per-Week Treatment
Convention. While healthy kidneys continuously
remove toxins and excess water from the body, in-center
hemodialysis consists of episodic sessions with long intervals
in between treatments, which can be harsh and stressful on
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the body. Toxins and fluids build up between treatments, often
leading to a number of acute and chronic health problems,
including cardiovascular disease, hypertension, anemia, or low
red blood cell count, malnutrition, fluid and electrolyte
imbalance, calcium deficiency, headaches, nausea, hypotension,
decreased mental acuity and an overall lack of strength and
vitality.
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Patient Quality of Life. Patients have limited
choice as to the clinic at which they will receive treatment,
especially in rural settings where only one clinic may be within
driving distance. Because many dialysis centers operate near
capacity, patients often have little choice in selecting their
treatment schedule or making changes to accommodate many daily
activities, including employment. Patients are typically
assigned a morning, afternoon or evening time slot on a
Monday Wednesday Friday or
Tuesday Thursday Saturday
regimen. If unable to make a scheduled appointment, a patient
may be forced to skip therapy, possibly leading to further ill
health. Multi-day travel away from home is problematic given the
difficulty of coordinating care at a different dialysis center.
Given the serious medical conditions of ESRD patients,
approximately 65% of whom die within the first five years of
therapy, the general atmosphere in the clinic can be stressful.
This stress can negatively impact a patients overall
emotional well-being and significantly diminish the
patients quality of life.
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Increased Risk of Infection. Clinical data
from our study comparing home-based and center-based dialysis
with the System One suggests that the risk of infection is
higher among patients receiving in-center hemodialysis than
among patients using home hemodialysis. We believe that
breakdown in standard infection-control practices, sharing of
dialysis machines, reuse of dialyzers and physical proximity to
other infected patients may contribute to this increased risk of
infection.
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Peritoneal Dialysis. Peritoneal
dialysis, or PD, is a home-treatment option generally best
suited for ESRD patients who have residual kidney function or
relatively low body weight. PD is the process by which waste
products are removed from the blood by use of the patients
peritoneum. The peritoneum is a large membrane enclosing the
internal organs located in the abdominal cavity. PD treatments
are typically self-administered by patients in their homes. To
administer PD, a catheter is surgically implanted to provide
access to the abdominal cavity. Through this catheter, dialysate
is introduced into the patients body and the peritoneum
acts as a natural dialyzing membrane. After approximately four
to six hours, the dialysate is drained from the patients
body and disposed. These exchanges of fresh and used dialysate
are typically performed four to five times a day. Some patients
do prolonged exchanges at night, and may require an additional
exchange during the day. Patients will typically have two to
three liters, or four to seven pounds, of dialysate in their
abdomens during therapy.
According to USRDS, in the United States approximately 7% of new
dialysis patients begin treatment on PD, with the remainder
starting on hemodialysis. In 2003, the number of patients
receiving PD was approximately 26,000, representing
approximately 8% of all ESRD dialysis patients in the United
States.
Patients receiving PD may experience less fluctuation in toxin,
electrolyte and water levels due to treatment on a daily basis.
Because PD is almost exclusively a home therapy, it has
significant quality of life benefits; therapy can be conducted
where and when the patient desires, including during nighttime
when the patient is asleep. Although PD provides a clinically
effective and more flexible treatment alternative to in-center
hemodialysis, there are limitations with this form of dialysis.
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Patient Eligibility Limitations. Clinical
literature suggests that PD may be an effective dialysis
treatment only for a subset of the ESRD patient population. It
may be difficult for patients to receive adequate therapy
particularly if they have a large body mass or have no residual
renal function.
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Turnover of Patients from PD to
Hemodialysis. According to USRDS, over 20% of
patients who initiate PD therapy switch to hemodialysis within
five years. In addition, after five years, less than 2% of
patients who initiate therapy on PD remain on that therapy. Over
time, many patients using PD must shift to hemodialysis or
receive a transplant when either loss of residual kidney
function becomes sufficiently severe or the peritoneal membrane
deteriorates so that it no longer has sufficient dialytic
capacity.
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Risk of Peritoneal Infection and Other
Complications. PD has been reported to be
associated with an increase in peritonitis, an infection of the
peritoneum, and catheter exit site infection. In addition, some
PD patients often suffer from obesity due to the dextrose load
contained in PD fluids and muscular back pain associated
with carrying large quantities of fluid in the abdomen.
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Abdominal Fullness; Negative Body
Image. Patients typically have two to three
liters, or four to seven pounds, of dialysate fluid in their
abdomen during therapy, which is performed a few times during
the day. This volume of fluid can cause patients to feel
uncomfortable and self-conscious of their bloated abdomen. Some
patients also complain of a negative body image associated with
the catheter that protrudes from their belly, which allows the
peritoneal dialysate fluid to be added to, or emptied from, the
peritoneal cavity.
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Home Hemodialysis. Fewer than one
percent of all hemodialysis patients are currently treated at
home. These home hemodialysis patients typically use traditional
hemodialysis equipment and must follow all of the same treatment
procedures used in a dialysis clinic, including dialysis system
set-up, treatment delivery, system disassembly and system
disinfection and maintenance. Home hemodialysis offers patients
the flexibility to determine their own treatment schedule and
thus enhances their overall quality of life. In addition, recent
studies suggest that therapy administered more frequently than
the typical clinical regimen of three times per week better
mimics the natural functioning of the human kidney and can lead
to improved clinical outcomes.
While the home represents a viable setting for hemodialysis,
from both a clinical and quality of life standpoint, adoption of
home hemodialysis has been limited, in large part, due to the
complexity and infrastructure needs associated with existing
hemodialysis equipment. We believe key limitations to adoption
have been:
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Traditional system complexity. Traditional
systems are complex and optimized for use by skilled dialysis
nurses or technicians; it is often difficult for patients to
operate and be trained on these systems.
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Large, bulky size and special infrastructure
requirements. Traditional systems are bulky in
size and consume a large amount of space within the home. These
systems typically require specialized and costly household
electrical and plumbing modifications to accommodate the
dedicated circuit and high pressure, high volume water delivery
required to operate the equipment. Since Medicare and private
insurance generally do not cover these modification costs,
patients often cover these costs themselves in addition to the
incremental ongoing utility costs associated with this
specialized electrical and plumbing infrastructure.
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Lack of portability. Due to the large size,
weight and special infrastructure requirements, traditional
systems are a permanent fixture in the patients home. As a
result, treatment is limited strictly to the home, making
patient travel with these systems almost impossible.
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Disinfection and maintenance
requirements. Equipment disinfection and
maintenance requirements are complex and increase the amount of
time needed to set up and disassemble equipment between
treatments.
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In addition to patients performing home hemodialysis with
traditional equipment, a small number of patients perform daily
hemodialysis at home using a machine designed by another company
specifically for home use. This home use system addresses the
complexity and ease-of-use issues associated with traditional
dialysis equipment, however, it is not readily portable and
requires permanent plumbing modifications to the home.
Traditional
Dialysis Treatment Alternatives for Critical Care
Current Dialysis Treatment Alternatives for Acute Kidney
Failure. Physicians currently treat most
acute kidney failure cases using conventional hemodialysis
equipment. Because these machines require water processing
equipment and significant space, they are generally ill suited
for the constrained space of the intensive care unit, or ICU.
Recent studies suggest clinical outcomes improve when longer or
continuous dialysis therapy is delivered to acute kidney failure
patients. However, this therapy is difficult to accomplish using
traditional equipment because a skilled dialysis nurse or
technician must be called in to set-up, operate
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and disassemble the equipment. Given the shortage of dialysis
nurses, it is rarely feasible to dedicate a dialysis nurse to
the care of just one patient for a prolonged or continuous
period.
A smaller percentage of acute kidney failure patients are
treated using systems designed specifically for critical care
use. These systems are smaller and more portable than
traditional dialysis equipment. They do not rely on
site-of-care
water processing and, because they are less complex, do not need
to be operated by a specialized dialysis nurse. These systems
are also designed to provide prolonged and continuous therapy.
The primary limitation of these ICU specific systems is that
they rely upon scale-based technology to weigh and balance
fluids used and removed during therapies. These scales require
nursing interventions to routinely and periodically empty waste
fluid bags and rehang empty bags to ensure continued treatment.
ICU specific dialysis equipment is also capable of performing
hemofiltration, a variation of hemodialysis therapy. Many
physicians prefer hemofiltration to hemodialysis for the
treatment of acute kidney failure. Both therapies mechanically
clean the blood; the difference between the therapies is how the
blood is cleaned in the dialyzer. In hemofiltration, the
dialyzer acts as a sieve that strains out wastes and toxins from
the blood. In hemodialysis, the dialyzer acts as a rinsing bath
where wastes and toxins in the blood diffuse, like tea from a
tea bag, into the clean dialysate passed through the dialyzer.
While dialysis systems designed specifically for use in the ICU
are capable of performing both forms of therapy, traditional
dialysis equipment is typically limited to hemodialysis.
Current Treatment Alternatives for Fluid
Overload. Conventional fluid overload
treatment for CHF primarily consists of pharmaceutical
therapies. Drug regimented treatment, however, is
time-consuming, as it can take several days to reach the desired
fluid reduction. Non-pharmacological treatments consist of salt
and fluid intake restrictions as well as limited use of another
membrane-based filtration mechanism, known as ultrafiltration,
using dialysis equipment. Ultrafiltration involves the
mechanical removal of fluids from the blood through a dialyzer.
Although currently used in a very small number of cases,
ultrafiltration has been shown to be an effective treatment for
patients with fluid overload. To date, it has not been broadly
adopted because it is a less well-known and less well-studied
treatment modality for these patients. Physicians who use
ultrafiltration to treat their patients for fluid overload
typically use dialysis equipment. However, traditional dialysis
equipment is not well-suited for this application because of its
size and complexity.
The
NxStage Solution
The
System One
Our primary product, the NxStage System One, is a small,
portable,
easy-to-use
hemodialysis system, which incorporates multiple design
technologies and features.
The System One is comprised of the following components:
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The NxStage Cycler. A compact portable
electromechanical device containing pumps, control mechanisms,
safety sensors and remote data capture functionality.
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The NxStage Cartridge. A single-use,
integrated treatment cartridge that loads simply and easily into
the cycler. The cartridge incorporates a proprietary disposable
volumetric fluid management system and includes a pre-attached
dialyzer. This fully disposable design eliminates any contact
between the dialysis machine and the dialysate, thereby avoiding
complex disinfection requirements associated with traditional
systems.
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Premixed Dialysate. The System One uses
high-purity, premixed dialysate for hemodialysis applications.
The volume of fluids used varies with treatment options and
prescription, but typical weekly volumes are similar to the
amount of dialysate used by a patient on PD therapy. Currently,
we supply all of our premixed dialysate in five liter bags. In
March 2006, we received FDA clearance for the PureFlow SL
module, a proprietary dialysate preparation product to be used
with the System One, which allows for the automated preparation
of dialysate fluid in the patients home using ordinary tap
water and dialysate concentrate thereby
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eliminating the need for bagged fluid. We expect to commercially
launch this product beginning in July 2006.
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Treatment with the System One begins with the operator loading
the disposable treatment cartridge into the cycler. The
cartridge, including all safety systems, automatically engages
when the cycler door is closed. The System One does not require
the threading of tubing sets associated with other hemodialysis
systems. The operator then connects the cartridge to a fluid
source to start the systems automated priming sequence.
After priming is complete, the cartridge tubing must be
connected to the patients catheter, port or other vascular
access site. Using a simple touch pad, the operator enters the
prescribed therapy into the System One cycler, including the
amount of fluid desired to be removed from the patient. The
operator connects the cartridge to a dialysate source. The
operator then presses a button to begin treatment. At the end of
treatment, the cycler returns the blood in the cartridge back to
the patient. The patient is disconnected from the cartridge and
the cartridge is discarded. The operator wipes down the outside
of the cycler and the work area with a cloth wet with diluted
bleach. The System One is then ready for the next treatment.
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Benefits
of the System One
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The System One presents a new hemodialysis treatment alternative
for ESRD, acute kidney failure and fluid overload. Our system is
designed to address the needs of patients, physicians and other
healthcare providers by providing the following benefits:
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Versatility. We have developed the System One
so that the same system can be used in clinical or non-clinical
settings, for either chronic or critical care. In addition, the
system can be used, with minor adjustment to the cartridge, for
hemodialysis, hemofiltration or ultrafiltration. This
versatility reduces the need for dialysis clinics and hospitals
to purchase and provide training on multiple systems for
different therapies.
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Portability. The size and mobility of the
System One, which weighs approximately 75 pounds and measures
15x15x18 inches, is flexible enough to use in any
environment prescribed by the physician, including the
patients home, dialysis clinic, ICU and CCU. When therapy
is prescribed in the home, we ship the necessary supplies,
including disposable cartridges and fluids, directly to the
patient. If the patient travels with the System One, we ship the
necessary disposables to the patients destination.
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Simplicity and Convenience. The System One is
designed for simple operation and convenience. It employs a
drop-in cartridge, avoiding the threading of tubing
sets required by other equipment and is operated by an
icon-based touch pad that is simple and intuitive. Because our
System One uses volumetric rather than scale-based fluid
balancing, bags do not need to be emptied and rehung.
Complexities and risks associated with water processing and
disinfection are minimized or eliminated with the System One
because we use premixed bagged fluids and because there is no
contact between any of the treatment fluids and the cycler. In
addition, our disposable products do not require disinfection.
The only operator disinfection required for the system is the
wipe down of the outside of the System One after each treatment
and a once monthly wipe down of an interior sensor to remove any
dust and debris. Our PureFlow SL module, which we plan to
commercially launch in the chronic care market beginning in July
2006, will not require any special disinfection because it uses
disposable components.
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No unique infrastructure requirements. The
System One and PureFlow SL module can plug into any standard
grounded outlet. Our bagged fluids eliminate the need for any
customized water source at the site of treatment, facilitating
therapy in any setting, especially the ICU and patient travel
destinations. Our PureFlow SL module has no unique household
water requirements and works with standard water pressures and
volumes. It can be hooked up to a sink or any other standard
water line with a simple connection and no special
infrastructure requirements are necessary. Waste dialysate is
discarded to any drain.
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Highly responsive customer support and
service. We offer 24 hour per day, seven day
per week customer support service through a team of experienced
nurses and engineers. Due to the
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portability of the System One, we are able to offer an overnight
equipment exchange program, avoiding the need for a large field
service organization.
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Designed for safety. With automatic loading
and calibration of all safety systems and simple dialysate
solution preparation, the System One is designed to
minimize operator error, although such errors do still occur.
The cartridge is preconnected to a filter to reduce connection
error. Our cycler includes redundant safety systems, which
provide further protection to patients undergoing treatment. We
have received several reports of operator error from both
patients in the home hemodialysis setting and nurses in the
critical care setting. To our knowledge, none of these reported
instances of operator error with the System One caused death or
permanent medical injury.
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High fluid purity. Our fluids, whether bagged
or prepared by the Pureflow SL module, meet United States
Pharmacopeia, or USP, standards for fluid purity and exceed the
Association for the Advancement of Medical Instrumentation, or
AAMI, industry standards for dialysate purity. Recent studies
have shown that the use of high purity dialysate, which exceeds
AAMI standards, helps in the reduction of inflammatory disorders
commonly experienced by ESRD patients.
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For the chronic care market, the System One, which is
specifically FDA cleared for hemodialysis use in the home, is
designed to make home treatment and more frequent treatment
easier and more practical. Although not performed using our
product, studies suggest that therapy administered five to six
times per week, commonly referred to as daily therapy, better
mimics the natural functioning of the human kidney and can lead
to improved clinical outcomes, including reduction in
hypertension, improved anemia status, reduced reliance on
pharmaceuticals, improved nutritional status, reduced
hospitalizations and overall improved quality of life as
patients feel better. A significant body of published literature
also supports the clinical and quality of life benefits
associated with home dialysis therapy. We believe traditional
equipment cannot satisfy the demand for home and more frequent
treatment due to its complexity, lack of portability, size and
infrastructure requirements. The costs of delivering more
frequent therapy in center, as well as clinic scheduling
limitations, present further obstacles to the broader adoption
of more frequent therapy, and we believe the System One
addresses many of the barriers to more frequent and home therapy.
For the critical care market, our System One is designed to
offer clinicians an alternative that simplifies the delivery of
acute kidney replacement therapy and makes longer or continuous
critical care therapies easier to deliver. Because of its small
size, portability and lack of infrastructure requirements, our
system can be easily moved between patient rooms, set up and
taken down. It can also be easily moved from the ICU to the CCU
or telemetry floor to treat patients with fluid overload. Our
use of volumetric balancing rather than scales eliminates the
frequent nursing interventions required by existing ICU dialysis
systems. The ability of our system to perform hemofiltration,
for which the System One is also FDA cleared in addition to
hemodialysis, is advantageous, as many clinicians choose to
prescribe this therapy for patients with acute kidney failure.
Our
Strategy
Our goal is to become the leading provider of home hemodialysis
systems, addressing the market opportunity for a hemodialysis
treatment that allows freedom from the regimen of traditional
in-center dialysis and enables patients to improve the quality
of their life. In the critical care market, we intend to become
a leading provider of dialysis systems addressing acute kidney
failure and fluid overload.
To achieve these objectives, we are pursuing the following
business strategies:
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Promote high ESRD patient and physician awareness of the
benefits of the System One. We are increasing our
efforts to educate ESRD patients, nurses, technicians and
physicians about the clinical and lifestyle benefits of the
System One home and more frequent hemodialysis and about the
ease-of-use and portability of the System One. Primarily through
cooperative marketing initiatives with our dialysis clinic
customers, we are currently expanding our patient and physician
education programs.
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Drive adoption of the System One through a targeted sales and
marketing program focused on selected dialysis clinics and
hospitals in both the chronic care and critical care
markets. We intend to significantly expand our
direct sales and marketing force to address our two markets. In
the chronic care market, we intend to primarily target leading
dialysis clinics with experience in home dialysis therapies. We
believe the System One is complementary to our customers
existing in-center dialysis services, providing these customers
improved access to the developing home and more frequent
hemodialysis markets and the ability to expand their patient
base by adding home patients without adding clinic
infrastructure. In the critical care market, we intend to
continue to target leading institutions that we believe can
benefit from the versatility of our system to address a number
of critical care applications. Through our specialized sales
force, we have placed the System One in several dialysis
clinics, including some owned by national providers as well as
other prominent medical institutions. We intend to increase the
number and enhance the scope of our key customer relationships
and drive adoption of our product.
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Leverage our existing technology and continue to innovate the
System One. We will continue to invest in
research and development to enhance our existing product. Our
development team integrates skills across the range of
technologies required to innovate dialysis systems, including:
filters, tubing sets, mechanical systems, fluids, software and
electronics. Our PureFlow SL module, which we plan to
commercially launch beginning in July 2006, is the most recent
example of our ongoing product development efforts.
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Focus on developing operations in the United
States. For the near and intermediate-term, we
are focusing our efforts on the U.S. market. We believe
there is a substantial opportunity outside the United States for
the System One and plan, over the long-term, to pursue
international growth when we have developed the appropriate
scale and infrastructure to expand into other geographic regions.
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Sales and
Marketing
We sell our products in two markets: the chronic market and the
critical care market. We have separate marketing and sales
efforts dedicated to each market. In 2005, sales to Clarian
Health Partners represented 10.0% of our total revenues, sales
to Renal Care Group represented 12.4% of our total revenues and
sales to Wellbound, Inc. represented 10.5% of our total
revenues. No other single customer represented 10% or more of
our revenues in 2005.
Chronic
Care
In the chronic care market, our customers are independent
dialysis clinics as well as dialysis clinics that are part of
national chains. Since Medicare regulations require that all
chronic ESRD patients be under the care of a dialysis clinic,
whether they are treated at-home, in-clinic or with a kidney
transplant, we do not, and cannot, sell the System One directly
to chronic care patients.
We have a chronic care direct sales force that calls on dialysis
clinics. In addition to specialized sales representatives, we
also employ nurses on our chronic care sales force to serve as
clinical educators to support our sales efforts.
Currently, there are approximately 4,500 Medicare-certified
dialysis outpatient facilities in the United States. Ownership
of these clinics is highly consolidated with DaVita controlling
approximately 27%, and Fresenius controlling approximately 33%
after giving effect to Fresenius acquisition of Renal Care
Group and assuming the completion of its recently announced sale
of approximately 100 clinics to the National Renal Institutes.
Independent clinics and hospitals represent the approximately
40% of remaining clinics. Because the chronic care market is
highly concentrated with some vertically integrated suppliers,
it is possible, with a relatively small sales force, for us to
target and market to only those clinics that we believe would be
interested in our system. Our customers include independent
clinics as well as large chains.
After renting or selling a System One to a clinic, our sales
representatives and clinical educators train the clinics
nurses and dialysis technicians on the proper use of the system
using proprietary training materials.
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We then rely on the trained technicians and nurses to train home
patients and other technicians and nurses using the System One,
rather than sending our sales representatives and nurses back to
the clinic to train each new patient, nurse or technician. This
approach also allows the clinic and physician to select, train
and support the dialysis patients that will use our system, much
the same way as they manage their patients who are on home
peritoneal dialysis therapy.
We began marketing the System One to perform hemodialysis for
ESRD patients in September 2004. As of May 15, 2006, there
were 556 patients with chronic ESRD using the System One.
Critical
Care
In the critical care market, because both acute kidney failure
and fluid overload are typically treated in hospital intensive
care units, our customers are hospitals. We are specifically
focusing our sales efforts in the critical care market on those
large institutions that we believe are most dedicated to
increased and improved dialysis therapy for patients with acute
kidney failure and believe in ultrafiltration as an earlier
stage treatment option for fluid overload associated with
multiple diseases, including congestive heart failure.
We have a critical care direct sales force that calls on
hospitals. In addition to specialized sales representatives, we
also employ nurses in our critical care sales force to serve as
clinical educators to support our sales efforts.
The System One for the critical care market has a list price of
$28,000; this price does not include the related disposables
required for each treatment. After selling or placing a System
One in a hospital, our sales representatives and clinical
educators train the hospitals ICU nurses on the proper use
of the system using proprietary training materials. We then rely
on the trained nurses to train other nurses. By adopting this
train the trainer approach, our sales
representatives and nurses do not need to return to the hospital
each time a new nurse needs to be trained.
We began promoting our System One product for use in the
critical care market in February 2003. As of May 15, 2006,
we had 55 hospitals as critical care customers.
Customer
Support Services
We use a depot service model for equipment servicing and repair
for the chronic care market. If a device malfunctions and
requires repair, we arrange for a replacement device to be
shipped to the site of care, whether it is a patients
home, clinic or hospital, and for pick up and return to us of
the defective system. This shipment is done by common carrier,
and, as there are no special installation requirements, the
patient, clinic or hospital can set up the new machine in a
matter of minutes. In addition, we ship monthly supplies via
common carrier and courier services directly to chronic care
patients, dialysis clinics and hospitals.
In addition to depot service, the critical care market also
demands field service calls for cycler servicing and repair. The
nature of the hospital environment, coupled with the practices
of other ICU dialysis equipment suppliers, frequently
necessitates
on-site
clinical support for our systems installed in this environment.
We maintain telephone service
coverage 24-hours
a day, seven days a week, to respond to technical questions
raised by patients, clinics and hospitals concerning our System
One product. In addition, due to the intense nature of the needs
of patients with acute kidney failure and fluid overload, our
critical care sales representatives and technical specialists
are personally available to answer questions 24 hours a
day, seven days a week. We generally do not handle clinical
questions or issues from patients, but instead refer them to
their physician or dialysis clinic.
Billing
In the chronic care market, we typically rent the System One,
and sell the related disposables, to the dialysis clinics, and
bill the clinics monthly for each system and all disposables
used by their patients. In the critical care market, we rent or
sell our systems, and sell all related disposables, to hospitals
and bill the
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hospitals directly. The clinics and hospitals then bill their
treated patients insurance providers, usually Medicare,
for the treatment provided.
Clinical
Experience and Results
Over one hundred published articles have reported on the
benefits of daily dialysis therapy. Although these publications
were based on studies that did not use our product, the
literature strongly supports that daily hemodialysis therapy can
lead to improved clinical outcomes, including reduction in
hypertension, improved anemia status, reduced reliance on
pharmaceuticals, improved nutritional status, reduced
hospitalizations and overall improved quality of life as
patients feel better.
Recently, we announced the first enrollment of a patient in our
post-market FREEDOM study (Following Rehabilitation, Economics,
and Everyday Dialysis Outcome Measurements) designed to quantify
the clinical benefits and cost savings of daily home therapy
administered to Medicare patients with the NxStage System One
versus conventional thrice-weekly dialysis. The FREEDOM Study is
a prospective, multi-center, observational study, which will
enroll up to 500 Medicare patients in up to 70 clinical centers
over what is expected to be a two-year period. It will compare
Medicare patients using the NxStage System One with a matched
cohort of patients from the USRDS patient database treated with
traditional in-center thrice weekly dialysis, to help define
differences in the cost of care and patient outcomes between the
daily home setting and the dialysis clinic setting. Comparing
the study group of patients using the NxStage System One to a
USRDS database group matched in terms of demographics,
co-morbidities, geography, number of years on dialysis, and
other key factors, should allow a valuable comparison to be made
without the time and cost challenges of a crossover study, in
which patients would be followed for a given time on each type
of therapy.
Our goal is to provide further insights into more frequent
dialysis and its cost-effectiveness as well as to confirm the
significant reported potential benefits of daily therapy on
patient quality of life and rehabilitation. Published
U.S. government data estimates the total health care cost
burden of a Medicare dialysis patient at approximately $65,000
annually, with dialysis services representing approximately 25%
of this cost, while the cost of hospitalizations, drugs and
physician fees make up more than 50%. It is believed daily
therapy may materially reduce overall Medicare costs for the
care of chronic dialysis patients, particularly through reduced
hospitalization and drug costs.
In addition to the FREEDOM study, we conducted two significant
clinical trials with the System One for ESRD therapy, a
post-market study of chronic daily hemofiltration and a study
under an FDA approved IDE. We are currently conducting a study
of ultrafiltration with the System One for fluid overload
associated with CHF.
In the IDE study, we compared center-based and home-based daily
dialysis with the System One. That study was a prospective,
multi-center, two-treatment, two-period, open-label, cross-over
study. The first phase of the study consisted of 48 treatments,
six per week, in an eight week period performed in-center, while
the second phase consisted of the same number of treatments
performed in an in-home setting. Between the two phases, there
was a two-week transition period conducted primarily in the
patients home. Prior to study initiation, enrolled
patients were to have been on at least two weeks of daily
hemodialysis with the System One in an in-center environment.
The objective of the study was to evaluate equivalence on a per
treatment basis between the delivery of hemodialysis with our
system in-center and at home. The result of the investigation
showed that hemodialysis in each setting was equivalent.
Research
and Development
Our research and development organization has focused on
developing innovative technical approaches that address the
limitations of current dialysis systems. Our development team
has skills across the range of technologies required to develop
and maintain dialysis systems. These areas include filters,
tubing sets, mechanical systems, fluids, software and
electronics. In response to physician and patient feedback and
our own assessments, we are continually working on enhancements
to our product designs to improve
ease-of-use,
functionality, reliability and safety. We also seek to develop
new products that positively
58
supplement our existing product offerings and intend to continue
to actively pursue opportunities for the research and
development of complementary products.
For the years ended December 31, 2003, 2004 and 2005, we
incurred total research and development expenses of
$4.5 million, $6.0 million and $6.3 million,
respectively.
Intellectual
Property
We seek to protect our investment in the research, development,
manufacturing and marketing of our products through the use of
patent, trademark, copyright and trade secret law. We own or
have rights to a number of patents, trademark, copyrights, trade
secrets and other intellectual property directly related and
important to our business.
As of March 31, 2006, we had 21 issued U.S. and
international patents and 51 U.S., international and foreign
pending patent applications.
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Patent No.
|
|
Regime
|
|
Filed
|
|
Expiration Date
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|
Description
|
|
6,254,567
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U.S.
|
|
2/23/2000
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2/21/2019
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Addresses fluids requirement by
regenerating dialysate
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6,554,789
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U.S.
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|
2/25/2000
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2/9/2017
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|
Panels defined by seals and
overlying panels
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6,572,576
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U.S.
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7/7/2001
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7/2/2021
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Leak detection by flow reversal
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6,572,641
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U.S.
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4/9/2001
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4/4/2021
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Fluid warmer that removes air
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6,579,253
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U.S.
|
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2/25/2000
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|
2/9/2017
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Balancing chambers are defined by
panels of the circuit
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6,582,385
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U.S.
|
|
2/19/1998
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2/14/2018
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|
Addresses fluids requirement by
purifying waste
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6,589,482
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U.S.
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|
2/25/2000
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2/9/2017
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Panels form a combination to
mutually displace waste and replacement fluid
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6,595,943
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|
U.S.
|
|
2/25/2000
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|
2/9/2017
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|
Blood pressure control in filter
to optimize throughput
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6,638,477
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U.S.
|
|
2/25/2000
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2/9/2017
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|
Divert part of waste stream to
control ultrafiltration or rinse
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6,638,478
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|
U.S.
|
|
2/25/2000
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|
2/9/2017
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|
Mechanically coupled flow
assemblies that balance flow of incoming and outgoing fluid
streams, respectively
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6,649,063
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U.S.
|
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7/12/2001
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|
7/7/2021
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Using the filter to generate
sterile replacement fluid
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6,673,314
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|
U.S.
|
|
2/25/2000
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|
2/9/2017
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|
Supply notification including
third-party notification by network
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6,702,561
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|
U.S.
|
|
7/12/2001
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|
7/7/2021
|
|
Potting distribution channel
molded into filter housing
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6,743,193
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|
U.S.
|
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7/17/2001
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7/12/2021
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|
Hermetic valve design
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6,830,553
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|
U.S.
|
|
2/25/2000
|
|
2/9/2017
|
|
Sterile filter in replacement
fluid line
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6,852,090
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|
U.S.
|
|
5/24/2001
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|
2/9/2017
|
|
Balancing chambers are defined by
circuit portions defined in cooperation with the base
|
6,872,346
|
|
U.S.
|
|
3/20/2003
|
|
3/15/2023
|
|
Manufacturing method for filters
using radiant heat to seal filter fibers
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6,955,655
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|
U.S.
|
|
6/27/2001
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|
2/9/2017
|
|
Frequent treatment with simple
setup
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6,979,309
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|
U.S.
|
|
1/7/2002
|
|
2/9/2017
|
|
New frequent hemofiltration
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7,004,924
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|
U.S.
|
|
10/19/98
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|
2/11/2018
|
|
Methods, systems, and kits for the
extracorporeal processing of blood
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EP969887
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|
EP (UK)
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8/15/1999
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2/9/2017
|
|
Frequent treatment with simple
setup
|
Patents for individual products extend for varying periods of
time according to the date a patent application is filed or a
patent is granted and the term of the patent protection
available in the jurisdiction granting the patent. The scope of
protection provided by a patent can vary significantly from
country to country.
In addition to our patents and pending patent applications in
the United States and selected
non-U.S. markets,
we use trade secrets and proprietary know-how in our products.
Any of our trade secrets,
59
know-how or other technology not protected by a patent could be
disclosed to, or independently developed by, a competitor.
Our strategy is to develop patent portfolios for our research
and development projects. We monitor the activities of our
competitors and other third parties with respect to their use of
intellectual property. We intend to aggressively defend the
patents we hold, and we intend to vigorously contest claims
other patent holders may bring against us.
The medical device industry is characterized by the existence of
a large number of patents and frequent litigation based on
allegations of patent infringement. While we attempt to ensure
that our products and methods do not infringe other
parties patents and proprietary rights, our competitors
may assert that our products, or the methods that we employ, are
covered by patents held by them. In addition, our competitors
may assert that future products and methods we may market
infringe their patents.
We require our employees, consultants and advisors to execute
confidentiality agreements in connection with their employment,
consulting or advisory relationship with us. We also require our
employees to agree to disclose and assign to us all inventions
conceived by them during their employment with us. Similar
obligations are imposed upon consultants and advisors performing
work for us relating to the design or manufacture of our
product. Despite efforts taken to protect our intellectual
property, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as
proprietary.
Manufacturing
The manufacture of our products is accomplished through a
complementary combination of outsourcing and internal
production. Specifically, we assemble, package and label our
disposable cartridges for the critical care market within our
45,000 square foot facility in Lawrence, Massachusetts. We
also manufacture our dialyzers internally, within our
5,000 square foot facility in Rosdorf, Germany. We
outsource the manufacture of our premixed dialysate and the
System One cycler, cartridges for the chronic care market and
sterilization of our disposable cartridges.
The manufacturing process for our disposable cartridges for the
critical care market includes the inspection, assembly, testing,
packaging, and sterilization of components that have been
manufactured to our specifications by various suppliers. We have
single-source suppliers of components, but in most instances
there are alternative sources of supply available. Where
obtaining a second source is more difficult, we have tried to
establish supply agreements that better protect our continuity
of supply. These agreements, currently in place with several key
suppliers, are intended to establish commitments to supply
product. We do not have supply agreements in place with all of
our single-source suppliers.
We have not made commitments to suppliers as exclusive providers
of a particular product except KMC Systems, Inc., the outsourced
manufacturer of the System One cycler. We have an agreement with
KMC that provides us a committed supply in exchange for limited
exclusivity, which expires upon our receipt of a specified
number of cyclers. We expect this exclusivity requirement to
expire in late 2006. Thereafter, the agreement may be renewed on
a non-exclusive basis for additional one-year terms. The
contract may be terminated upon a material breach, generally
following a
30-day cure
period. We may terminate the exclusivity provision earlier if
KMC fails to supply our product requirements for two consecutive
months.
We purchase bicarbonate-based premixed dialysate from B. Braun
and our lactate-based premixed dialysate from B. Braun and other
sources. We have a long-term supply agreement with B. Braun that
obligates B. Braun to supply the dialysate to us through 2009 in
exchange for modest minimum purchase requirements of
approximately $100,000 per year. The contract may be
terminated upon a material breach, generally following a
30-day cure
period. We also purchase lactate-based premixed dialysate from
Laboratorios PISA. We have entered into a long-term supply
agreement with PISA that will obligate PISA to supply dialysate
to us through 2008 in exchange for volume commitments. The
contract may be terminated upon a material breach, generally
following a
30-day cure
period.
We expect to purchase our PureFlow SL module from Enercon. We
are negotiating a short-term supply agreement with Enercon,
which we expect to finalize shortly, that will obligate Enercon
to supply this
60
equipment to us for the next 12 months. There are no
minimums associated with this agreement, and the agreement
renews on a year to year basis, unless prior written notice is
given by either party. The contract may be terminated upon a
material breach, generally following a
30-day cure
period.
We are currently negotiating a long-term supply agreement with
Medisystems, a well established supplier to the medical device
industry, for our disposable cartridge. David Utterberg, a
director and significant stockholder of NxStage, is the sole
stockholder and chief executive officer of Medisystems. We are
currently purchasing components and chronic disposable
cartridges from Medisystems under purchase orders. We cannot be
certain that we will enter into an agreement with Medisystems.
We believe that our purchases from Medisystems have been on
terms no less favorable to us than could be obtained from
unaffiliated third parties.
Competition
Chronic
Care
The dialysis therapy market is mature, consolidated and
competitive. We compete with suppliers of hemodialysis and
peritoneal dialysis devices and certain dialysis device
manufacturers that also provide dialysis services. We currently
face direct competition in the United States primarily from
Fresenius, Gambro, Baxter and Aksys. Fresenius, Gambro and
Baxter each have large and well-established dialysis products
businesses and Aksys markets a competitive product specifically
designed for more frequent use in the home. In addition, DaVita
has entered into a preferred supplier agreement with Gambro
pursuant to which Gambro will provide a significant majority of
DaVitas dialysis equipment and supplies for a period of at
least 10 years.
We believe the competition in the market for kidney dialysis
equipment and supplies is based primarily on:
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product quality;
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ease-of-use;
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cost effectiveness;
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sales force coverage; and
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clinical flexibility.
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We believe that we compete favorably in terms of product quality
and ease of use due to our System One design, portability,
drop-in cartridge and use of premixed fluids. We believe we also
compete favorably on the basis of clinical flexibility, given
the System Ones ability to work well in acute and chronic
settings and to perform hemofiltration, hemodialysis and
ultrafiltration. We believe we compete favorably in terms of
cost-effectiveness to clinics. Although our product is priced at
a premium compared to some competitive products in the market,
we allow clinics to reduce labor costs by offering their
patients a home treatment alternative. We compete unfavorably in
terms of sales force coverage and branding because we have only
recently commenced commercial sales of our System One in the
chronic care market and have a smaller sales force than most of
our competitors.
Our primary competitors are large, well-established businesses
with significantly more financial and personnel resources than
us. They also have significantly greater commercial
infrastructures than we have. We believe our ability to compete
successfully will depend largely on our ability to:
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establish the infrastructures necessary to support a growing
home and critical care dialysis products business;
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maintain and improve product quality;
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continue to develop sales and marketing capabilities;
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61
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achieve cost reductions; and
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access the capital needed to support the business.
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Our ability to successfully market the System One, and any
products we may develop in the future, for the treatment of
kidney failure could also be adversely affected by
pharmacological and technological advances in preventing the
progression of chronic ESRD
and/or in
the treatment of acute kidney failure, technological
developments by others in the area of dialysis, the development
of new medications designed to reduce the incidence of kidney
transplant rejection and progress in using kidneys harvested
from genetically-engineered animals as a source of transplants.
There can be no assurance that competitive pressure or
pharmacological or technological advancements will not have a
material adverse effect on our business.
Critical
Care
We believe that competition in the critical care market will be
affected by system functionality,
ease-of-use,
reliability, portability and infrastructure requirements. In the
fluid overload market, we believe competition will be further
affected by physicians willingness to adopt
ultrafiltration as a viable treatment alternative to
pharmaceutical therapy. In the critical care market, we face
direct competition from Gambro, Baxter, B. Braun, Fresenius and
CHF Solutions.
In the fluid overload market, drug therapy is currently the most
common and preferred treatment. To date, ultrafiltration has not
been broadly adopted and, if the medical community does not
accept ultrafiltration as clinically useful, cost-effective and
safe, we will not be able to successfully compete against
existing pharmaceutical therapies. Our ability to successfully
market the System One for the treatment of fluid overload
associated with multiple diseases, including CHF, could also be
adversely affected by pharmacological and technological advances
in preventing or treating fluid overload.
Government
Regulation
Food
and Drug Administration
In the United States, our products are subject to regulation by
the FDA, which regulates our products as medical devices. The
FDA regulates the clinical testing, manufacture, labeling,
distribution, import and export, sale and promotion of medical
devices. Noncompliance with applicable FDA requirements can
result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant
pre-market clearance or pre-market approval for devices,
withdrawal of marketing clearances or approvals and criminal
prosecution.
Unless an exemption applies, all medical devices must receive
either prior 510(k) clearance or pre-market approval from the
FDA before they may be commercially distributed in the United
States. Submissions to obtain 510(k) clearance and pre-market
approval must be accompanied by a user fee, unless exempt. In
addition, the FDA can also impose restrictions on the sale,
distribution or use of devices at the time of their clearance or
approval, or subsequent to marketing.
The FDA classifies medical devices into one of three classes:
Class I, Class II or
Class III depending on the FDAs
assessment of the degree of risk associated with the device and
the controls it deems necessary to reasonably ensure the
devices safety and effectiveness. The FDA has deemed our
System One to be a Class II medical device and we have
marketed it as such in the United States.
Class I devices are those for which safety and
effectiveness can be assured by adherence to a set of general
controls, which include compliance with facility registration
and product listing requirements, reporting of adverse events,
and appropriate, truthful and non-misleading labeling,
advertising and promotional materials. Class II devices are
also subject to these same general controls, as well as any
other special controls deemed necessary by the FDA to ensure the
safety and effectiveness of the device. These special controls
can include performance standards, post-market surveillance,
patient registries and FDA guidelines. Pre-market review and
clearance by the FDA for Class II devices is accomplished
through the 510(k) pre-market notification procedure, unless the
device is exempt. When 510(k) clearance is required, a
manufacturer must submit a pre-
62
market notification to the FDA demonstrating that the proposed
device is substantially equivalent in intended use and in safety
and effectiveness to a legally marketed Class I or
Class II device or a Class III device that has been on
the market on or prior to May 28, 1976, for which the FDA
has not required pre-market application approval. If the FDA
agrees that the device is substantially equivalent to the
predicate, it will subject the device to the same classification
and degree of regulation as the predicate device, thus
effectively granting clearance to market it. After a device
receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, requires a new
510(k) clearance or possibly a pre-market approval.
Class III devices are devices for which insufficient
information exists that general or special controls will provide
reasonable assurance of safety and effectiveness, and the
devices are life-sustaining or life-supporting, or of
substantial importance in preventing the impairment of human
health, or present a potential, unreasonable risk of illness or
injury. Class III devices requiring an approved premarket
approval application to be marketed are devices that were
regulated as new drugs prior to May 28, 1976, devices not
found substantially equivalent to devices marketed prior to
May 28, 1976 and Class III preamendment devices, which
are devices introduced in the U.S. market prior to
May 28, 1976, that by regulation require premarket approval.
FDA
Regulatory Clearance Status
We currently have all of the regulatory clearances required to
market the System One in the United States in both the chronic
and critical care markets. The FDA has cleared the System One
for the treatment, under a physicians prescription, of
renal failure or fluid overload using hemofiltration,
hemodialysis
and/or
ultrafiltration. The FDA has also specifically cleared the
System One for home hemodialysis use under a physicians
prescription.
We received our first clearance from the FDA for a predecessor
model to the System One in January 2001 for hemofiltration and
ultrafiltration. In July 2003, we received expanded clearance
from the FDA for the System One for hemodialysis, hemofiltration
and ultrafiltration. Most recently, in June 2005, we received
FDA clearance specifically allowing us to promote home
hemodialysis using the System One. We have received a total of
20 product clearances from the FDA since our inception in
December 1998. We continue to seek opportunities for product
improvements and feature enhancements, which will, from time to
time, require FDA clearance before market launch.
FDA
Clearance and Premarket Approval Procedures
510(k) Clearance Pathway. When we are required
to obtain a 510(k) clearance for a device, which we wish to
market, we must submit a pre-market notification to the FDA
demonstrating that the device is substantially equivalent to a
previously cleared 510(k) device or a device that was in
commercial distribution before May 28, 1976 (or to a
pre-1976
class III device for which the FDA has not yet called for
the submission of pre-market approval applications). The FDA
attempts to respond to a 510(k) pre-market notification within
90 days of submission of the notification (or in some
instances 30 days under what is referred to as
special 510(k) submission), but the response may be
a request for additional information or data, sometimes
including clinical data. As a practical matter, pre-market
clearance can take significantly longer, including up to one
year or more.
After a device receives 510(k) clearance for a specific intended
use, any modification that could significantly affect its safety
or effectiveness, or that constitutes a major change in its
intended use, would require a new 510(k) clearance or could
require pre-market approval. In the first instance, the
manufacturer may determine that a change does not require a new
510(k) clearance. The FDA can review any such decision and can
disagree with a manufacturers determination. If the FDA
disagrees with a manufacturers determination that a new
clearance or approval is not required for a particular
modification, the FDA can require the manufacturer to cease
marketing
and/or
recall the modified device until 510(k) clearance or pre-market
approval is obtained.
Pre-market Approval Pathway. A pre-market
approval application must be submitted if the device cannot be
cleared through the 510(k) process. The pre-market approval
process is much more demanding than
63
the 510(k) pre-market notification process. A pre-market
approval application must be supported by extensive data and
information including, but not limited to, technical,
preclinical, clinical trials, manufacturing and labeling to
demonstrate to the FDAs satisfaction the safety and
effectiveness of the device.
After the FDA determines that a pre-market approval application
is complete, the FDA accepts the application and begins an
in-depth review of the submitted information. The FDA, by
statute and regulation, has 180 days to review an accepted
pre-market approval application, although the review generally
occurs over a significantly longer period of time, and can take
up to several years. During this review period, the FDA may
request additional information or clarification of information
already provided. Also during the review period, an advisory
panel of experts from outside the FDA may be convened to review
and evaluate the application and provide recommendations to the
FDA as to the approvability of the device. In addition, the FDA
will conduct a pre-approval inspection of the manufacturing
facility to ensure compliance with the Quality System
Regulations. New pre-market approval applications or
supplemental pre-market approval applications are required for
significant modifications to the manufacturing process,
labeling, use and design of a device that is approved through
the pre-market approval process. Pre-market approval supplements
often require submission of the same type of information as a
pre-market approval application, except that the supplement is
limited to information needed to support any changes from the
device covered by the original pre-market approval application,
and may not require as extensive clinical data or the convening
of an advisory panel.
Clinical Trials. A clinical trial is almost
always required to support a pre-market approval application and
is sometimes required for a 510(k) pre-market notification.
Clinical trials for devices that involve significant risk,
referred to as significant risk devices, require submission of
an application for an IDE to the FDA. The IDE application must
be supported by appropriate data, such as animal and laboratory
testing results, showing that it is safe to test the device in
humans and that the testing protocol is scientifically sound.
Clinical trials for a significant risk device may begin once the
IDE application is approved by the FDA and the institutional
review board, or IRB, overseeing the clinical trial. If FDA
fails to respond to an IDE application within 30 days of
receipt, the application is deemed approved, but IRB approval
would still be required before a study could begin. Products
that are not significant risk devices are deemed to be
non-significant risk devices under FDA regulations,
and are subject to abbreviated IDE requirements, including
informed consent, IRB approval of the proposed clinical trial,
and submitting certain reports to the IRB. Clinical trials are
subject to extensive recordkeeping and reporting requirements.
Our clinical trials must be conducted under the oversight of an
IRB at each clinical study site and in accordance with
applicable regulations and policies including, but not limited
to, the FDAs good clinical practice, or GCP, requirements.
Continuing
FDA Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include, among others:
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Quality System Regulations, which require manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
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labeling regulations, which govern product labels and labeling,
prohibit the promotion of products for unapproved, or off-label,
uses and impose other restrictions on labeling and promotional
activities;
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medical device reporting, or MDR, regulations, which require
that manufacturers report to the FDA if their device may have
caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur; and
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recalls and notices of correction or removal.
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MDR Regulations. The MDR regulations require
that we report to the FDA any incident in which our product may
have caused or contributed to a death or serious injury, or in
which our product malfunctioned and, if the malfunction were to
recur, would likely cause or contribute to a death or serious
64
injury. As of March 31, 2006, we submitted 109 MDRs.
Most of these have been submitted to comply with FDAs
blood loss policy for routine dialysis treatments. This policy
requires the manufacturer to file MDR reports related to routine
dialysis treatments if the blood loss is greater than 20cc.
FDA Inspections. We have registered with the
FDA as a medical device manufacturer. Compliance with regulatory
requirements is assured through periodic, unannounced facility
inspections by the FDA, and these inspections may include the
manufacturing facilities of our subcontractors. Failure to
comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include any of the
following:
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warning letters or untitled letters;
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fines, injunctions, and civil penalties;
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|
administrative detention;
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voluntary or mandatory recall or seizure of our products;
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customer notification, or orders for repair, replacement or
refund;
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operating restrictions, partial suspension or total shutdown of
production;
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refusal to review pre-market notification or pre-market approval
submissions;
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rescission of a substantial equivalence order or suspension or
withdrawal of a pre-market approval; and
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criminal prosecution.
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The FDA has inspected our facility and quality systems three
times. In our first inspection, one observation was made, but
was rectified during the inspection, requiring no further
response from us. Our last two inspections, including our most
recent inspection in March 2006, resulted in no observations. We
cannot provide assurance that we can maintain a comparable level
of regulatory compliance in the future at our facility.
Foreign
Regulation of Medical Devices
Clearance or approval of our products by regulatory authorities
comparable to the FDA may be necessary in foreign countries
prior to the commencement of marketing of the product in those
countries, whether or not FDA clearance has been obtained. The
regulatory requirements for medical devices vary significantly
from country to country. They can involve requirements for
additional testing and may be time consuming and expensive. We
have not sought approval for our products outside of the United
States, Canada and the European Union. We cannot provide
assurance that we will be able to obtain regulatory approvals in
any other markets.
The System One cycler and related cartridges are regulated as
medical devices in Canada under the Canadian Medical Device
Regulations and in the European Union, or EU, under the Medical
Device Directive. We have received four product licenses from
Canada; and our System One is covered by a recently obtained
Canadian license. Although we have obtained CE marking in the EU
for our System One, this CE marking is not up to date. Before we
would be able to market our current products in the EU, we would
be required to submit additional regulatory documentation. We
are not currently marketing any products in Canada or in the
European Union.
Fraud and
Abuse Laws
Anti-Kickback
Statutes
The federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual
for, or the furnishing, arranging for or recommending a good or
service for
65
which payment may be made in whole or part under a federal
healthcare program such as Medicare or Medicaid. The definition
of remuneration has been broadly interpreted to include anything
of value, including for example gifts, discounts, the furnishing
of supplies or equipment, credit arrangements, payments of cash
and waivers of payments. Several courts have interpreted the
statutes intent requirement to mean that if any one
purpose of an arrangement involving remuneration is to induce
referrals or otherwise generate business involving goods or
services reimbursed in whole or in part under federal healthcare
programs, the statute has been violated. The law contains a few
statutory exceptions, including payments to bona fide employees,
certain discounts and certain payments to group purchasing
organizations. Violations can result in significant penalties,
imprisonment and exclusion from Medicare, Medicaid and other
federal healthcare programs. Exclusion of a manufacturer would
preclude any federal healthcare program from paying for its
products. In addition, some enforcement officials have argued
that kickback arrangements can provide the basis for an action
under the Federal False Claims Act, which is discussed in more
detail below.
The Anti-Kickback Statute is broad and potentially prohibits
many arrangements and practices that are lawful in businesses
outside of the healthcare industry. Recognizing that the
Anti-Kickback Statute is broad and may technically prohibit many
innocuous or beneficial arrangements, the Office of Inspector
General of Health and Human Services, or OIG, has issued a
series of regulations, known as the safe harbors, beginning in
July 1991. These safe harbors set forth provisions that, if all
the applicable requirements are met, will assure healthcare
providers and other parties that they will not be prosecuted
under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors
does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that
do not fully satisfy each applicable safe harbor may result in
increased scrutiny by government enforcement authorities such as
the OIG. Arrangements that implicate the Anti-Kickback Law, and
that do not fall within a safe harbor, are analyzed by the OIG
on a
case-by-case
basis.
Government officials have focused recent enforcement efforts on,
among other things, the sales and marketing activities of
healthcare companies, and recently have brought cases against
individuals or entities with personnel who allegedly offered
unlawful inducements to potential or existing customers in an
attempt to procure their business. Settlements of these cases by
healthcare companies have involved significant fines
and/or
penalties and in some instances criminal pleas.
In addition to the Federal Anti-Kickback Law, many states have
their own kickback laws. Often, these laws closely follow the
language of the federal law, although they do not always have
the same exceptions or safe harbors. In some states, these
anti-kickback laws apply with respect to all payors, including
commercial health insurance companies.
False
Claims Laws
Federal false claims laws prohibit any person from knowingly
presenting, or causing to be presented, a false claim for
payment to the federal government or knowingly making, or
causing to be made, a false statement to get a false claim paid.
Manufacturers can be held liable under false claims laws, even
if they do not submit claims to the government, if they are
found to have caused submission of false claims. The Federal
Civil False Claims Act also includes whistle blower provisions
that allow private citizens to bring suit against an entity or
individual on behalf of the United States and to recover a
portion of any monetary recovery. Many of the recent highly
publicized settlements in the healthcare industry related to
sales and marketing practices have been cases brought under the
False Claims Act. The majority of states also have statutes or
regulations similar to the federal false claims laws, which
apply to items and services reimbursed under Medicaid and other
state programs, or, in several states, apply regardless of the
payor. Sanctions under these federal and state laws may include
civil monetary penalties, exclusion of a manufacturers
products from reimbursement under government programs, criminal
fines and imprisonment.
Privacy
and Security
The HIPAA and the rules promulgated thereunder require certain
entities, referred to as covered entities, to comply with
established standards, including standards regarding the privacy
and security of protected health information, or PHI. HIPAA
further requires that covered entities enter into agreements
66
meeting certain regulatory requirements with their business
associates, as such term is defined by HIPAA, which, among other
things, obligate the business associates to safeguard the
covered entitys PHI against improper use and disclosure.
While not directly regulated by HIPAA, a business associate may
face significant contractual liability pursuant to such an
agreement if the business associates breaches the agreement or
causes the covered entity to fail to comply with HIPAA. In the
course of our business operations, we have entered into several
business associate agreements with certain of our customers that
are also covered entities. Pursuant to the terms of these
business associate agreements, we have agreed, among other
things, not to use or further disclose the covered entitys
PHI except as permitted or required by the agreements or as
required by law, to use reasonable safeguards to prevent
prohibited disclosure of such PHI and to report to the covered
entity any unauthorized uses or disclosures of such PHI.
Accordingly, we incur compliance related costs in meeting
HIPAA-related obligations under business associates agreements
to which we are a party. Moreover, if we fail to meet our
contractual obligations under such agreements, we may incur
significant liability.
In addition, HIPAAs criminal provisions could potentially
be applied to a non-covered entity that aided and abetted the
violation of, or conspired to violate HIPAA, although we are
unable at this time to determine conclusively whether our
actions could be subject to prosecution in the event of an
impermissible disclosure of health information to us. Also, many
state laws regulate the use and disclosure of health
information, and are not necessarily preempted by HIPAA, in
particular those laws that afford greater protection to the
individual than does HIPAA. Finally, in the event we change our
business model and become a HIPAA covered entity, we would be
directly subject to HIPAA, its rules and its civil and criminal
penalties.
Reimbursement
Chronic
Care
Medicare regulations require that all chronic ESRD patients be
under the care of a dialysis clinic, whether they are treated at
home or in-clinic. We rent or sell our System One to dialysis
clinics; these clinics are, in turn, reimbursed by Medicare,
Medicaid and private insurers. According to the 2005 USRDS
report, Medicare is the primary payor for approximately 81% of
patients using hemodialysis and PD. It is believed that 15% of
patients are covered by commercial insurance, with the remaining
4% of patients classified by the USRDS as other or
unknown. Certain centers have reported that the
NxStage daily home dialysis therapy attracts a higher percentage
of commercial insurance patients, and periodic estimates by a
number of these centers have shown that 30% to 40% of their
patients are covered by commercial insurance.
Medicare. Medicare generally provides health
insurance coverage for persons who are age 65 or older and
for persons who are completely disabled. For ESRD patients,
however, Medicare coverage is not dependent on age or
disability. For patients eligible for Medicare based solely on
ESRD, generally patients under age 65, Medicare eligibility
begins three months after the month in which the patient begins
dialysis treatments. During this three-month waiting period
either Medicaid, private insurance or the patient is responsible
for payment for dialysis services. Medicare generally waives
this waiting period for individuals who participate in a
self-care dialysis training program, or are hospitalized for a
kidney transplant and the surgery occurs within a specified time
period.
For ESRD patients under age 65 who have any employer group
health insurance coverage, regardless of the size of the
employer or the individuals employment status, Medicare
coverage is generally secondary to the employer coverage during
a 30-month
period that follows the establishment of Medicare eligibility or
entitlement based on ESRD. During the period, the patients
existing insurer is responsible for paying primary benefits at
the rate specified in the plan, which may be a negotiated rate
or the healthcare providers usual and customary rate. As
the secondary payor during this coordination period, Medicare
will make payments up to the applicable composite rate for
dialysis services reimbursed through the composite rate to
supplement any primary payments by the employer group health
plan if the plan covers the services but pays only a portion of
the charge for the services.
67
Medicare generally is the primary payor for ESRD patients after
the 30-month
period. Under current rules, Medicare is also the primary payor
for ESRD patients during the
30-month
period under certain circumstances. Medicare remains the primary
payor when an individual becomes eligible for Medicare on the
basis of ESRD if, (a) the individual was already
age 65 or over or was eligible for Medicare based on
disability and (b) the individuals private insurance
coverage is not by reason of current employment or, if it is,
the employer has fewer than 20 employees in the case of
eligibility by reason of age, or fewer than 100 employees in the
case of eligibility by reason of disability. The rules regarding
entitlement to primary Medicare coverage when the patient is
eligible for Medicare on the basis of both ESRD and age, or
disability, have been the subject of frequent legislative and
regulatory changes in recent years and there can be no assurance
that these rules will not be unfavorably changed in the future.
When Medicare is the primary payor for services furnished by
dialysis clinics, it reimburses dialysis clinics for 80% of the
composite rate, leaving the secondary insurance or the patient
responsible for the remaining 20%. The Medicare composite rate
is set by Congress and is intended to cover virtually all costs
associated with each dialysis treatment, excluding physician
services and certain separately billable drugs and laboratory
services. There is some regional variation in the composite
rate, but, the national average is currently approximately
$149 per treatment for independent clinics and $154 per
treatment for hospital-based dialysis facilities. This is an
increase from approximately $126.33 per treatment for
independent clinics and $130.32 per treatment for hospital-based
dialysis facilities in 2004, due to two recent changes in
Medicare reimbursement. As a result of legislation enacted in
2003 and first implemented in 2005, the Centers for Medicare and
Medicaid Services, or CMS, shifted a portion of the Medicare
reimbursement dollars for dialysis from separately billable
drugs to the composite rate for dialysis services. This drug
add-on to the composite rate is subject to an increase based on
the estimated rate of growth of drugs and biologicals. In
addition, Congress recently passed an additional 1.6% increase
to the composite rate for treatments received on or after
January 1, 2006. Depending upon patient case mix,
reimbursement may be further improved, based on the case-mix
adjustment to the composite rate implemented as a result of the
2003 legislation. Under the case-mix adjustment, Medicare now
pays more for larger patients and those under the age of 65.
This may be beneficial to our customers, as to date our patient
population has tended to be younger and larger than the ESRD
national average.
CMS, rules limit the number of hemodialysis treatments paid for
by Medicare to three a week, unless there is medical
justification for the additional treatments. The determination
of medical justification must be made at the local Medicare
contractor level on a
case-by-case
basis. A clinics decision as to how much it is willing to
spend on dialysis equipment and services will be at least partly
dependent on whether Medicare will reimburse more than three
treatments per week for the clinics patients.
Medicaid. Medicaid programs are
state-administered programs partially funded by the federal
government. These programs are intended to provide coverage for
certain categories of patients whose income and assets fall
below state defined levels and who are otherwise uninsured. For
those who are eligible, the programs serve as supplemental
insurance programs for the Medicare co-insurance portion and
provide certain coverage, for example, self-administered
outpatient prescription medications, that is not covered by
Medicare. For ESRD treatment, state regulations generally follow
Medicare reimbursement levels and coverage without any
co-insurance amounts, which is pertinent mostly for the
three-month waiting period. Certain states, however, require
beneficiaries to pay a monthly share of the cost based upon
levels of income or assets.
Private Insurers. Some ESRD patients have
private insurance that covers dialysis services. Healthcare
providers receive reimbursement for ESRD treatments from the
patient or private insurance during a waiting period of up to
three months before the patient becomes eligible for Medicare.
In addition, if the private payor is an employer group health
plan, it is generally required to continue to make primary
payments for dialysis services during the
30-month
period following eligibility or entitlement to Medicare. In
general, employers may not reduce coverage or otherwise
discriminate against ESRD patients by taking into account the
patients eligibility or entitlement to Medicare benefits.
It is generally believed that private insurance pays more than
two times more for dialysis services than Medicare and these
patients with private insurance are generally viewed as more
profitable by dialysis service providers.
68
Critical
Care
For Medicare patients, both acute kidney failure and fluid
overload therapies provided in an in-patient hospital setting
are reimbursed under a traditional diagnosis related group, or
DRG, system. Under this system, reimbursement is determined
based on a patients primary diagnosis and is intended to
cover all costs of treating the patient. The presence of acute
kidney failure or fluid overload increases the severity of the
primary diagnosis and, accordingly, could increase the amount
reimbursed. The longer hospitalization stays and higher labor
needs, which are typical for patients with acute kidney failure
and fluid overload, must be managed for care of these patients
to be cost-effective. We believe that there is a significant
incentive for hospitals to find a more cost-efficient way to
treat these patients in order to improve hospital economics for
these therapies.
Employees
As of March 31, 2006, NxStage had 179 full-time
employees, three part-time employees and 20 seasonal or
temporary employees. From time to time we also employ
independent contractors to support our engineering, marketing,
sales, clinical and administrative organizations.
Properties
and Facilities
We are headquartered in Lawrence, Massachusetts, where we lease
approximately 45,000 square feet under a lease expiring
2012. We also lease approximately 24,000 square feet of
warehousing and manufacturing space in North Andover,
Massachusetts and 5,000 square feet of manufacturing and
office space in Rosdorf, Germany, where our filter is
manufactured. We believe that our existing facilities are
adequate for our current needs and that suitable additional or
alternative space will be available at such time as it becomes
needed on commercially reasonable terms.
Legal
Proceedings
From time to time we may be a party to various legal proceedings
arising in the ordinary course of our business. We are not
currently subject to any material legal proceedings.
69
MANAGEMENT
Executive
Officers and Directors
The following table sets forth our executive officers and
directors, their ages and the positions they held as of
April 30, 2006.
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Name
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Age
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Position
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Jeffrey H. Burbank
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43
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President, Chief Executive Officer
and Director
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David N. Gill*
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51
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Senior Vice President, Chief
Financial Officer and Treasurer
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Philip R. Licari
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47
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Senior Vice President and Chief
Operating Officer
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Winifred L. Swan
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41
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Senior Vice President, General
Counsel and Secretary
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Joseph E. Turk, Jr.
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38
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Senior Vice President, Commercial
Operations
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Philippe O.
Chambon, M.D., Ph.D.(1)(3)
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48
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Chairman of the Board of
Directors
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Jean-Francois
Formela, M.D. (3)(4)
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49
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Director
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Daniel A. Giannini(2)
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56
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Director
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Craig W. Moore(1)(2)
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61
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Director
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Reid S. Perper(2)
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46
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Director
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Peter P. Phildius(1)(3)
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76
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Director
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David S. Utterberg
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60
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Director
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* |
On May 16, 2006, we announced that Mr. Gill plans to
step down from the position of Chief Financial Officer on
July 31, 2006. We have initiated a search for a new Chief
Financial Officer, and Mr. Gill has expressed a willingness
to extend his term of office beyond July 31 if we have not
hired his successor by such date. We expect that the board of
directors will elect Mr. Gill to the board in July 2006 to
fill the vacancy that will result upon the expiration of the
term of office of Jean-Francois Formela. See note (4) below.
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(1)
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Member of the Compensation Committee
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(2)
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Member of the Audit Committee
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(3)
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Member of the Nominating and Corporate Governance Committee
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(4)
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Mr. Formela is not seeking reelection as a director, and his
term will end at our 2006 Annual Meeting of Stockholders on
May 30, 2006. At such time, Mr. Formela will no longer
serve on any board committees.
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Jeffrey H. Burbank has been our President and Chief
Executive Officer since December 1998 and has been a director of
NxStage since that time. Prior to joining NxStage,
Mr. Burbank was a founder and the CEO of VascA, Inc., a
medical device company that develops and markets a new blood
access device for dialysis patients. He is currently a director
of VascA. Before joining VascA, he spent nine years in the Renal
Division of Gambro, Inc., most recently as Director of Marketing
and Advanced Technologies. Mr. Burbank is on the Board of
the National Kidney Foundation. He holds a B.S. from Lehigh
University.
David N. Gill has been our Senior Vice President, Chief
Financial Officer and Treasurer since July 2005. He served as
Senior Vice President and Chief Financial Officer of CTI
Molecular Imaging, Inc., a publicly-traded medical equipment
company, from January 2002 to May 2005, before its sale.
Previously, he served from February 2000 to March 2001 as Chief
Financial Officer and Director, and from January 2001 to
70
August 2001 as President, Chief Operating Officer, and
Director, of Interland, Inc., a publicly-traded telecom-related
company, before its sale. Mr. Gill served from July 1996 to
February 2000 as Chief Financial Officer and from February 1997
to February 2000 as Chief Operating Officer of Novoste
Corporation, a publicly traded medical device company.
Mr. Gill serves on the Board of Directors of LeMaitre
Vascular, Inc. and Idleaire Technologies Corporation. He holds a
B.S. degree, cum laude, in Accounting from Wake
Forest University and an M.B.A. degree, with honors, from Emory
University, and was formerly a certified public accountant.
Philip R. Licari has been our Senior Vice President since
January 2005 and our Vice President and Chief Operating Officer
since October 2004. From August 1996 to October 2004,
Mr. Licari was employed at Boston Scientific Corporation, a
worldwide developer, manufacturer and marketer of medical
devices, where he held vice president positions in Global Supply
Chain, Clinical Operations and Corporate Sales/National
Accounts. Mr. Licari earned a B.S. in Biomedical
Engineering from Tufts University and an M.B.A. in finance from
the University of Chicago Graduate School of Business.
Winifred L. Swan has been our Senior Vice President since
January 2005 and our Vice President and General Counsel since
November 2000. From July 1995 to November 2000, Ms. Swan
was Senior Corporate Counsel at Boston Scientific Corporation.
She holds a B.A., cum laude, in Economics and Public
Policy from Duke University and a J.D., cum laude and
Order of the Coif, from the University of Pennsylvania
Law School.
Joseph E. Turk, Jr. has been our Senior Vice
President, Commercial Operations since January 2005 and our Vice
President, Sales and Marketing since May 2000. From August 1998
to May 2000, Mr. Turk was employed at Boston Scientific as
Director of New Business Development. Mr. Turk holds an
A.B. degree in Economics from Wabash College and an M.B.A. in
Marketing and Finance from Northwestern Universitys
Kellogg School of Management.
Philippe O. Chambon, M.D., Ph.D. has served as a
director of NxStage since 1998 and has been Chairman of the
Board since December 2004. Since July, 2005, Dr. Chambon
has been a Managing Director of New Leaf Venture Partners, a
spin-off from The Sprout Group. He joined Sprout in May 1995 and
became a General Partner in January 1997. He currently is on the
board of Auxilium Pharmaceuticals, Inc., and PharSight
Corporation as well as several private companies. Previously,
Dr. Chambon served as manager in the healthcare practice of
The Boston Consulting Group from May 1993 to April 1995. From
September 1987 to April 1993, he was an executive with Sandoz
Pharmaceutical, where he led strategic product development,
portfolio management and pre-marketing activities in his
capacity as Executive Director of new product management.
Dr. Chambon did graduate research in molecular immunology
at The Pasteur Institute and earned a MD, Ph.D. from the
University of Paris. Dr. Chambon also has an MBA from
Columbia University in New York.
Jean-Francois Formela, M.D., has been a director
since 2003. Dr. Formela, a Senior Partner, joined Atlas
Venture in 1993. Previously, he was Senior Director, Medical
Marketing and Scientific Affairs at Schering-Plough, a
pharmaceutical company, in the United States. During his tenure
there, he was responsible for the marketing of Intron A,
Schering-Ploughs alpha-interferon. In his last position at
Schering-Plough, he directed the U.S. Phase IV studies in
all therapeutic areas, as well as the health economics, medical
information, and biotechnology pre-marketing groups. As a
medical doctor, Dr. Formela practiced emergency medicine at
Necker University hospital in Paris. Dr. Formela serves on
the Board of Directors of SGX Pharmaceuticals, Inc. and several
private companies. Dr. Formela holds an M.D. from Paris
University School of Medicine and an M.B.A. from Columbia
Business School.
Daniel A. Giannini, CPA, has served as a director of
NxStage since October 2005. Mr Giannini is currently an
executive advisor at the Advanced Technology Development Center
of the Georgia Institute of Technology. He retired in June 2005
after a more than 30-year career as a Certified Public
Accountant with PricewaterhouseCoopers LLP. For the most
recent five years, Mr. Giannini served as an audit partner with
PricewaterhouseCoopers LLP and led its Atlanta offices
Technology, Information, Communications and Entertainment
practice. Mr. Giannini received a Bachelor of Science degree in
Business Administration from LaSalle University.
Craig W. Moore has served as a director of NxStage since
2002. From 1997 to 2001, Mr. Moore was Chairman of the
Board and Chief Executive Officer at Everest Healthcare Services
Corporation, a provider of dialysis to patients with renal
failure. Since 2001, Mr. Moore has acted as a consultant to
various companies in the healthcare services industry. From 1986
through 2001, Mr. Moore was President of Continental Health
71
Care, Ltd., an extracorporeal services and supply company and,
from 1990 through 2004, he was President of New York Dialysis
Management, a dialysis management business. He is a director for
Bio-logic Systems Corporation.
Reid S. Perper has served as a director of NxStage since
September 2005. Since January 2004, Mr. Perper has been a
Managing Director of Healthcare Investment Partners LLC. From
November 2000 through June 2003, Mr. Perper was a Managing
Director and
Co-Head of
Europe for CSFB Private Equity. Prior to joining CSFB,
Mr. Perper was a Managing Director of DLJ Merchant
Banking Partners. Mr. Perper joined Donaldson,
Lufkin & Jenrette in 1988.
Peter P. Phildius has served as a director of NxStage
since 1998 and served as Chairman of our board from 1998 until
December 2004. Since 1986, Mr. Phildius has been the
Chairman and Chief Executive Officer of Avitar, Inc., which
develops, manufactures and markets products for the oral fluid
diagnostic and clinical testing markets, as well as customized
polyurethane applications used in wound dressings. Since 1985,
Mr. Phildius has been a partner in PKS Consulting Services.
Mr. Phildius also previously served as the President and
Chief Operating Officer of National Medical Care, Inc. (now
Fresenius Medical Care) and Vice President and President of the
Parenteral, Artificial Organs and Fenwal Divisions of Baxter
Laboratories, the predecessor of Baxter Healthcare Corp.
David S. Utterberg has served as a director of NxStage
since 1998. Since 1981, Mr. Utterberg has been the CEO,
President and owner of Medisystems Corporation and since 1996 he
has been the President and owner of DSU Medical Corporation.
Medisystems Corporation is a designer, manufacturer and supplier
of disposable medical devices for the extracorporeal blood
therapy market and DSU Medical Corporation holds and licenses
over 90 U.S. and foreign patents and other intellectual
property in medical technology focused on extracorporeal therapy
devices. Mr. Utterberg is also a director of VascA, Inc.
Medisystems Corporation is our primary supplier of the
disposable cartridges used with our NxStage System One and our
only supplier of cartridge subassemblies. See Certain
Relationships and Related Party
Transactions Medisystems Corporation.
Board of
Directors
Our board of directors consists of eight members. The terms of
service of each director will expire upon the election and
qualification of successor directors at each annual meeting of
our stockholders.
Our bylaws provide that any vacancies in our board of directors
and newly created directorships may be filled only by our board
of directors and the authorized number of directors may be
changed only by our board of directors.
Each executive officer is elected by, and serves at the
discretion of, the board of directors. Each of our executive
officers and directors, other than non-employee directors,
devotes his or her full time to our affairs.
Committees
of the Board of Directors
Our board currently has three committees: the audit committee,
the compensation committee and the nominating and corporate
governance committee.
Audit Committee. The members of our audit
committee are Daniel A. Giannini, Craig W. Moore and Reid S.
Perper. Mr. Giannini chairs the audit committee and is our
audit committee financial expert (as is currently defined under
the SEC rules implementing Section 407 of the
Sarbanes-Oxley Act of 2002). Our audit committee, among other
duties:
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appoints a firm to serve as independent auditor to audit our
consolidated financial statements;
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is responsible for reviewing the independence, qualifications
and quality control procedures of the independent auditors;
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discusses the scope and results of the audit with the
independent auditor, and reviews with management and the
independent auditor our interim and year-end operating results;
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72
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considers the adequacy of our internal accounting controls,
critical accounting policies and audit procedures; and
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approves (or, as permitted, pre-approves) all audit and
non-audit services to be performed by the independent auditor.
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The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent auditors
and for overseeing their work. All audit services and all
non-audit services to be provided to us by our independent
auditors must be approved in advance by our audit committee. We
believe that the composition of our audit committee meets the
requirements for independence under the current Nasdaq National
Market and SEC rules and regulations.
Compensation Committee. The members of our
compensation committee are Philippe O. Chambon, MD., Ph.D.,
Craig W. Moore and Peter P. Phildius. Mr. Moore chairs the
compensation committee. The purpose of our compensation
committee is to discharge the responsibilities of our board of
directors relating to compensation of our executive officers.
Specific responsibilities of our compensation committee include:
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reviewing and recommending approval of compensation of our
executive officers;
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administering our stock incentive plans; and
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reviewing and making recommendations to our board with respect
to incentive compensation and equity plans.
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Nominating and Corporate Governance
Committee. The members of our nominating and
corporate governance committee are Philippe O. Chambon,
M.D., Ph.D., Jean-Francois Formela and Peter P. Phildius.
Mr. Phildius chairs the nominating and corporate governance
committee. Dr. Formela will no longer serve as a director
or a member of the nominating and corporate governance committee
following our 2007 annual meeting of stockholders. Our
nominating and corporate governance committee identifies,
evaluates and recommends nominees to our board of directors and
committees of our board of directors, conducts searches for
appropriate directors, and evaluates the performance of our
board of directors and of individual directors. The nominating
and corporate governance committee is also responsible for
reviewing developments in corporate governance practices,
evaluating the adequacy of our corporate governance practices
and reporting and making recommendations to the board concerning
corporate governance matters.
Director
Compensation
Under our current non-employee director compensation policy, our
non-employee directors receive:
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a $15,000 annual retainer for their service as directors, to be
paid quarterly in advance;
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$2,500 for each board meeting attended by the director in
person, $1,000 for each board meeting attended by telephone and
$1,000 for each committee meeting attended where the committee
meeting is scheduled on a date other than a board meeting;
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if he or she is a member of the Audit Committee, an additional
annual retainer of $6,000 (or $10,000 for the Audit Committee
Chair), to be paid quarterly in advance;
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if he or she is a member of any committee other than the Audit
Committee, an additional annual retainer of $4,000 for each
other committee, to be paid quarterly in advance;
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expense reimbursement for attending board of directors and
committee meetings; and
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on the date of our annual meeting of stockholders at which a
non-employee director is elected, a fully vested stock option to
purchase 14,000 shares of our common stock with an exercise
price equal to the then fair market value of our common stock,
as determined by the closing price of our common stock on the
date of the annual meeting. For a director elected or otherwise
appointed to the board of directors on a date other than the
date of an annual meeting of stockholders, such director will
receive a fully vested stock option to purchase
14,000 shares of our common stock pro-rated for the period
between the date he or she is first elected to the board and
May 31 of the year in which such director is elected or
appointed to our board of directors.
|
73
Each non-employee director has the option to elect to receive
shares of our common stock in lieu of the cash compensation to
be paid to such director under our non-employee director
compensation policy.
No director shall receive more than $50,000, in cash or stock,
in any calendar year for board fees, without the prior approval
of the Compensation Committee.
During fiscal 2005, in addition to cash compensation received
pursuant to our non-employee director compensation policy, we
granted each of Messrs. Moore, Perper, Phildius and
Utterberg and Drs. Chambon and Formela, a stock option to
purchase 12,000 shares of our common stock, and we granted
Mr. Giannini a stock option to purchase 15,000 shares
of our common stock. Each of these stock options was fully
vested at the time of grant and has a per share exercise price
of $12.59, the fair market value of our common stock as
determined by the closing price of our common stock on the date
of grant.
We do not compensate directors who are also employees for their
services as directors.
Compensation
Committee Interlocks and Insider Participation
The current members of the Compensation Committee are
Messrs. Phildius and Moore and Dr. Chambon. No member
of the Compensation Committee was at any time during 2005, or
formerly, an officer or employee of ours or any subsidiary of
ours, nor has any member of the Compensation Committee had any
relationship with us requiring disclosure under Item 404 of
Regulation S-K
under the Exchange Act.
No executive officer of NxStage has served as a director or
member of the compensation committee (or other committee serving
an equivalent function) of any other entity, one of whose
executive officers served as a director of or member of our
Compensation Committee.
Executive
Compensation
The following table sets forth certain information with respect
to the annual and long-term compensation for each of the last
three years of our Chief Executive Officer and our four other
most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 in fiscal 2005.
Summary
Compensation Table
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Long-Term
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Compensation
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Awards
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Annual Compensation
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Number of
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Other Annual
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Shares
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All Other
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Compensation
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Underlying
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Compensation
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Name and Principal
Position
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Year
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Salary ($)
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Bonus ($)
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($)(1)
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Stock Options
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($)(2)
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Jeffrey H. Burbank
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2005
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$
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277,962
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$
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22,129
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(3)
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$
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2,400
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219,360
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$
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8,545
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President and Chief
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2004
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269,100
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174,301
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44,603
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8,545
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Executive Officer
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2003
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260,000
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52,406
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36,560
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8,545
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David N. Gill(4)
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2005
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107,498
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27,150
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24,977
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228,392
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3,801
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Senior Vice
President,
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2004
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Chief Financial
Officer
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2003
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Philip R. Licari
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2005
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225,000
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20,609
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840
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8,000
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Senior Vice
President,
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2004
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41,827
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10,457
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285,920
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208,962
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Chief Operating
Officer
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2003
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Winifred L. Swan
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2005
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203,000
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18,603
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855
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47,528
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8,000
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Senior Vice
President,
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2004
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196,650
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1,200
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6,997
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7,914
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General Counsel
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2003
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190,000
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1,200
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7,494
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7,604
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Joseph E. Turk, Jr.
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2005
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217,350
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(5)
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3,000
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51,184
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8,000
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Senior Vice
President,
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2004
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217,350
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240,825
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13,986
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8,000
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Commercial Operations
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2003
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210,000
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250
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14,989
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8,000
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Christopher G. Manos(6)
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2005
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120,750
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148,880
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1,828
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8,000
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Former Chief
Financial
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2004
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201,825
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480
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11,255
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8,000
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Officer
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2003
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195,000
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40
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7,802
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74
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(1) |
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Consists of: (i) an annual stipend paid to each executive
for cellular telephone service of up to $3,000 per
executive, (ii) $23,877 reimbursement of relocation
expenses paid to Mr. Gill, (iii) severance payments of
$148,600 paid to Mr. Manos in 2005 in connection with his
resignation from NxStage, (iv) $171,901, $52,206, and
$237,825 of loan forgiveness to Mr. Burbank in 2004 and
2003, and to Mr. Turk in 2004, respectively, and
(v) the intrinsic value of a stock option grant issued
below fair market value to Mr. Licari in 2004. |
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(2) |
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Consists of our matching contributions under our 401(k) plan. |
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(3) |
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Mr. Burbank earned a 2005 bonus of $46,052, of which
$23,923 was not paid to Mr. Burbank pursuant to a board
action requiring that bonuses earned between 2004 and 2006 be
offset against a portion of the tax
gross-up
paid to Mr. Burbank in connection with the forgiveness of
all of his indebtedness to NxStage in 2004. |
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(4) |
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Mr. Gill commenced employment with NxStage as our Chief
Financial Officer in July 2005, and the salary disclosed in the
table above represents the pro-rated amount of
Mr. Gills annual base salary for fiscal 2005. |
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(5) |
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Mr. Turk earned a 2005 bonus of $28,151, none of which was
paid to Mr. Turk pursuant to a board action requiring that
bonuses earned between 2004 and 2006 be offset against a portion
of the tax
gross-up
paid to Mr. Turk in connection with the forgiveness of all
of his indebtedness to NxStage in 2004. |
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(6) |
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Mr. Manos resigned his employment with NxStage as our Chief
Financial Officer in July 2005, and the salary disclosed in the
table above represents the pro-rated amount of
Mr. Manos annual base salary for fiscal 2005. In
addition, as noted above in footnote number one, Mr. Manos
received severance payments of $148,600 during 2005 in
connection with his resignation. |
Stock
Option Grants in Fiscal 2005
We granted the following stock options to our named executive
officers during the fiscal year ended December 31, 2005:
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Individual Grants
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Percent of
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Potential Realizable
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Number of
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Total
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Value at Assumed Annual
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Securities
|
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Options
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Rates of Stock Price
|
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Underlying
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Granted to
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Exercise
|
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Appreciation for Option
|
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Options
|
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Employees
|
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Price
|
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Expiration
|
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Term(3)
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Name
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Granted(1)
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in Fiscal Year
|
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($/Share)(2)
|
|
Date
|
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5% ($)
|
|
10% ($)
|
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Jeffrey H. Burbank
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73,120
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6.0
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%
|
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$
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6.84
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|
|
|
1/20/2015
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314,447
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796,871
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146,240
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12.0
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%
|
|
$
|
8.55
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9/15/2012
|
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786,118
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1,992,178
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David N. Gill
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208,392
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17.1
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%
|
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$
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8.55
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7/8/2015
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896,175
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2,271,083
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20,000
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1.7
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%
|
|
$
|
12.59
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|
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|
12/8/2012
|
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158,356
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401,304
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Philip R. Licari
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|
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|
|
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|
|
|
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Winifred L. Swan
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|
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10,968
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0.9
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%
|
|
$
|
6.84
|
|
|
|
1/20/2015
|
|
|
|
47,167
|
|
|
|
119,531
|
|
|
|
|
36,560
|
|
|
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3.0
|
%
|
|
$
|
8.55
|
|
|
|
9/15/2012
|
|
|
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196,530
|
|
|
|
498,045
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|
Joseph E. Turk, Jr.
|
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29,248
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2.4
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%
|
|
$
|
6.84
|
|
|
|
1/20/2015
|
|
|
|
125,779
|
|
|
|
318,748
|
|
|
|
|
21,936
|
|
|
|
1.8
|
%
|
|
$
|
8.55
|
|
|
|
9/15/2012
|
|
|
|
117,918
|
|
|
|
298,827
|
|
Christopher G. Manos
|
|
|
7,312
|
|
|
|
0.6
|
%
|
|
$
|
6.84
|
|
|
|
1/20/2015
|
|
|
|
7,861
|
|
|
|
19,922
|
|
|
|
|
(1) |
|
Represents stock options granted pursuant to our 1999 Stock
Option and Grant Plan and our 2005 Stock Incentive Plan, which
options have terms of 10 years and seven years,
respectively. The options granted to named executive officers in
2005 vest as to 25% of the underlying shares of common stock on
the first anniversary of the date of grant and as to the
remainder in 36 equal monthly installments beginning the month
after the first anniversary of the date of grant, with the
following exceptions: |
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(i) |
|
The stock option to purchase 146,240 shares of common stock
granted to Mr. Burbank vests as to 20% of the underlying
shares on the first anniversary of the date of grant and as to
the remainder in 48 equal monthly installments beginning the
month after the first anniversary of the date of grant, and |
75
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(ii) |
|
The stock option to purchase 20,000 shares of common stock
granted to Mr. Gill was fully vested on the date of grant. |
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|
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(2) |
|
The exercise price was determined to be equal to the fair market
value of our common stock on the date of grant. |
|
(3) |
|
Potential realizable value is based on an assumption that the
market price of our common stock will appreciate at the stated
rate, compounded annually, from the date of grant until the end
of the options contractual term. These values are
calculated based on rules promulgated by the SEC and do not
reflect any estimate or projection of the future prices of our
common stock. Actual gains, if any, on stock option exercises
will depend on the future performance of our common stock, the
option holders continued employment through the option
period and the date on which the options are exercised. |
Aggregated
Option Exercises and Fiscal Year-End Option Values
The following table sets forth certain information regarding the
exercise of stock options during fiscal 2005 and the number and
value of unexercised stock options held as of December 31,
2005 by our named executive officers.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Number of Securities
|
|
|
Value of Unexercised
|
|
|
|
Shares
|
|
|
Value
|
|
|
Underlying Unexercised
|
|
|
In-The-Money
|
|
|
|
Acquired on
|
|
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Realized
|
|
|
Options at Year-End
(#)
|
|
|
Options at Year-End
($)(3)
|
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Name
|
|
Exercise (#)
|
|
|
($)(1)
|
|
|
Exercisable(2)
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Jeffrey H. Burbank
|
|
|
|
|
|
|
|
|
|
|
314,669
|
|
|
|
146,240
|
|
|
|
2,302,106
|
|
|
|
499,030
|
|
David N. Gill
|
|
|
|
|
|
|
|
|
|
|
228,392
|
|
|
|
|
|
|
|
711,118
|
|
|
|
|
|
Winifred L. Swan
|
|
|
|
|
|
|
|
|
|
|
75,509
|
|
|
|
36,560
|
|
|
|
589,916
|
|
|
|
124,758
|
|
Philip R. Licari
|
|
|
|
|
|
|
|
|
|
|
208,962
|
|
|
|
|
|
|
|
1,641,847
|
|
|
|
|
|
Joseph E. Turk, Jr.
|
|
|
|
|
|
|
|
|
|
|
81,804
|
|
|
|
21,936
|
|
|
|
548,619
|
|
|
|
74,855
|
|
Christopher G. Manos(4)
|
|
|
73,120
|
|
|
|
325,000
|
|
|
|
130,809
|
|
|
|
|
|
|
|
1,007,394
|
|
|
|
|
|
|
|
|
(1) |
|
Value represents the difference between the exercise price per
share of common stock and the fair market value per share of our
common stock on the date of exercise, multiplied by the number
of shares acquired on exercise. |
|
(2) |
|
Mr. Gills July 8, 2005 stock option grant of
208,392 shares provides that the stock option is fully
exercisable on the date of grant but the underlying shares vest
over time, and during the vesting period, are subject to a
repurchase right in favor of NxStage. |
|
(3) |
|
These values are based on the closing sales price of our common
stock as reported by the Nasdaq National Market on
December 30, 2005 ($11.96), the last trading day of fiscal
2005, less the applicable option exercise price. |
|
(4) |
|
On April 19, 2006, Mr. Manos exercised his option to
purchase 130,809 shares of common stock. In connection with
Mr. Manos resignation, he forfeited 61,757 options. |
Employment
Agreements
In October 2005, we entered into employment agreements with each
of our named executive officers. Each agreement superceded
existing agreements with these executive officers. The terms of
the employment agreements are set forth below.
Jeffrey H. Burbank. Pursuant to the terms of
his employment agreement, Mr. Burbank is entitled to
receive an annual base salary of $290,000. During 2005, we paid
Mr. Burbank an annual base salary of $277,962, and approved
an aggregate cash bonus of $46,052, $23,923 of which was not
paid to Mr. Burbank pursuant to a board action requiring
that bonuses earned between 2004 and 2006 be offset against a
portion of the tax
gross-up
paid to Mr. Burbank in connection with the forgiveness of
all of his indebtedness to NxStage in 2004. On March 16,
2006, our Compensation Committee approved an increase in
Mr. Burbanks annual
76
base salary to $298,700 effective January 1, 2006. If,
before a change in control of NxStage, as defined in the
agreement, we terminate Mr. Burbanks employment
without cause or he resigns for good reason, each as defined in
the agreement, then Mr. Burbank will be entitled to receive:
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|
|
severance payments in an amount equal to his then-current base
salary, which will be paid over the 12 months following
termination of his employment;
|
|
|
|
continued medical coverage during the 12 months following
termination of his employment; and
|
|
|
|
continued vesting during the 12 months following
termination of his employment in all stock options and stock
awards he holds at the time his employment is terminated as if
he continued to be employed during such period, and, except as
described below, will have up to 90 days following the
expiration of such period to exercise such options.
|
If, following a change in control, (i) we terminate
Mr. Burbanks employment, or (ii) we had
terminated Mr. Burbanks employment at any time three
months prior to announcement of the change in control and we
cannot reasonably demonstrate that such termination did not
arise in connection with such change in control, or if
Mr. Burbank resigns for good reason within 12 months
following a change in control, then he will be entitled to:
|
|
|
|
|
receive a lump sum severance payment equal to two times his
then-current base salary and two times the greater of his annual
bonus for the fiscal year preceding his termination or his
target bonus for the then-current fiscal year;
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|
|
continue to receive medical coverage during the 24 months
following termination of his employment; and
|
|
|
|
full vesting and acceleration of stock options and stock awards
he holds at the time his employment is terminated and a period
of 90 days to exercise such stock options.
|
David N. Gill. Pursuant to the terms of his
employment agreement, Mr. Gill is entitled to receive an
annual base salary of $225,000. During 2005, we paid
Mr. Gill an annual base salary of $107,498, which reflects
the pro-rated amount of his salary from the commencement of his
employment in July 2005 through December 31, 2005, and an
aggregate cash bonus of $27,150. On March 16, 2006, our
Compensation Committee approved an increase in
Mr. Gills annual base salary to $250,000 effective
January 1, 2006. If, before a change in control of NxStage,
as defined in the agreement, we terminate Mr. Gills
employment without cause or he resigns for good reason, each as
defined in the agreement, (i) prior to October 8,
2006, Mr. Gills stock options granted on July 8,
2005 will vest and become exercisable to the extent necessary
such that 50% of such stock options will be fully exercisable as
of the end of his nine-month severance period and
(ii) Mr. Gill will have up to 180 days from the
end of his nine-month severance period to exercise such stock
options. In addition, in the event of such termination of his
employment, Mr. Gill will be entitled to receive:
|
|
|
|
|
severance payments in an amount equal to 0.75 times his
then-current base salary, which will be paid over the nine
months following termination of his employment;
|
|
|
|
continue to receive medical coverage during the nine months
following termination of his employment; and
|
|
|
|
continued vesting during the nine months following termination
of his employment in all stock options and stock awards he holds
at the time his employment is terminated as if he continued to
be employed during such period, and, except as set forth below,
will have up to 180 days following the expiration of such
period to exercise such stock options.
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If, following a change in control, (i) we terminate
Mr. Gills employment, or (ii) we had terminated
Mr. Gills employment at any time three months prior
to announcement of the change in control and we cannot
reasonably demonstrate that such termination did not arise in
connection with such change in control,
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or if Mr. Gill resigns for good reason within
12 months following a change in control, then he will be
entitled to:
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receive a lump sum severance payment equal to 1.5 times his
then-current base salary and 1.5 times the greater of his annual
bonus for the fiscal year preceding his termination or his
target bonus for the then-current fiscal year;
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continue to receive medical coverage during the 18 months
following termination of his employment; and
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full vesting and acceleration of stock options and stock awards
on the date of the change in control and up to 180 days to
exercise such stock options from the date his employment is
terminated.
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On May 16, 2006, we announced that Mr. Gill our, Chief
Financial Officer, plans to resign from NxStage on July 31,
2006, although he has expressed a willingness to extend his term
of office beyond July 31 if we have not hired his successor
by such date.
Philip R. Licari. Pursuant to the terms of his
employment agreement, Mr. Licari is entitled to receive an
annual base salary of $225,000. During 2005, we paid
Mr. Licari an annual base salary of $225,000, and a cash
bonus of $20,609. On March 16, 2006, our Compensation
Committee approved an increase in Mr. Licaris annual
base salary to $231,750 effective January 1, 2006. If,
before a change in control of NxStage, as defined in the
agreement, we terminate Mr. Licaris employment
without cause or he resigns for good reason, each as defined in
the agreement, then Mr. Licari will be entitled to receive:
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severance payments in an amount equal to 0.5 times his
then-current base salary, which will be paid over the six months
following termination of his employment;
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continued medical coverage during the six months following
termination of his employment; and
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continued vesting during the six months following termination of
his employment in all stock options and stock awards he holds at
the time his employment is terminated as if he continued to be
employed during such period, and, except as described below,
will have up to 90 days following the expiration of such
period to exercise such options.
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If, following a change in control, (i) we terminate
Mr. Licaris employment, or (ii) we had
terminated Mr. Licaris employment at any time three
months prior to announcement of the change in control and we
cannot reasonably demonstrate that such termination did not
arise in connection with such change in control, or if
Mr. Licari resigns for good reason within 12 months
following a change in control, then he will be entitled to:
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receive a lump sum severance payment equal to his then-current
base salary and the greater of his annual bonus for the fiscal
year preceding his termination or his target bonus for the
then-current fiscal year;
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continued medical coverage during the 12 months following
termination of his employment; and
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full vesting and acceleration of stock options and stock awards
he holds at the time his employment is terminated and a period
of 90 days to exercise such stock options.
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Joseph E. Turk. Pursuant to the terms of his
employment agreement, Mr. Turk is entitled to receive an
annual base salary of $217,350. During 2005, we paid
Mr. Turk an annual base salary of $217,350 and approved an
aggregate bonus of $28,151, none of which was paid to
Mr. Turk pursuant to a board action requiring that bonuses
earned between 2004 and 2006 be offset against a portion of the
tax gross-up
paid to Mr. Turk in connection with the forgiveness of all
of Mr. Turks indebtedness to NxStage in 2004. On
March 16, 2006, our Compensation Committee approved an
increase in Mr. Turks annual base salary to $223,870
effective January 1, 2006. If, before a change in control
of NxStage, as defined in the agreement, we
78
terminate Mr. Turks employment without cause or he
resigns for good reason, each as defined in the agreement, then
Mr. Turk will be entitled to receive:
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severance payments in an amount equal to 0.5 times his
then-current base salary, which will be paid over the six months
following termination of his employment;
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continued medical coverage during the six months following
termination of his employment; and
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continued vesting during the six months following termination of
his employment in all stock options and stock awards he holds at
the time his employment is terminated as if he continued to be
employed during such period, and, except as described below,
will have up to 90 days following the expiration of such
period to exercise such options.
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If, following a change in control, (i) we terminate
Mr. Turks employment, or (ii) we had terminated
Mr. Turks employment at any time three months prior to
announcement of the change in control and we cannot reasonably
demonstrate that such termination did not arise in connection
with such change in control, or if Mr. Turk resigns for
good reason within 12 months following a change in control,
then he will be entitled to:
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receive a lump sum severance payment equal to his then-current
base salary and the greater of his annual bonus for the fiscal
year preceding his termination or his target bonus for the
then-current fiscal year;
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continue to receive medical coverage during the 12 months
following termination of his employment; and
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full vesting and acceleration of stock options and stock awards
he holds at the time his employment is terminated and a period
of 90 days to exercise such stock options.
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Winifred L Swan. Pursuant to the terms of her
employment agreement, Ms. Swan is entitled to receive an
annual base salary of $203,000. During 2005, we paid
Ms. Swan an annual base salary of $203,000, and an
aggregate cash bonus of $18,603. On March 16, 2006, our
Compensation Committee approved an increase in
Ms. Swans annual base salary to $210,000 effective
January 1, 2006. If, before a change in control of NxStage,
as defined in the agreement, we terminate Ms. Swans
employment without cause or she resigns for good reason, each as
defined in the agreement, then Ms. Swan will be entitled to
receive:
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severance payments in an amount equal to 0.5 times her
then-current base salary, which will be paid over the six months
following termination of her employment;
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continued medical coverage during the six months following
termination of her employment; and
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continued vesting during the six months following termination of
her employment in all stock options and stock awards she holds
at the time her employment is terminated as if she continued to
be employed during such period, and, except as described below,
will have up to 90 days following the expiration of such
period to exercise such options.
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If, following a change in control, (i) we terminate
Ms. Swans employment, or (ii) we had terminated
Ms. Swans employment at any time three months prior
to announcement of the change in control and we cannot
reasonably demonstrate that such termination did not arise in
connection with such change in control, or if Ms. Swan
resigns for good reason within 12 months following a change
in control, then she will be entitled to:
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receive a lump sum severance payment equal to 1.25 times her
then-current base salary and 1.25 times the greater of her
annual bonus for the fiscal year preceding her termination or
her target bonus for the then-current fiscal year;
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continue to receive medical coverage during the 15 months
following termination of her employment; and
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full vesting and acceleration of stock options and stock awards
she holds at the time her employment is terminated and a period
of 90 days to exercise such stock options.
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In addition to the terms set forth above, the executive
officers employment agreements also provide that each
executive officer is entitled to:
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participate in short-term and long-term incentive programs,
which incentive compensation will be subject to the terms of the
applicable plans and paid on the basis of the executive
officers individual performance, as determined by our
board of directors or Compensation Committee.
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receive retirement and welfare benefits that we make available
from time to time to our senior level executives;
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receive a
gross-up
amount on benefits received under this agreement to compensate
for excise taxes and associated penalties imposed by
Section 4999 of the Internal Revenue Code of 1986, as
amended.
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Christopher G. Manos. We entered into an
employment agreement with Mr. Manos, our former Senior Vice
President, Finance, Chief Financial Officer and Treasurer, dated
November 1, 2002. Pursuant to this agreement,
Mr. Manos received an annual base salary subject to annual
increases upon review by our President and Chief Executive
Officer. For fiscal year 2005, Mr. Manos salary was
$207,000. Beginning in 2003, Mr. Manos became eligible to
receive a bonus of up to 20% of his then-current salary at the
discretion of our board of directors, based on his achievement
of certain objectives and NxStages overall performance.
Pursuant to the agreement, we granted Mr. Manos a stock
option, exercisable at any time during his employment and within
ten years after the grant, to purchase an aggregate of
234,886 shares of our common stock at a price of
$4.10 per share. The terms of the option are governed by an
option agreement between NxStage and Mr. Manos.
Mr. Manos resigned as Chief Financial Officer in July 2005.
Pursuant to his employment agreement and option agreements with
NxStage, Mr. Manos received six months salary continuation
and a lump sum bonus payment equivalent to three months of
continuation of his base salary, less applicable state and
federal taxes.
Each of Messrs. Burbank, Gill, Licari, Manos, Turk and
Ms. Swan have signed agreements providing for the
protection of our confidential information and the transfer of
ownership rights to intellectual property developed by such
executive officer while he or she was employed by us. If the
executive officer fails to comply with the provisions of the
proprietary information agreement between NxStage and the
executive officer, the payments and benefits described above
will cease. If the executive officer terminates employment with
NxStage voluntarily, other than for good reason, if we terminate
the executive officers employment as a result of physical
or mental disability or for cause, each as defined in the
agreement, or if the executive officer dies, the executive
officer will receive compensation and benefits through the last
day of employment.
Employee
Benefit Plans
1999
Stock Option and Grant Plan
Our 1999 stock option and grant plan, or 1999 plan, was adopted
by our board of directors in September 1999 and was approved by
our stockholders in September 1999. The plan provides for the
grant of incentive stock options, nonqualified stock options,
restricted stock awards and unrestricted stock awards to our
employees, directors, consultants and advisors. A maximum of
4,085,009 shares of common stock were issuable under the
1999 plan. As of March 31, 2006, options to purchase
2,414,155 shares of common stock were outstanding under the
1999 Plan at a weighted average exercise price of $5.69 per
share and no shares were available for future issuance.
In accordance with the terms of the 1999 plan, our board of
directors has authorized our compensation committee to
administer the 1999 plan. In addition, the compensation
committee may delegate all or part of the committees
authority under the 1999 plan to the president of our company.
Subject to any applicable
80
limitations contained in the 1999 plan, our compensation
committee or the president, as the case may be, selects the
recipients of awards and determines:
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the number of shares of common stock covered by options and the
dates upon which such options become exercisable;
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the terms and conditions of each option, including the exercise
price and duration of such options; and
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the number of shares of common stock subject to any stock award
and the terms and conditions of such awards.
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Stock options granted under the 1999 plan are fully exercisable
on the date of grant and, upon exercise, are subject to a
repurchase right in favor of NxStage. The repurchase right
lapses as to 25% of the underlying shares on the first
anniversary date of the grant and as to the remainder in 36
equal monthly installments beginning one month after the first
anniversary date of the grant. The repurchase right on all stock
options, except for the stock option granted to Mr. Gill,
our Chief Financial Officer, terminated upon the closing of our
initial public offering.
Stock options granted under the 1999 plan generally vest and
become exercisable as to 25% of the underlying shares on the
first anniversary date of the grant and as to the remainder in
36 equal monthly installments beginning one month after the
first anniversary of the grant. Upon the closing of our initial
public offering, no further stock option grants were made, and
no future grants will be made under the 1999 plan.
The 1999 plan also provides that in the event of a merger or
other acquisition event, 50% of all unvested options and 50% of
all unvested restricted stock awards will fully vest upon the
effective date of the merger or other acquisition event. If a
successor entity makes provisions for the assumption or
continuation of awards, any award that was assumed or continued
will vest upon a holders termination if the termination
was within 12 months of the merger or other acquisition
event and the termination was by the company without cause or
the holder for good reason.
We terminated the 1999 plan in connection with our initial
public offering, but the vesting and effectiveness of awards
previously granted under the 1999 plan may continue.
2005
Stock Incentive Plan
Our 2005 stock incentive plan, which we refer to as the 2005
plan, was adopted by our board of directors and approved by our
stockholders in October 2005 and became effective in
October 2005. We have reserved for issuance under the 2005
plan that number of shares as is equal to the sum of 971,495 and
the number of shares subject to awards granted under the 1999
plan that expire, terminate, or are otherwise surrendered,
canceled, forfeited or repurchased by us at their original
issuance price pursuant to a contractual repurchase right. This
number of shares will be increased annually on the first day of
each fiscal year beginning with fiscal 2007 and ending on the
second day of fiscal 2015 by a number of shares equal to the
lesser of (a) 600,000 shares of our common stock,
(b) 3% of the then-outstanding shares of our common stock
or (c) a number determined by our board. As of
March 31, 2006, options to purchase an aggregate of
308,850 shares of common stock were outstanding under the
2005 Plan at a weighted average exercise price of
$12.46 per share, 13,027 shares were outstanding as
restricted stock and 656,522 shares were available for
future grant.
The 2005 plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock, stock appreciation
rights and other stock-based awards. Our officers, employees,
consultants, advisors and directors, and those of our
subsidiaries, are eligible to receive awards under the 2005
plan; however, incentive stock options may only be granted to
our employees.
81
Our board of directors administers the 2005 plan, although it
may delegate its authority to a committee. Our board, or a
committee to which it has delegated its authority, selects the
recipients of awards and determine, subject to any limitations
in the 2005 plan:
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the number of shares of common stock covered by options and the
dates upon which those options become exercisable;
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the exercise prices of options;
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the duration of options;
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the methods of payment of the exercise price; and
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the number of shares of common stock subject to any restricted
stock or other stock-based awards and the terms and conditions
of those awards, including the conditions for repurchase, issue
price and repurchase price.
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Upon the occurrence of a reorganization event (as defined in the
2005 plan), or the signing of an agreement with respect to
a reorganization event, all outstanding options will be assumed
or equivalent options substituted by the successor corporation.
If the reorganization event also constitutes a change in control
event (as defined in the 2005 plan), 50% of the shares that
underlie each option outstanding under the 2005 plan and
that are unvested as of the date of the reorganization event
will become immediately exercisable. If a change of control
event occurs and within one year of the change in control event
an option holders employment with us or our succeeding
corporation is terminated by such holder for good reason (as
defined in the 2005 plan) or is terminated by us or the
succeeding corporation without cause (as defined in the 2005
plan), each option held by the holder will become immediately
exercisable for the remaining 50% of the shares that had been
unvested as of the date of the change of control event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation in a reorganization event does not agree to assume
or substitute for outstanding options, our board of directors
will provide that all unexercised options will become
exercisable in full prior to the reorganization event and the
options, if unexercised, will terminate on the date the
reorganization event takes place. If under the terms of the
reorganization event holders of our common stock receive cash
for their shares, our board may instead provide for a cash-out
of the value of any outstanding options less the applicable
exercise price.
Upon the occurrence of a reorganization event, or the signing of
an agreement with respect to a reorganization event, our
repurchase and other rights with respect to shares of restricted
stock will inure to the benefit of our successor and will apply
equally to the cash, securities or other property into which our
common stock is then converted.
Upon the occurrence of a change in control event (as defined in
the 2005 plan) that does not also constitute a reorganization
event, 50% of the shares that underlie each option outstanding
under the 2005 plan and that are unvested as of the date of the
change of control event will become immediately exercisable. If
a change of control event occurs and within one year of the
change in control event an option holders employment with
us or our succeeding corporation is terminated by such holder
for good reason (as defined in the 2005 plan) or is terminated
by us or the succeeding corporation without cause (as defined in
the 2005 plan), each option held by the holder will become
immediately exercisable for the remaining 50% of the shares that
had been unvested as of the date of the change of control event.
Upon the occurrence of a change in control event that does not
also constitute a reorganization event, 50% of the shares of
restricted stock outstanding under any award will become
immediately free of all restrictions and conditions. If within
one year of a change in control event a restricted stock
holders employment with us or our succeeding corporation
is terminated by such holder for good reason or is terminated by
us or the succeeding corporation without cause, the remaining
50% of such holders restricted stock that had been
unvested as of the date of the change of control event will
become immediately free of all restrictions and conditions.
No incentive stock option may be granted under the 2005 plan
after September 6, 2015, but the vesting and effectiveness
of awards granted before that date may extend beyond that date.
82
Our board of directors may amend, modify or terminate any
outstanding award, provided that the consent of a holder of an
outstanding award is required unless our board determines that
the amendment, modification or termination would not materially
and adversely affect the holder. Our board may at any time
amend, suspend or terminate the 2005 plan, except that, to the
extent determined by our board, no amendment requiring
stockholder approval under any applicable legal, regulatory or
listing requirement will become effective until the requisite
stockholder approval is obtained.
2005
Employee Stock Purchase Plan
Our 2005 employee stock purchase plan, which we refer to as the
purchase plan, was adopted by our board of directors in
September 2005 and approved by our stockholders in October 2005
and became effective in October 2005. We have reserved a
total of 50,000 shares of our common stock for issuance to
participating employees under the purchase plan. As of
March 31, 2006, no shares of common stock have been
sold under the purchase plan and 50,000 shares are
available for future grant.
All of our employees, including our directors who are employees
and all employees of any of our participating subsidiaries, who
have been employed by us for at least six months prior to
enrolling in the purchase plan, who are employees on the first
day of the purchase plan period, and whose customary employment
is for more than 20 hours a week and for more than five
months in any calendar year, are eligible to participate in the
purchase plan. Beginning with the second offering scheduled July
2006, the length of employment eligibility has been reduced to
three months from six months. Employees who would, immediately
after being granted an option to purchase shares under the
purchase plan, own 5% or more of the total combined voting power
or value of our common stock are not be eligible to participate
in the purchase plan.
We will make one or more offerings to our employees to purchase
stock under the purchase plan. Offerings will begin on each
January 1 and July 1, or the first business day
thereafter, provided that our first offering commenced on
January 1, 2006, the date on which trading of our common
stock on the Nasdaq National Market commenced in connection with
our initial public offering. Each offering commencement date
will begin a six-month period during which payroll deductions
will be made and held for the purchase of the common stock at
the end of the purchase plan period.
On the first day of a designated payroll deduction period, or
offering period, we will grant to each eligible employee who has
elected to participate in the purchase plan an option to
purchase shares of our common stock. The employee may authorize
up to the lesser of (a) 10% of his or her compensation and
(b) $12,500 to be deducted by us during the offering
period. On the last day of the offering period, the employee
will be deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions.
Under the terms of the purchase plan, the option exercise price
shall be determined by the board of directors or a committee
appointed by the board to administer the purchase plan, based on
the lesser of (i) the closing price of the common stock on
the first business day of the plan period or the exercise date,
as defined in the plan, or shall be based solely on the closing
price of the common stock on the exercise date, provided that
the option exercise price shall be at least 85% of the
applicable closing price. In the absence of a determination by
the board of directors or the committee, the option exercise
price will be 95% of the closing price of the common stock on
the exercise date.
An employee who is not a participant on the last day of the
offering period will not be entitled to exercise any option, and
the employees accumulated payroll deductions will be
refunded. An employees rights under the purchase plan will
terminate upon voluntary withdrawal from the purchase plan at
any time, or when the employee ceases employment for any reason,
except that upon termination of employment because of death, the
balance in the employees account will be paid to the
employees beneficiary.
401(k)
Plan
Our employee savings plan is qualified under Section 401 of
the Internal Revenue Code. Our employees may elect to reduce
their current compensation by up to 25%, but may not exceed the
statutorily prescribed annual limit, and have the amount of such
reduction contributed to the 401(k) plan. We make
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matching contributions or additional contributions to the
401(k) plan in amounts to be determined annually by our
board of directors.
Limitations
on Directors Liability and Indemnification
Agreements
As permitted by Delaware law, we have adopted provisions in our
certificate of incorporation and bylaws that limit or eliminate
the personal liability of directors for breach of fiduciary duty
of care as a director. Our certificate of incorporation and
bylaws limit the liability of directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary
damages for breaches of their fiduciary duties as directors,
except liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or knowing violation of law;
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unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations do not apply to liabilities arising under
federal securities laws and do not affect the availability of
equitable remedies, including injunctive relief or recission.
As permitted by Delaware law, our certificate of incorporation
and bylaws also provide that:
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we will indemnify our directors and officers to the fullest
extent permitted by law;
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we may indemnify our other employees and other agents to the
same extent that we indemnify our officers and directors, unless
otherwise determined by the board of directors; and
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we will advance expenses to our directors and executive officers
in connection with legal proceedings in connection with a legal
proceeding to the fullest extent permitted by law.
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The indemnification provisions contained in our certificate of
incorporation and bylaws are not exclusive.
In addition to the indemnification provided for in our
certificate of incorporation and restated bylaws, we have
entered into indemnification agreements with each of our
directors and executive officers. Each indemnification agreement
provides that we will indemnify the director or executive
officer to the fullest extent permitted by law for claims
arising in his or her capacity as our director, officer,
employee or agent, provided that he or she acted in good faith
and in a manner that he or she reasonably believed to be in, or
not opposed to, our best interests and, with respect to any
criminal proceeding, had no reasonable cause to believe that his
or her conduct was unlawful. If the claim is brought by us or on
our behalf, we will not be obligated to indemnify the director
or executive officer if he or she is found liable to us, unless
the court determines that, despite the adjudication of
liability, in view of all the circumstances of the case the
director or executive officer is fairly and reasonably entitled
to be indemnified. In the event that we do not assume the
defense of a claim against a director or executive officer, we
are required to advance his or her expenses in connection with
his or her defense, provided that he or she undertakes to repay
all amounts advanced if it is ultimately determined that he or
she is not entitled to be indemnified by us.
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PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth certain information known to us
regarding beneficial ownership of our common stock as of
March 31, 2006 and as adjusted to reflect the sale of the
shares of common stock in this offering by:
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each person known by us to be the beneficial owner of more than
5% of our common stock;
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our named executive officers;
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each of our directors;
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all executive officers and directors as a group; and
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each of the selling stockholders.
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Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Under these rules, beneficial
ownership includes any shares as to which the individual or
entity has sole or shared voting power or investment power and
includes any shares that an individual or entity has the right
to acquire beneficial ownership of within 60 days of
April 30, 2006 through the exercise of any warrant, stock
option or other right. Except as noted by footnote, and subject
to community property laws where applicable, the stockholders
named in the table below have sole voting and investment power
with respect to all shares of common stock shown as beneficially
owned by them.
As of March 31, 2006, there were 21,184,287 shares of
common stock issued and outstanding. The percentage of shares
beneficially owned after this offering includes the
5,500,000 shares of common stock being offered by us.
Except as set forth below, the address of all stockholders is
c/o NxStage Medical, Inc., 439 South Union Street, 5th Floor,
Lawrence, Massachusetts 01843.
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Shares Beneficially
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Owned
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Shares Beneficially Owned
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Name and Address of
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Prior to Offering
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Shares
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After Offering
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Beneficial Owner
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Number
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Percentage
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Offered
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Number
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Percentage
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5%
Stockholders (1):
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Credit Suisse (Sprout Group)
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5,765,773
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(2)
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27.1
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%
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5,765,773
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21.6
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%
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Eleven Madison Avenue
New York, NY 10010
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Atlas Venture
|
|
|
2,598,922
|
(3)
|
|
|
12.3
|
%
|
|
|
|
|
|
|
2,598,922
|
|
|
|
9.7
|
%
|
890 Winter Street,
Suite 320
Waltham, MA 02451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federated Investors, Inc
|
|
|
2,000,000
|
(4)
|
|
|
9.4
|
%
|
|
|
|
|
|
|
2,000,000
|
|
|
|
7.5
|
%
|
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Investment Partners
Holdings, LLC
|
|
|
1,276,112
|
(5)
|
|
|
6.0
|
%
|
|
|
|
|
|
|
1,276,112
|
|
|
|
4.8
|
%
|
4900 West Dry Creek Road
Healdsburg, CA 95448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey H. Burbank
|
|
|
806,996
|
(6)
|
|
|
3.8
|
%
|
|
|
54,771
|
|
|
|
752,225
|
|
|
|
2.8
|
%
|
Philippe O. Chambon
|
|
|
5,492,534
|
(6)(7)
|
|
|
25.9
|
%
|
|
|
|
|
|
|
5,492,534
|
|
|
|
20.6
|
%
|
Daniel A. Giannini
|
|
|
15,000
|
|
|
|
*
|
|
|
|
|
|
|
|
15,000
|
|
|
|
*
|
|
Reid S. Perper
|
|
|
1,288,112
|
(6)(8)
|
|
|
6.1
|
%
|
|
|
|
|
|
|
1,288,112
|
|
|
|
4.8
|
%
|
Jean-Francois Formela
|
|
|
2,610,922
|
(6)(9)
|
|
|
12.3
|
%
|
|
|
|
|
|
|
2,610,922
|
|
|
|
9.8
|
%
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
Shares Beneficially Owned
|
|
Name and Address of
|
|
Prior to Offering
|
|
|
Shares
|
|
|
After Offering
|
|
Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Offered
|
|
|
Number
|
|
|
Percentage
|
|
|
Peter P. Phildius
|
|
|
71,555
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
71,555
|
|
|
|
*
|
|
David S. Utterberg
|
|
|
1,989,528
|
(6)(1)
|
|
|
9.4
|
%
|
|
|
|
|
|
|
1,989,528
|
|
|
|
7.5
|
%
|
Craig W. Moore
|
|
|
30,791
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
30,791
|
|
|
|
*
|
|
Other Named Executive
Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David N.Gill
|
|
|
20,000
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
20,000
|
|
|
|
*
|
|
Winifred L. Swan
|
|
|
87,939
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
87,939
|
|
|
|
*
|
|
Philip R. Licari
|
|
|
208,962
|
(6)
|
|
|
1.0
|
%
|
|
|
|
|
|
|
208,962
|
|
|
|
*
|
|
Joseph E. Turk, Jr
|
|
|
183,099
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
183,099
|
|
|
|
*
|
|
All directors and executive
officers as a group
(12 persons)
|
|
|
12,805,438
|
(10)
|
|
|
60.4
|
%
|
|
|
54,771
|
|
|
|
12,750,667
|
|
|
|
47.8
|
%
|
Other Selling
Stockholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hendrik Kuiper
|
|
|
178,748
|
|
|
|
*
|
|
|
|
58,600
|
|
|
|
120,148
|
|
|
|
*
|
|
|
|
|
* |
|
Represents holdings of less than one percent. |
|
(1) |
|
This information is taken from a Schedule 13G filed on
January 25, 2006 and is as of December 31, 2005. David
S. Utterberg reports sole voting power and sole dispositive
power as to 1,989,528 shares of our common stock, including
13,497 shares of common stock which Mr. Utterberg has
the right to acquire within 60 days of March 31, 2006
upon exercise of outstanding stock options. Mr. Utterberg
is also a member of our board of directors and is included in
this table under the heading Directors. |
|
(2) |
|
This information is taken from a Schedule 13D filed on
December 16, 2005 by Credit Suisse jointly with its
affiliates, the Sprout Entities, and is as of October 27,
2005. As of December 16, 2005, the Sprout Entities may be
deemed to beneficially own an aggregate of 5,765,773 shares
of common stock, consisting of (i) 1,941,301 shares of
common stock held directly by Sprout Capital IX, L.P.,
(ii) 2,046,353 shares of common stock and warrants for
the purchase of 61,681 shares of common stock held directly
by Sprout Capital VIII, L.P., (iii) 830,437 shares of
common stock held directly by Sprout Capital VII, L.P.,
(iv) 9,666 shares of common stock held directly by
Sprout CEO Fund, L.P., (v) 7,648 shares of common
stock held directly by Sprout Entrepreneurs Fund, L.P.,
(vi) 112,061 shares of common stock held directly by
Sprout IX Plan Investors, L.P., (vii) 47,203 shares of
common stock held directly by Sprout Plan Investors, L.P.,
(viii) 122,817 shares of common stock and warrants to
purchase 3,700 shares of common stock held directly by
Sprout Venture Capital, L.P., (ix) 130,532 shares of
common stock and warrants to purchase 4,948 shares of
common stock held directly by DLJ ESC II, L.P.,
(x) 174,641 shares of common stock and warrants to
purchase 204 shares of common stock held directly by DLJ
Capital Corporation and (xi) 272,581 shares of common
stock held directly by CSFB
Fund Co-Investment
Program, L.P. The members of the Sprout entities investment
committee, including Philippe Chambon, share voting and
dispositive control over the shares referenced in this footnote.
Mr. Chambon disclaims beneficial ownership of such shares
except to the extent of his proportionate pecuniary interest
therein. |
|
(3) |
|
This information is taken from a Schedule 13G filed on
February 8, 2006 by Atlas Venture jointly with its
affiliates and is as of December 31, 2005. Consists of
(i) 1,502,723 shares of common stock held by Atlas
Venture Fund V, L.P., (ii) 373,324 shares of
common stock held by Atlas Venture
Fund V-A
C.V., (iii) 25,011 shares of common stock held by
Atlas Venture Entrepreneurs Fund V, L.P.,
(iv) 672,804 shares of common stock held by Atlas
Venture Fund III, L.P., (v) 14,625 shares of
common stock held by Atlas Venture Entrepreneurs
Fund III, L.P. and (vi) 10,435 shares of common stock
subject to outstanding warrants which expire in May 2006. As
general partner of certain of the foregoing funds, and by virtue
of the such funds relationship as affiliated limited
partnerships, each of Atlas Venture Associates III, L.P.,
or AVA III LP, and Atlas Venture Associates V, L.P.,
or AVA V LP, may also be deemed to beneficially own the
foregoing shares of common stock. As the general partner of
AVA III LP and AVA V LP, |
86
|
|
|
|
|
respectively, Atlas Venture Associates III, Inc., or
AVA III Inc., and Atlas Venture Associates V, Inc., or
AVA V Inc., may also be deemed to beneficially own the foregoing
shares. AVA III LP, AVA V LP, AVA III Inc. and AVA V
Inc. disclaim beneficial ownership of the shares except to the
extent of their pecuniary interest therein. In their capacities
as directors of AVA III Inc. and AVA V Inc. each of
Messrs. Axel Bichara, Jean-Francois Formela and Christopher
Spray may be deemed to beneficially own the shares. Each of
Messrs. Bichara, Formela and Spray disclaim beneficial
ownership of the shares except to the extent of his pecuniary
interest therein. |
|
(4) |
|
This information is taken from a Schedule 13G filed on
February 14, 2006 by Federated Investors, Inc. and is as of
December 31, 2005. Federated Investors, Inc. reports sole
voting power and sole dispositive power as to all
2,000,000 shares. |
|
(5) |
|
This information is taken from a Schedule 13G filed on
February 14, 2006 by Healthcare Investment Partners
Holdings, LLC and its affiliates, is as of December 31,
2005 and consists of 1,276,112 shares of common stock held
by Healthcare Investment Partners Holdings, LLC. The Managing
Directors of Healthcare Investment Partners Holdings, LLC, Reid
Perper, Henry Wendt and Edward Brown, share voting and
dispositive control over the shares referenced in this footnote.
Each of Messrs. Perper, Wendt and Brown disclaims
beneficial ownership of such shares except to the extent of his
proportionate pecuniary interest therein. |
(6) The number of shares of our common stock that each person is
deemed to beneficially own includes the number of shares of our
common stock which such person has the right to acquire within
60 days after March 31, 2006 upon exercise of
outstanding stock options as set forth opposite his or her name
below and for which we have no existing repurchase right:
|
|
|
|
|
|
|
Number
|
|
Name
|
|
of Shares
|
|
|
Jeffrey H. Burbank
|
|
|
314,669
|
|
Philippe O. Chambon
|
|
|
12,000
|
|
Daniel A. Giannini
|
|
|
15,000
|
|
Reid S. Perper
|
|
|
12,000
|
|
Jean-Francois Formela
|
|
|
12,000
|
|
Peter P. Phildius
|
|
|
67,913
|
|
David S. Utterberg
|
|
|
13,497
|
|
Craig W. Moore
|
|
|
30,791
|
|
David N. Gill
|
|
|
20,000
|
|
Winifred L. Swan
|
|
|
75,509
|
|
Philip R. Licari
|
|
|
208,962
|
|
Joseph E. Turk, Jr.
|
|
|
81,804
|
|
|
|
|
(7) |
|
Consists of shares held by the Sprout Entities. Dr. Chambon
disclaims beneficial ownership of these shares except to the
extent of his proportionate pecuniary interest in such shares. |
|
(8) |
|
Consists of shares held by Healthcare Investment Partners
Holdings LLC, of which Mr. Perper is a Managing Director.
Mr. Perper disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest in
such shares. |
|
(9) |
|
Consists of shares held by Atlas Venture, of which
Dr. Formela is a Senior Partner. Dr. Formela disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest in such shares. |
|
|
|
(10) |
|
Includes an aggregate of 864,145 shares of our common stock
which all executive officers and directors have the right to
acquire within 60 days after March 31, 2006 upon
exercise of outstanding stock options. In addition, includes
80,967 shares of common stock subject to outstanding
warrants which expire in May 2006. |
87
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2003, we have engaged in the following
transactions with our directors, executive officers and holders
of more than 5% of our common stock, and affiliates of our
directors, executive officers and 5% stockholders.
Medisystems
Corporation
Medisystems Corporation is our primary supplier of the
disposable cartridges used with our NxStage System One and our
only supplier of cartridge subassemblies. The chief executive
officer and sole stockholder of Medisystems, David S. Utterberg,
is a member of our board of directors and owns approximately
9.4% of our outstanding common stock as of March 31, 2006.
We purchased approximately $41,000, $232,000 and $896,000 of
products during fiscal 2003, 2004 and 2005, respectively, from
Medisystems. We purchased approximately $126,000 and $759,000 of
products and components from Medisystems during the three months
ended March 31, 2005 and 2006, respectively. We are
currently negotiating a long-term supply agreement with
Medisystems covering components, subassemblies and completed
cartridges, and are hopeful that we will be able to complete our
negotiations and enter into a definitive agreement with
Medisystems in the near term. We believe that our purchases from
Medisystems have been on terms no less favorable to us than
could be obtained from unaffiliated third parties.
Preferred
Stock Issuances
Issuance
of Series E Preferred Stock
On April 15, 2003, we sold an aggregate of
2,669,908 shares of Series E preferred stock at a
price per share of $5.97 for an aggregate purchase price of
$15,939,351. All shares of our Series E preferred stock
automatically converted into 1,952,227 shares of our common
stock upon completion of our initial public offering. Of these
2,669,908 shares of Series E preferred stock, an
aggregate of 2,657,345 shares were sold to the following
director and holders of more than five percent of our voting
securities:
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
Series E
|
|
|
|
|
Name
|
|
Preferred Stock
|
|
|
Purchase Price
|
|
|
Sprout Group(1)
|
|
|
987,552
|
|
|
$
|
5,895,685
|
|
David S. Utterberg
|
|
|
753,769
|
|
|
|
4,500,001
|
|
Atlas Venture(2)
|
|
|
733,553
|
|
|
|
4,379,311
|
|
Adams Street Partners(3)
|
|
|
157,345
|
|
|
|
939,350
|
|
Lightspeed Venture Partners(4)
|
|
|
25,126
|
|
|
|
150,002
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,657,345
|
|
|
$
|
15,864,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of 354,895 shares held by Sprout Capital VIII,
L.P., 326,824 shares held by Sprout Capital, IX, L.P.,
195,256 shares held by Sprout Capital VII, L.P.,
36,094 shares held by DLJ Capital Corp., 30,756 shares
held by DLJ ESC II, L.P., 21,300 shares held by Sprout
Venture Capital L.P., 18,866 shares held by Sprout IX Plan
Investors, LP, 2,273 shares held by The Sprout CEO Fund,
L.P. and 1,288 shares held by Sprout Entrepreneurs Fund,
L.P. Philippe Chambon, M.D., Ph.D., a member of our
board of directors, is a general partner of Sprout Group. |
|
(2) |
|
Consists of 424,146 shares held by Atlas Venture
Fund V, L.P., 192,783 shares held by Atlas Venture
Fund III, L.P., 52,686 shares held by Atlas Venture
Parallel
Fund V-A,
C.V., 52,686 shares held by Atlas Venture Parallel
Fund V-B, C.V., 7,060 shares held by Atlas Venture
Entrepreneurs Fund V, L.P. and 4,192 shares held
by Atlas Venture Entrepreneurs Fund III, L.P.
Jean-Francois Formela, M.D., a member of our board of
directors, is a Senior Partner of Atlas Venture. |
|
(3) |
|
Consists of 157,345 shares held by BVCF IV, L.P. |
|
(4) |
|
Consists of 12,563 shares held by Weiss, Peck &
Greer Venture Associates IV, L.L.C., 10,983 shares held by
WPG Enterprise Fund III, L.L.C. and 1,580 shares held
by Weiss, Peck & Greer Venture Associates IV
Cayman, L.P. |
88
Issuance
of Series F Preferred Stock
On August 18, 2004, we sold an aggregate of
2,747,253 shares of Series F preferred stock at a
price per share of $7.28 for an aggregate purchase price of
$20,000,002. All shares of our Series F preferred stock
automatically converted into 2,448,707 shares of our common
stock upon completion of our initial public offering. Of these
2,747,253 shares of Series F preferred stock, an
aggregate of 1,840,660 shares were sold to the following
director and holders of more than five percent of our voting
securities:
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
Series F
|
|
|
|
|
Name
|
|
Preferred Stock
|
|
|
Purchase Price
|
|
|
Sprout Group(1)
|
|
|
957,319
|
|
|
$
|
6,969,282
|
|
Atlas Venture(2)
|
|
|
450,861
|
|
|
|
3,282,268
|
|
David S. Utterberg
|
|
|
343,195
|
|
|
|
2,498,460
|
|
Adams Street Partners(3)
|
|
|
68,681
|
|
|
|
499,998
|
|
Lightspeed Venture Partners(4)
|
|
|
20,604
|
|
|
|
149,997
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,840,660
|
|
|
$
|
13,400,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of 447,582 shares held by Sprout Capital, VIII,
L.P., 412,180 shares held by Sprout Capital, IX, L.P.,
38,788 shares held by Sprout Plan Investors, LP,
26,863 shares held by Sprout Venture Capital L.P.,
23,793 shares held by Sprout IX Plan Investors, LP,
6,489 shares held by DLJ Capital Corp. and
1,624 shares held by Sprout Entrepreneurs Fund, L.P.
Philippe Chambon, M.D., Ph.D., a member of our board
of directors, is a general partner of Sprout Group. |
|
(2) |
|
Consists of 260,692 shares held by Atlas Venture
Fund V, L.P., 118,490 shares held by Atlas
Venture Fund III, L.P., 32,382 shares held by Atlas
Venture Parallel
Fund V-A,
C.V., 32,382 shares held by Atlas Venture Parallel
Fund V-B,
C.V., 4,339 shares held by Atlas Venture
Entrepreneurs Fund V, L.P. and 2,576 shares held
by Atlas Venture Entrepreneurs Fund III, L.P.
Jean-Francois Formela, M.D., a member of our board of
directors, is a Senior Partner of Atlas Venture. |
|
(3) |
|
Consists of 68,681 shares held by BVCF IV, L.P. |
|
(4) |
|
Consists of 10,302 shares held by Weiss, Peck &
Greer Venture Associates IV, L.L.C., 9,006 shares held by
WPG Enterprise Fund III, L.L.C. and 1,296 shares held
by Weiss, Peck & Greer Venture Associates IV
Cayman, L.P. |
Issuance
of Series F-1 Preferred Stock
On July 8, 2005 and July 15, 2005, we sold an
aggregate of 2,197,801 shares of Series F-1 preferred
stock at a price per share of $7.28 for an aggregate purchase
price of $16,000,000. All shares of
Series F-1
preferred stock automatically converted into
1,958,961 shares of our common stock upon completion of our
initial public offering. Of these 2,197,801 shares of
Series F-1
preferred stock, an aggregate of 1,960,779 shares were sold
to the following director and holders of more than five percent
of our voting securities:
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
Series F-1
|
|
|
|
|
Name
|
|
Preferred Stock
|
|
|
Purchase Price
|
|
|
Healthcare Investment Partners
Holdings LLC(1)
|
|
|
1,373,626
|
|
|
$
|
9,999,997
|
|
Sprout Group(2)
|
|
|
304,661
|
|
|
|
2,217,933
|
|
Atlas Venture(3)
|
|
|
143,484
|
|
|
|
1,044,564
|
|
David S. Utterberg
|
|
|
109,220
|
|
|
|
795,122
|
|
Adams Street Partners(4)
|
|
|
21,857
|
|
|
|
159,119
|
|
Lightspeed Venture Partners(5)
|
|
|
7,931
|
|
|
|
57,738
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,960,779
|
|
|
$
|
14,274,473
|
|
|
|
|
|
|
|
|
|
|
footnotes continued on following page
89
|
|
|
(1) |
|
Ried Perper, a member of our board of directors, is a Managing
Director of Healthcare Investment Partners Holdings LLC. |
|
(2) |
|
Consists of 142,440 shares held by Sprout
Capital VIII, L.P., 131,174 shares held by Sprout
IX Plan Investors, L.P., 12,334 shares held by Sprout
Plan Investors, L.P., 8,549 shares held by Sprout
Venture Capital, L.P., 2,065 shares held by DLJ
Capital Corp. and 517 shares held by Sprout
Entrepreneurs Fund, L.P. Philippe
Chambon, M.D., Ph.D., a member of our board of
directors, is a general partner of New Leaf Venture Partners, a
spin-off from the Sprout Group. |
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Consists of 82,964 shares held by Atlas Venture
Fund V, L.P., 37,709 shares held by Atlas Venture
Fund III, L.P., 10,305 shares held by Atlas Venture
Parallel
Fund V-A,
C.V., 10,305 shares held by Atlas Venture Parallel
Fund V-B,
C.V., 1,381 shares held by Atlas Venture
Entrepreneurs Fund V, L.P. and 820 shares held
by Atlas Venture Entrepreneurs Fund III, L.P.
Jean-Francois Formela, M.D., a member of our board of
directors, is a Senior Partner of Atlas Venture. |
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Consists of 21,857 shares held by BVCF IV, L.P. |
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(5) |
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Consists of 3,467 shares held by WPG Enterprise Fund III,
L.L.C., 3,966 shares held by Weiss, Peck & Greer
Venture Associates IV, L.L.C. and 498 shares held by Weiss,
Peck & Greer Venture Associates IV Cayman, L.P. |
Payments
to Peter Phildius
In 2004, we paid Peter Phildius $6,250 per month for service as
chairman of our board of directors and in 2005 we paid
Mr. Phildius $60,000 for consulting services. Commencing in
2006, we compensate Mr. Phildius only under the
non-employee director compensation policy.
Registration
Rights
The following directors, officers and holders of more than five
percent of our voting securities and their affiliates have been
granted registration rights with respect to shares of our common
stock:
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Name
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Number of Shares
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Sprout Entities(1)
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5,293,499
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Atlas Venture(2)
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2,499,000
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David S. Utterberg
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1,903,024
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Healthcare Investment Partners
Holdings LLC(3)
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1,224,357
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Jeffrey H. Burbank
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54,771
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(1) |
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Philippe Chambon, M.D., Ph.D., a member of our board
of directors, is a general partner of New Leaf Ventures, a
spin-off from Sprout Group. |
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(2) |
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Jean-Francois Formela, M.D., a member of our board of
directors, is a Senior Partner of Atlas Venture. |
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(3) |
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Reid S. Perper, a member of our board of directors, is a
Managing Director of Healthcare Investment Partners LLC. |
Indemnification
Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. Each indemnification agreement
provides that we will indemnify the director or officer to the
fullest extent permitted by law for claims arising in his or her
capacity as our director, executive officer, employee or agent,
provided that he or she acted in good faith and in a manner that
he or she reasonably believed to be in, or not opposed to, our
best interests and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was
unlawful. If the claim is brought by us or on our behalf, we
will not be obligated to indemnify the director or executive
officer if he or she is found liable to us, unless the court
determines
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that, despite the adjudication of liability, in view of all the
circumstances of the case the director or senior officer is
fairly and reasonably entitled to be indemnified. In the event
that we do not assume the defense of a claim against a director
or executive officer, we are required to advance his or her
expenses in connection with his or her defense, provided that he
or she undertakes to repay all amounts advanced if it is
ultimately determined that he or she is not entitled to be
indemnified by us.
Stock
Option Grants
We have granted options to purchase shares of our common stock
to our executive officers and directors. See
Management Director Compensation,
Management Executive Compensation
and Management Option Grants in Last
Fiscal Year.
Other
Considerations
We have adopted a policy providing that all material
transactions between us and our officers, directors and other
affiliates must be:
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approved by a majority of the members of our board of directors
and by a majority of the disinterested members of our board of
directors; and
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on terms no less favorable to us than those that we believe
could be obtained from unaffiliated third parties.
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DESCRIPTION
OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of common stock, par value $.001 per share, and
5,000,000 shares of preferred stock, par value
$.001 per share, all of which shares of preferred stock are
undesignated. Our board of directors may establish the rights
and preferences of the preferred stock from time to time. As of
March 31, 2006, there were 21,184,287 shares of common
stock issued and outstanding. As of March 31, 2006, there
were 119 stockholders of record of our capital stock.
Common
Stock
Holders of common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do
not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing
for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of
directors, subject to any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution
or winding up, the holders of common stock are entitled to
receive proportionately our net assets available after the
payment of all debts and other liabilities and subject to the
prior rights of any outstanding preferred stock. Holders of
common stock have no preemptive, subscription, redemption or
conversion rights. Our outstanding shares of common stock are,
and the shares offered by us in this offering will be, when
issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may
designate and issue in the future.
Preferred
Stock
Under the terms of our certificate of incorporation, our board
of directors is authorized to issue shares of preferred stock in
one or more series without stockholder approval. Our board of
directors has the discretion to determine the rights,
preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
preferred stock.
The purpose of authorizing our board of directors to issue
preferred stock and determine its right and preferences is to
eliminate delays associated with a stockholder vote on specific
issuances. The issuance of preferred stock, while providing
flexibility in connection with possible future acquisitions and
other corporate purposes, will affect, and may adversely affect,
the rights of holders of any preferred stock that may be issued
in the future. It is not possible to state the actual effect of
the issuance of any shares of preferred stock on the rights of
holders of common stock until the board of directors determines
the specific rights attached to that preferred stock. The
effects of issuing preferred stock could include one or more of
the following:
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restricting dividends on the common stock;
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diluting the voting power of the common stock;
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impairing the liquidation rights of the common stock; or
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delaying or preventing changes in control or management of
NxStage.
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We have no present plans to issue any shares of preferred stock.
Warrants
As of March 31, 2006:
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Lighthouse Capital Partners IV, L.P. held a warrant to purchase
36,730 shares of our common stock at an exercise price of
$8.17 per share. This warrant expires on December 23,
2011.
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Lighthouse Capital Partners V, L.P. held a warrant to
purchase 36,730 shares of our common stock at an exercise price
of $8.17 per share. The warrant expires on
December 23, 2011.
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Comerica Bank California held a warrant to
purchase shares 15,309 of our common stock at an exercise price
of $8.16 per share. This warrant expires on
September 26, 2009.
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Atlas Venture Fund III, L.P. and a related entity held
warrants to purchase shares 10,434 of our common stock at an
exercise price of $7.13 per share. In November 2006, we
extended the exercise date of these warrants through
May 31, 2006.
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Sprout Capital VII, L.P. and related entities held warrants to
purchase shares 70,533 of our common stock at an exercise price
of $7.13 per share. In November 2006, we extended the
exercise date of these warrants through May 31, 2006.
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These warrants provide for adjustments in the event of stock
dividends, stock splits, reclassifications or other changes in
our corporate structure. Certain of the holders of these
warrants have registration rights that are outlined below under
the heading Registration Rights.
Millennium Technology Ventures, LP. has the right to acquire,
for no additional consideration, 1,904 shares of our common
stock if and when it exercises a warrant it holds to purchase
shares of VascA, Inc. preferred stock.
Options
As of March 31, 2006, options to purchase an aggregate of
2,723,005 shares of common stock at a weighted-average
exercise of $6.46 per share were outstanding.
Registration
Rights
The holders of 13,432,652 shares of common stock and the
holders of warrants to purchase 169,736 shares of our
common stock have rights to require us to file registration
statements under the Securities Act or to include their shares
in registration statements that we may file in the future for
NxStage or other stockholders.
The holders of more than 30% of the shares having registration
rights may demand that we register all or a portion of their
common stock for sale under the Securities Act, so long as the
aggregate offering price of such securities is reasonably
anticipated to be at least $5,000,000. We will effect the
registration as requested, unless the underwriters decide to
limit the number of shares that may be included in the
registration due to marketing factors. We are required to effect
two of these registrations. However, if at any time we become
eligible to file a registration statement on
Form S-3,
or any successor form, holders of registration rights may make
two requests for us to effect a registration on such forms of
their common stock having an aggregate offering price of at
least $500,000.
In addition, if at any time after this offering we register any
shares of common stock, either for our own account or for the
account of other security holders, the holders of registration
rights are entitled to notice of the registration and to include
all or a portion of their common stock in the registration. A
holders right to demand or include shares in a
registration is subject to the right of the underwriters to
limit the number of shares included in the offering.
Anti-Takeover
Provisions of Delaware Law, our Certificate of Incorporation and
our Bylaws
We are subject to the provisions of Section 203 of the
General Corporation Law of Delaware. Subject to certain
exceptions, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the
person became an interested stockholder, unless the interested
stockholder attained such status with the approval of our board
of directors or the business combination is approved in a
prescribed manner. A business combination includes, among other
things, a merger or consolidation involving us and the
interested stockholder and the sale of more than 10% of our
assets. In general, an interested stockholder is any entity or
person beneficially owning 15% or more of our outstanding voting
stock and any entity or person affiliated with or controlling or
controlled by such entity or person.
Under our certificate of incorporation, any vacancy on our board
of directors, including a vacancy resulting from an enlargement
of our board of directors, may only be filled by vote of a
majority of our
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directors then in office. The limitations on the removal of
directors and filling of vacancies could make it more difficult
for a third party to acquire, or discourage a third party from
acquiring, control of us.
Our certificate of incorporation and our bylaws also provide
that any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before
the meeting and may not be taken by written action in lieu of a
meeting. Our certificate of incorporation and our bylaws further
provide that, except as otherwise required by law, special
meetings of the stockholders may only be called by the chairman
of the board, chief executive officer or our board of directors.
In addition, our bylaws establish an advance notice procedure
for stockholder proposals to be brought before an annual meeting
of stockholders, including proposed nominations of persons for
election to the board of directors. Stockholders at an annual
meeting may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the
direction of the board of directors or by a stockholder of
record on the record date for the meeting, who is entitled to
vote at the meeting and who has delivered timely written notice
in proper form to our secretary of the stockholders
intention to bring such business before the meeting. These
provisions could have the effect of delaying until the next
stockholders meeting stockholder actions that are favored
by the holders of a majority of our outstanding voting
securities. These provisions may also discourage a third party
from making a tender offer for our common stock, because even if
it acquired a majority of our outstanding voting securities, the
third party would be able to take action as a stockholder, such
as electing new directors or approving a merger, only at a duly
called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that
the affirmative vote of a majority of the shares entitled to
vote on any matter is required to amend a corporations
certificate of incorporation or bylaws, unless a
corporations certificate of incorporation or bylaws, as
the case may be, requires a greater percentage. Our certificate
of incorporation and bylaws require the affirmative vote of the
holders of at least 75% of the shares of our capital stock
issued and outstanding and entitled to vote to amend or repeal
any of the provisions described in the prior two paragraphs.
Limitation
of Liability and Indemnification
Our certificate of incorporation contains provisions permitted
under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a
directors liability for monetary damages for a breach of
fiduciary duty, except in circumstances involving wrongful acts,
such as the breach of a directors duty of loyalty or acts
or omissions that involve intentional misconduct or a knowing
violation of law. Further, our certificate of incorporation
contains provisions to indemnify our directors and officers to
the fullest extent permitted by the General Corporation Law of
Delaware.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
EquiServe Trust Company.
Nasdaq
National Market
Our common stock is quoted on the Nasdaq National Market under
the symbol NXTM.
Lock-up
Agreements
Except for sales of common stock to the underwriters in
accordance with the terms of the purchase agreement, we, each of
our directors and officers, and certain holders of our
outstanding stock and options to acquire our stock have agreed
not to sell or otherwise dispose of, directly or indirectly, any
shares of our common stock (or any security convertible into or
exchangeable or exercisable for common stock) without the prior
written consent of Merrill Lynch and J.P. Morgan for a
period of 90 days from the date of this prospectus. In
addition, for a period of 90 days from the date of this
prospectus, except as required by law, we have agreed that our
board of directors will not consent to any offer for sale, sale
or other disposition, or any transaction which is designed or
could be expected to result in the disposition by any person,
directly or indirectly, of any shares of our common stock
without the prior written consent of Merrill Lynch and
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J.P. Morgan. Merrill Lynch and J.P. Morgan, in their
sole discretion, at any time or from time to time and without
notice, may release for sale in the public market all or any
portion of the shares restricted by the terms of the lock-up
agreements.
Registration
Rights
The holders of 13,432,652 shares of common stock and the
holders of warrants to purchase 169,736 shares of our
common stock have rights to require or participate in the
registration of those shares under the Securities Act. See
Description of Capital Stock Registration
Rights for a detailed description of these registration
rights.
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CERTAIN
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS OF OUR COMMON STOCK
The following is a general discussion of the material
U.S. federal income and estate tax considerations
applicable to
non-U.S. holders
with respect to their ownership and disposition of shares of our
common stock. This discussion is for general information only
and is not tax advice. Accordingly, all prospective
non-U.S. holders
of our common stock should consult their own tax advisors with
respect to the U.S. federal, state, local and
non-U.S. tax
consequences of the purchase, ownership and disposition of our
common stock. In general, a
non-U.S. holder
means a beneficial owner of our common stock who is not for
U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation or any other organization taxable as a corporation
for U.S. federal tax purposes, created or organized in the
United States or under the laws of the United States or of any
state thereof or the District of Columbia;
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an estate, the income of which is included in gross income for
U.S. federal income tax purposes regardless of its source;
or
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a trust (A) if (i) a U.S. court is able to
exercise primary supervision over the trusts
administration and (ii) one or more U.S. persons have
the authority to control all of the trusts substantial
decisions or (B) that has a valid election in effect under
applicable U.S. Treasury Regulations to be treated as a
U.S. person.
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This discussion is based on current provisions of the
U.S. Internal Revenue Code of 1986, as amended, existing
and proposed U.S. Treasury Regulations promulgated
thereunder, current administrative rulings and judicial
decisions, in effect as of the date of this prospectus, all of
which are subject to change or to differing interpretation,
possibly with retroactive effect. Any change could alter the tax
consequences to
non-U.S. holders
described in this prospectus. We assume in this discussion that
a
non-U.S. holder
holds shares of our common stock as a capital asset (generally
property held for investment).
This discussion does not address all aspects of
U.S. federal income and estate taxation that may be
relevant to a particular
non-U.S. holder
in light of that
non-U.S. holders
individual circumstances nor does it address any aspects of
U.S. state, local or
non-U.S. taxes.
This discussion also does not consider any specific facts or
circumstances that may apply to a
non-U.S. holder
and does not address the special tax rules applicable to
particular
non-U.S. holders,
such as:
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insurance companies;
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tax-exempt organizations;
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financial institutions;
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brokers or dealers in securities;
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partnerships or other pass-through entities;
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regulated investment companies;
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pension plans;
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owners of more than 5% of our common stock;
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owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
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certain U.S. expatriates.
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If a partnership holds shares of our common stock, the tax
treatment of a partner will generally depend upon the status of
the partner and the activities of the partnership. A partner and
the partnership holding shares of our common stock should
consult his, her or its tax advisors regarding the tax
considerations of acquiring, holding and disposing of shares of
our common stock.
There can be no assurance that the Internal Revenue Service,
referred to as the IRS, will not challenge one or more of the
tax consequences described herein, and we have not obtained, nor
do we intend
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to obtain, an opinion of counsel with respect to the
U.S. federal income or estate tax consequences to a
non-U.S. holder
of the purchase, ownership, or disposition of our common stock.
We urge prospective investors to consult with their own tax
advisors regarding the U.S. federal, state, local and
non-U.S. income
and other tax considerations of acquiring, holding and disposing
of shares of our common stock.
Distributions
on Our Common Stock
We have not declared or paid distributions on our common stock
since our inception and do not intend to pay any distributions
on our common stock in the foreseeable future. In the event we
do pay distributions on our common stock, however, these
distributions generally will constitute dividends for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. If a distribution
exceeds our current and accumulated earnings and profits, the
excess will be treated as a tax-free return of the
non-U.S. holders
investment, up to such
non-U.S. holders
tax basis in the common stock and thereafter as capital gain,
subject to the tax treatment described below in Gain on
Sale, Exchange or Other Taxable Disposition of Our Common
Stock.
Dividends paid to a
non-U.S. holder
generally will be subject to withholding of U.S. federal
income tax at a 30% rate or such lower rate as may be provided
by an applicable income tax treaty between the United States and
such
non-U.S. holders
country of residence.
Non-U.S. holders
are urged to consult their tax advisors regarding their
entitlement to benefits under a relevant income tax treaty. If
we determine, at a time reasonably close to the date of payment
of a distribution on our common stock, that the distribution
will not constitute a dividend because we do not anticipate
having current or accumulated earnings and profits, we intend
not to withhold any U.S. federal income tax on the
distribution as permitted by U.S. Treasury Regulations. If
we or another withholding agent withholds tax on such a
distribution, a
non-U.S. holder
may be entitled to a refund of the tax withheld which the
non-U.S. holder
may claim by timely filing an appropriate claim for refund with
the IRS.
Dividends that are treated as effectively connected with a trade
or business conducted by a
non-U.S. holder
within the United States (and if an applicable income tax treaty
so provides, are also attributable to a permanent establishment
or a fixed base maintained by such
non-U.S. holder)
are generally exempt from the 30% withholding tax if the
non-U.S. holder
satisfies applicable certification and disclosure requirements.
However, such U.S. effectively connected income, net of
specified deductions and credits, is taxed at the same graduated
U.S. federal income tax rates applicable to
U.S. persons. Any U.S. effectively connected income
received by a
non-U.S. holder
that is a corporation may also, under certain circumstances, be
subject to an additional branch profits tax at a 30% rate or
such lower rate as specified by an applicable income tax treaty
between the United States and such holders country of
residence.
To claim the benefit of a tax treaty or an exemption from
withholding because the income is effectively connected with the
conduct of a trade or business in the United States, a
non-U.S. holder
must provide a properly executed IRS Form W-8BEN for treaty
benefits or IRS Form W-8ECI for effectively connected
income, before the payment of dividends. These forms must be
periodically updated.
Non-U.S. holders
may obtain a refund of any excess amounts withheld by timely
filing an appropriate claim for refund with the IRS.
Gain On
Sale, Exchange or Other Taxable Disposition of Our Common
Stock
In general, a
non-U.S. holder
will not be subject to any U.S. federal income tax or
withholding tax on any gain realized upon such holders
sale, exchange or other taxable disposition of shares of our
common stock unless:
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the gain is effectively connected with a U.S. trade or
business (and if an applicable income tax treaty so provides, is
also attributable to a permanent establishment or a fixed base
maintained by such
non-U.S. holder),
in which case the
non-U.S. holder
generally will be taxed at the graduated U.S. federal
income tax rates applicable to U.S. persons and, if the
non-U.S. holder
is a foreign corporation, the additional branch profits tax
described above in Distributions on Our Common Stock
may apply;
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the
non-U.S. holder
is a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year of the
disposition and certain other conditions are met, in which case
the
non-U.S. holder
will be subject to a 30% tax on the net gain derived from the
disposition, which may be offset by U.S. source capital
losses of the
non-U.S. holder,
if any; or
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we are or have been, at any time during the five-year period
preceding such disposition (or the
non-U.S. holders
holding period if shorter) a U.S. real property
holding corporation unless our common stock is regularly
traded on an established securities market and the
non-U.S. holder
holds no more than 5% of our outstanding common stock, directly
or indirectly. If we are determined to be a U.S. real
property holding corporation and the foregoing exception does
not apply, then a purchaser may withhold 10% of the proceeds
payable to a
non-U.S. holder
from a sale of our common stock and the
non-U.S. holder
generally will be taxed on its net gain derived from the
disposition at the graduated U.S. federal income tax rates
applicable to U.S. persons and, if the
non-U.S. holder
is a foreign corporation, the additional branch profits tax
described above in Distributions on Our Common Stock
may apply. Generally, a corporation is a U.S. real property
holding corporation only if the fair market value of its
U.S. real property interests equals or exceeds 50% of the
sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade
or business. Although there can be no assurance, we do not
believe that we are, or have been, a U.S. real property
holding corporation, or that we are likely to become one in the
future. Furthermore, no assurance can be provided that our stock
will be regularly traded on an established securities market for
purposes of the rules described above.
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U.S. Federal
Estate Tax
Shares of our common stock owned or treated as owned at the time
of death by an individual who is not a citizen or resident of
the United States, as specifically defined for U.S. federal
estate tax purposes, will be considered U.S. situs assets
and will be included in the individuals gross estate for
U.S. federal estate tax purposes. Such shares, therefore,
may be subject to U.S. federal estate tax, unless an
applicable estate tax or other treaty provides otherwise.
Backup
Withholding and Information Reporting
We must report annually to the IRS and to each
non-U.S. holder
the gross amount of the distributions on our common stock paid
to such holder and the tax withheld, if any, with respect to
such distributions.
Non-U.S. holders
may have to comply with specific certification procedures (such
as providing a properly completed IRS Form W-8BEN) to
establish that such holder is not a U.S. person in order to
avoid backup withholding at the applicable rate, currently 28%,
with respect to dividends on our common stock. Dividends paid to
non-U.S. holders
subject to the U.S. withholding tax, as described above in
Distributions on Our Common Stock, generally will be
exempt from U.S. backup withholding.
Information reporting and backup withholding will generally
apply to the proceeds of a disposition of our common stock by a
non-U.S. holder
effected by or through the U.S. office of any broker,
U.S. or foreign, unless the holder certifies its status as
a
non-U.S. holder
and satisfies certain other requirements, or otherwise
establishes an exemption. Generally, information reporting and
backup withholding will not apply to a payment of disposition
proceeds where the transaction is effected outside the United
States through a
non-U.S. office
of a broker. However, for information reporting purposes,
dispositions effected through a
non-U.S. office
of a broker with substantial U.S. ownership or operations
generally will be treated in a manner similar to dispositions
effected through a U.S. office of a broker.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Copies of information returns may be made available to the tax
authorities of the country in which the
non-U.S. holder
resides or is incorporated under the provisions of a specific
treaty or agreement.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that an
appropriate claim is timely filed with the IRS.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc., Thomas Weisel Partners LLC and
JMP Securities LLC are acting as representatives of the
underwriters named below. Subject to the terms and conditions
contained in a purchase agreement, dated the date of this
prospectus, among us, the selling stockholders and the
underwriters, the underwriters named below have severally agreed
to purchase, and we and the selling stockholders have agreed to
sell to them, severally, the number of shares indicated below:
|
|
|
|
|
|
|
Number
|
|
Underwriter
|
|
of Shares
|
|
|
Merrill Lynch, Pierce, Fenner
& Smith
Incorporated
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
Thomas Weisel Partners LLC
|
|
|
|
|
JMP Securities LLC
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,613,371
|
|
|
|
|
|
|
The underwriters have agreed to purchase all of the shares sold
under the purchase agreement if any of these shares are
purchased. If an underwriter defaults, the purchase agreement
provides that the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwrites may be required to make in respect of those
liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of
officers certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Commissions
and Discounts
The underwriters representatives have advised us and the
selling stockholders that the underwriters propose initially to
offer the shares to the public at the initial public offering
price on the cover page of this prospectus and to dealers at
that price less a concession not in excess of
$ per share. The underwriters
may allow, and the dealers may reallow, a discount not in excess
of $ per share to other
dealers. After the public offering, the public offering price,
concession and discount may be changed.
The follow table shows the public offering price, underwriting
discount and proceeds before expenses to us and the selling
stockholders. The information assumes either no exercise or full
exercise by the underwriters of their overallotment option to
purchase additional shares of our common stock:
|
|
|
|
|
|
|
|
|
Per Share
|
|
Without Option
|
|
With Option
|
|
Public offering price
|
|
$
|
|
$
|
|
$
|
Underwriting discount
|
|
$
|
|
$
|
|
$
|
Proceeds, before expenses, to
NxStage
|
|
$
|
|
$
|
|
$
|
Proceeds, before expenses, to the
selling stockholders
|
|
$
|
|
$
|
|
$
|
The expenses of the offering, not including the underwriting
discount, are estimated at $671,000 and are payable by us.
99
Overallotment
Option
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate of 825,000 additional shares of common stock at the
public offering price listed on the cover page of this
prospectus, less underwriting discounts. The underwriters may
exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of
the shares of common stock offered by this prospectus. To the
extent the option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase about the
same percentage of the additional shares of common stock as the
number listed next to the underwriters name in the table
above bears to the total number of shares of common stock listed
next to the names of all underwriters in the table above. If the
underwriters option is exercised in full, assuming a per share
offering price of $10.94, based on the last reported sale price
of our common stock on the Nasdaq National Market on
May 25, 2006, the total price to the public would be
approximately $69.2 million and the total proceeds to us
would be approximately $64.4 million after deducting
estimated underwriting discounts and commissions and offering
expenses.
No Sales
of Similar Securities
We, the selling stockholders, each of our directors and officers
and holders of a substantial majority of our outstanding stock
have agreed, with exceptions, not to sell or transfer any common
stock for 90 days after the date of this prospectus,
subject to an extension of up to 18 days without first
obtaining the written consent of Merrill Lynch, Pierce, Fenner
and Smith Incorporated and J.P. Morgan Securities Inc. on behalf
of the underwriters. Specifically, we and these other
individuals have agreed not to directly or indirectly:
|
|
|
|
|
offer, pledge, sell, contract to sell, sell any common stock;
|
|
|
|
sell any option or contract to purchase any common stock;
|
|
|
|
purchase any option or contract to sell any common stock;
|
|
|
|
grant any option, right or warrant for the sale of any common
stock;
|
|
|
|
lend or either dispose of or transfer any common stock;
|
|
|
|
request or demand that we file a registration statement related
to the common stock; or
|
|
|
|
enter into any swap or other arrangement that transfers, in
whole or in part, the economic consequences of ownership of any
common stock, whether any transaction swap or transaction is to
be settled by delivery of common stock or other securities, in
cash or otherwise.
|
These restrictions do not apply to:
|
|
|
|
|
the sale of shares to the underwriters;
|
|
|
|
the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus that is described in
this prospectus;
|
|
|
|
the issuance by us of shares or options to purchase shares of
common stock pursuant to our stock incentive and employee stock
purchase plans, provided that the recipient of the shares agrees
to be subject to the restrictions described in this
paragraph; or
|
|
|
|
certain transactions by persons other than us relating to shares
of common stock or other securities acquired in open market
transactions after the completion of the offering of the shares.
|
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
See the section entitled Shares Eligible for Future
Sale for further discussion of certain transfer
restrictions.
Quotation
on the Nasdaq National Market
The shares are quoted on the Nasdaq National Market under the
symbol NXTM.
100
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the underwriters may
engage in transactions that stabilize the price of our common
stock, such as bids or purchases to peg, fix or maintain that
price.
Short sales involve syndicate sales of common stock in excess of
the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position.
Covered short sales are sales of shares made in an
amount up to the number of shares represented by the
underwriters over-allotment option. In determining the
source of shares to close out the covered syndicate short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. Transactions to close out the covered
syndicate short involve either purchases of the shares in the
open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also
make naked short sales of shares in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing shares of common stock in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in
the offering. Stabilizing transactions consist of bids for or
purchases of shares in the open market while the offering is in
progress. Purchases of the common stock to stabilize its price
or to reduce a short position may cause the price of the common
stock to be higher than it might be in the absence of such
purchases.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters makes any representation that the
underwriters representatives or lead manager will engage
in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
Electronic
Distribution
A prospectus in electronic format will be made available on the
website maintained by Merrill Lynch. Other than the electronic
prospectus, the information on the website is not part of this
prospectus. Merrill Lynch may agree to allocate a number of
shares for sale to their online brokerage account holders.
Other
Relationships
In the future, certain of the underwriters or their affiliates
may provide investment and commercial banking and financial
advisory services to NxStage and its affiliates in the ordinary
course of business, for which they may receive customary fees
and commissions. To date, we have not engaged the underwriters
to provide any such services, and no such fees or commissions
have been paid or incurred.
LEGAL
MATTERS
The validity of the shares of common stock we are offering will
be passed upon for us by Wilmer Cutler Pickering Hale and Dorr
LLP, Boston, Massachusetts. Legal matters in connection with
this offering will be passed upon for the underwriters by
Shearman & Sterling LLP, New York, New York.
EXPERTS
The consolidated financial statements of NxStage Medical, Inc.
as of December 31, 2004 and 2005, and for each of the three
years in the period ended December 31, 2005, appearing in
this prospectus and the related registration statement have been
audited by Ernst & Young LLP, independent registered
public accounting firm, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance on such
report given on the authority of such firm as experts in
accounting and auditing.
101
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act of 1933, with respect to our common
stock offered hereby. This prospectus, which forms part of the
registration statement, does not contain all of the information
set forth in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted
in accordance with the rules and regulations of the SEC. For
further information about us and our common stock, we refer you
to the registration statement and the exhibits and schedules to
the registration statement filed as part of the registration
statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit
are qualified in all respects by reference to the actual text of
the exhibit. You may read and copy the registration statement,
including the exhibits and schedules to the registration
statement, at the SECs Public Reference Room at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet site at www.sec.gov,
from which you can electronically access the registration
statement, including the exhibits and schedules to the
registration statement.
We are subject to the full informational and periodic reporting
requirements of the Securities Exchange Act of 1934, as amended.
We fulfill our obligations with respect to such requirements by
filing periodic reports and other information with the SEC. We
intend to furnish our stockholders with annual reports
containing consolidated financial statements certified by an
independent registered public accounting firm. We also maintain
an Internet site at www.nxstage.com. Our internet site is not a
part of this prospectus.
102
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of NxStage Medical, Inc.
We have audited the accompanying consolidated balance sheets of
NxStage Medical, Inc. as of December 31, 2005 and 2004, and
the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of NxStage Medical, Inc. at December 31,
2005 and 2004, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 31, 2006,
except for Note 15, as to which the date is
May 15, 2006
F-2
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,639,499
|
|
|
$
|
61,223,377
|
|
|
$
|
35,034,750
|
|
Marketable securities
|
|
|
12,495,000
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
14,692,810
|
|
Accounts receivable, net
|
|
|
524,265
|
|
|
|
1,367,860
|
|
|
|
2,589,609
|
|
Inventory
|
|
|
4,410,253
|
|
|
|
5,956,336
|
|
|
|
7,510,939
|
|
Prepaid expenses and other current
assets
|
|
|
39,585
|
|
|
|
523,160
|
|
|
|
359,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,108,602
|
|
|
|
69,070,733
|
|
|
|
60,187,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
759,008
|
|
|
|
2,070,387
|
|
|
|
2,439,381
|
|
Field equipment, net
|
|
|
1,041,263
|
|
|
|
4,843,398
|
|
|
|
7,361,548
|
|
Other assets
|
|
|
546,061
|
|
|
|
446,508
|
|
|
|
474,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
25,454,934
|
|
|
$
|
76,431,026
|
|
|
$
|
70,463,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,409,269
|
|
|
$
|
3,027,524
|
|
|
$
|
5,722,840
|
|
Accrued expenses
|
|
|
1,046,146
|
|
|
|
2,344,318
|
|
|
|
2,778,648
|
|
Deferred rent obligation
|
|
|
|
|
|
|
84,997
|
|
|
|
84,997
|
|
Current portion of long-term debt
|
|
|
1,448,165
|
|
|
|
1,513,480
|
|
|
|
1,542,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,903,580
|
|
|
|
6,970,319
|
|
|
|
10,129,085
|
|
Deferred rent obligation
|
|
|
|
|
|
|
473,268
|
|
|
|
453,315
|
|
Long-term debt
|
|
|
3,005,717
|
|
|
|
1,633,070
|
|
|
|
1,236,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,909,297
|
|
|
|
9,076,657
|
|
|
|
11,818,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock, at redemption value (Note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B:
1,875,000 shares authorized, issued and outstanding at
December 31, 2004
|
|
|
5,006,250
|
|
|
|
|
|
|
|
|
|
Series C:
1,155,169 shares authorized and 1,151,632 shares
issued and outstanding at December 31, 2004
|
|
|
6,000,003
|
|
|
|
|
|
|
|
|
|
Series D:
5,011,173 shares authorized and 4,857,622 shares
issued and outstanding at December 31, 2004
|
|
|
29,000,008
|
|
|
|
|
|
|
|
|
|
Series E:
2,690,846 shares authorized and 2,669,908 shares
issued and outstanding at December 31, 2004
|
|
|
15,939,351
|
|
|
|
|
|
|
|
|
|
Series F:
2,829,671 shares authorized and 2,747,253 shares
issued and outstanding at December 31, 2004
|
|
|
20,000,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible
preferred stock
|
|
|
75,945,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated preferred stock: par
value $0.001, 5,000,000 shares authorized as of
December 31, 2005 and March 31, 2006; zero shares
issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: par value $0.001,
20,000,000 shares authorized as of December 31, 2004
and 100,000,000 shares authorized as of December 31,
2005 and March 31, 2006; 2,566,681, 21,176,554 and
21,184,287 shares issued and outstanding at
December 31, 2004 and 2005, and March 31, 2006,
respectively
|
|
|
2,567
|
|
|
|
21,177
|
|
|
|
21,184
|
|
Additional paid-in capital
|
|
|
2,391,223
|
|
|
|
151,675,548
|
|
|
|
151,914,501
|
|
Deferred compensation
|
|
|
(420,509
|
)
|
|
|
(259,910
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(59,496,069
|
)
|
|
|
(84,010,669
|
)
|
|
|
(93,265,639
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
122,811
|
|
|
|
(71,777
|
)
|
|
|
(25,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(57,399,977
|
)
|
|
|
67,354,369
|
|
|
|
58,644,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable
convertible preferred stock and stockholders equity
(deficit)
|
|
$
|
25,454,934
|
|
|
$
|
76,431,026
|
|
|
$
|
70,463,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
F-3
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
285,954
|
|
|
$
|
1,884,569
|
|
|
$
|
5,993,739
|
|
|
$
|
1,033,792
|
|
|
$
|
3,400,722
|
|
Cost of revenues
|
|
|
940,371
|
|
|
|
3,438,832
|
|
|
|
9,585,286
|
|
|
|
1,782,166
|
|
|
|
4,857,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
|
|
(654,417
|
)
|
|
|
(1,554,263
|
)
|
|
|
(3,591,547
|
)
|
|
|
(748,374
|
)
|
|
|
(1,456,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,526,491
|
|
|
|
5,970,442
|
|
|
|
6,304,463
|
|
|
|
1,432,040
|
|
|
|
1,778,894
|
|
Selling and marketing
|
|
|
2,180,747
|
|
|
|
3,334,028
|
|
|
|
7,549,830
|
|
|
|
1,321,040
|
|
|
|
3,192,983
|
|
Distribution
|
|
|
32,602
|
|
|
|
494,786
|
|
|
|
2,059,279
|
|
|
|
308,925
|
|
|
|
1,289,599
|
|
General and administrative
|
|
|
2,868,304
|
|
|
|
3,603,967
|
|
|
|
4,854,471
|
|
|
|
1,025,016
|
|
|
|
1,974,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,608,144
|
|
|
|
13,403,223
|
|
|
|
20,768,043
|
|
|
|
4,087,021
|
|
|
|
8,236,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,262,561
|
)
|
|
|
(14,957,486
|
)
|
|
|
(24,359,590
|
)
|
|
|
(4,835,395
|
)
|
|
|
(9,692,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
146,047
|
|
|
|
130,347
|
|
|
|
643,417
|
|
|
|
72,086
|
|
|
|
595,407
|
|
Interest expense
|
|
|
(91,985
|
)
|
|
|
(14,542
|
)
|
|
|
(763,437
|
)
|
|
|
(145,824
|
)
|
|
|
(157,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,062
|
|
|
|
115,805
|
|
|
|
(120,020
|
)
|
|
|
(73,738
|
)
|
|
|
437,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,208,499
|
)
|
|
$
|
(14,841,681
|
)
|
|
$
|
(24,479,610
|
)
|
|
$
|
(4,909,133
|
)
|
|
$
|
(9,254,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and
diluted
|
|
$
|
(4.10
|
)
|
|
$
|
(5.81
|
)
|
|
$
|
(4.31
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding, basic and diluted
|
|
|
2,489,688
|
|
|
|
2,555,605
|
|
|
|
5,680,566
|
|
|
|
2,566,399
|
|
|
|
21,182,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
F-4
NXSTAGE
MEDICAL, INC.
CONSOLIDATED
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
|
|
|
Carrying
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
From
|
|
|
Accumulated
|
|
|
Income
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Loss
|
|
|
Balance at December 31,
2002
|
|
|
7,884,254
|
|
|
$
|
40,006,261
|
|
|
|
2,560,644
|
|
|
$
|
2,561
|
|
|
$
|
1,496,459
|
|
|
$
|
(95,843
|
)
|
|
$
|
(289,615
|
)
|
|
$
|
(34,367,595
|
)
|
|
$
|
(17,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Series E redeemable
convertible preferred stock, net of issuance costs of $46,814
|
|
|
2,669,908
|
|
|
|
15,939,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,814
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
4,582
|
|
|
|
5
|
|
|
|
13,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,709
|
)
|
|
$
|
(3,709
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,208,499
|
)
|
|
|
|
|
|
|
(10,208,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,212,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2003
|
|
|
10,554,162
|
|
|
$
|
55,945,612
|
|
|
|
2,565,226
|
|
|
$
|
2,566
|
|
|
$
|
1,518,555
|
|
|
$
|
(65,939
|
)
|
|
$
|
(289,615
|
)
|
|
$
|
(44,622,908
|
)
|
|
$
|
(21,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Series F redeemable
convertible preferred stock, net of issuance costs of $31,480
|
|
|
2,747,253
|
|
|
|
20,000,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,480
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
|
|
1
|
|
|
|
5,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,124
|
|
|
|
(159,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,780
|
|
|
|
(285,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
debt agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,000
|
|
|
$
|
24,000
|
|
Forgiveness of note receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,909
|
|
|
|
119,909
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,841,681
|
)
|
|
|
|
|
|
|
(14,841,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,697,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
13,301,415
|
|
|
$
|
75,945,614
|
|
|
|
2,566,681
|
|
|
$
|
2,567
|
|
|
$
|
2,391,223
|
|
|
$
|
(420,509
|
)
|
|
$
|
|
|
|
$
|
(59,496,069
|
)
|
|
$
|
122,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
Series F-1
redeemable convertible preferred stock, net of issuance costs of
$34,990
|
|
|
2,197,801
|
|
|
|
15,999,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,990
|
)
|
|
|
|
|
|
|
|
|
Conversion of redeemable
convertible preferred stock to common stock
|
|
|
(15,499,216
|
)
|
|
|
(91,945,607
|
)
|
|
|
12,124,840
|
|
|
|
12,125
|
|
|
|
91,933,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
issuance costs
|
|
|
|
|
|
|
|
|
|
|
6,325,000
|
|
|
|
6,325
|
|
|
|
56,023,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D warrant extension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
128,729
|
|
|
|
129
|
|
|
|
533,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
31,304
|
|
|
|
31
|
|
|
|
223,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to nonemployees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,400
|
|
|
|
(34,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,066
|
|
|
|
(58,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,000
|
)
|
|
$
|
(24,000
|
)
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170,588
|
)
|
|
|
(170,588
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,479,610
|
)
|
|
|
|
|
|
|
(24,479,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,674,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
$
|
|
|
|
|
21,176,554
|
|
|
$
|
21,177
|
|
|
$
|
151,675,548
|
|
|
$
|
(259,910
|
)
|
|
$
|
|
|
|
$
|
(84,010,669
|
)
|
|
$
|
(71,777
|
)
|
|
|
|
|
Issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
7,733
|
|
|
|
7
|
|
|
|
15,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of deferred
compensation upon adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259,910
|
)
|
|
|
259,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,240
|
|
|
$
|
46,240
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,254,970
|
)
|
|
|
|
|
|
|
(9,254,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,208,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
(Unaudited)
|
|
|
|
|
|
$
|
|
|
|
|
21,184,287
|
|
|
$
|
21,184
|
|
|
$
|
151,914,501
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(93,265,639
|
)
|
|
$
|
(25,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these
consolidated financial statements.
F-5
NXSTAGE
MEDICAL, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,208,499
|
)
|
|
$
|
(14,841,681
|
)
|
|
$
|
(24,479,610
|
)
|
|
$
|
(4,909,133
|
)
|
|
$
|
(9,254,970
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of marketable
securities
|
|
|
|
|
|
|
|
|
|
|
(24,000
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
370,797
|
|
|
|
452,925
|
|
|
|
1,033,688
|
|
|
|
155,247
|
|
|
|
497,740
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
140,833
|
|
|
|
35,208
|
|
|
|
35,208
|
|
Forgiveness of related party loans
|
|
|
62,913
|
|
|
|
289,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
38,904
|
|
|
|
90,334
|
|
|
|
253,065
|
|
|
|
54,671
|
|
|
|
495,406
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(148,677
|
)
|
|
|
(375,579
|
)
|
|
|
(843,595
|
)
|
|
|
(141,435
|
)
|
|
|
(1,221,270
|
)
|
Inventory
|
|
|
(1,044,889
|
)
|
|
|
(2,346,311
|
)
|
|
|
(5,929,697
|
)
|
|
|
(1,256,713
|
)
|
|
|
(4,416,148
|
)
|
Prepaid expenses and other current
assets
|
|
|
89,893
|
|
|
|
11,002
|
|
|
|
(483,598
|
)
|
|
|
3,371
|
|
|
|
151,597
|
|
Accounts payable
|
|
|
35,163
|
|
|
|
1,215,678
|
|
|
|
1,613,878
|
|
|
|
443,489
|
|
|
|
2,689,146
|
|
Accrued expenses
|
|
|
(31,193
|
)
|
|
|
331,600
|
|
|
|
1,370,911
|
|
|
|
24,915
|
|
|
|
543,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(10,835,588
|
)
|
|
|
(15,172,417
|
)
|
|
|
(27,348,125
|
)
|
|
|
(5,590,380
|
)
|
|
|
(10,479,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(80,084
|
)
|
|
|
(195,071
|
)
|
|
|
(1,198,222
|
)
|
|
|
(230,463
|
)
|
|
|
(512,327
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,692,810
|
)
|
Sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
12,495,000
|
|
|
|
7,500,000
|
|
|
|
|
|
Purchase of marketable securities
|
|
|
|
|
|
|
(12,471,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
1,678
|
|
|
|
(135,013
|
)
|
|
|
(5,869
|
)
|
|
|
(300,076
|
)
|
|
|
(158,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(78,406
|
)
|
|
|
(12,801,084
|
)
|
|
|
11,290,909
|
|
|
|
6,969,461
|
|
|
|
(15,363,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
redeemable convertible preferred stock
|
|
|
15,892,537
|
|
|
|
19,968,522
|
|
|
|
15,965,003
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
|
|
|
|
|
|
|
|
56,507,896
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
13,101
|
|
|
|
5,265
|
|
|
|
533,906
|
|
|
|
|
|
|
|
15,228
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
223,060
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) on
loans and lines of credit
|
|
|
(136,417
|
)
|
|
|
4,730,311
|
|
|
|
(1,448,164
|
)
|
|
|
(226,873
|
)
|
|
|
(411,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
15,769,221
|
|
|
|
24,704,098
|
|
|
|
71,781,701
|
|
|
|
(226,873
|
)
|
|
|
(396,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange effect on cash and
cash equivalents
|
|
|
(2,470
|
)
|
|
|
28,284
|
|
|
|
(140,607
|
)
|
|
|
(36,740
|
)
|
|
|
51,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
4,852,757
|
|
|
|
(3,241,119
|
)
|
|
|
55,583,878
|
|
|
|
1,115,468
|
|
|
|
(26,188,627
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
4,027,861
|
|
|
|
8,880,618
|
|
|
|
5,639,499
|
|
|
|
5,639,499
|
|
|
|
61,223,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
8,880,618
|
|
|
$
|
5,639,499
|
|
|
$
|
61,223,377
|
|
|
$
|
6,754,967
|
|
|
$
|
35,034,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
28,092
|
|
|
$
|
14,542
|
|
|
$
|
270,098
|
|
|
$
|
145,824
|
|
|
$
|
57,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from inventory to field
equipment
|
|
$
|
63,180
|
|
|
$
|
1,091,198
|
|
|
$
|
4,366,981
|
|
|
$
|
530,735
|
|
|
$
|
2,866,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvement allowance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
614,798
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
financing activity
|
|
$
|
|
|
|
$
|
422,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation and paid-in
capital
|
|
$
|
9,000
|
|
|
$
|
444,904
|
|
|
$
|
92,466
|
|
|
$
|
|
|
|
$
|
16,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to
common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,945,607
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension of Series D warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
478,094
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial
statements.
F-6
NXSTAGE
MEDICAL, INC.
December 31, 2005
NxStage Medical, Inc. (the Company) is a medical device company
that develops, manufactures and markets products for the
treatment of kidney failure and fluid overload. The
Companys primary product, the NxStage System One (the
System One), was designed to satisfy an unmet clinical need for
a system that can deliver the therapeutic flexibility and
clinical benefits associated with traditional dialysis machines
in a smaller, portable,
easy-to-use
form that can be used by healthcare professionals and trained
lay users alike in a variety of settings, including patient
homes, as well as more traditional care settings such as
hospitals and dialysis clinics. The System One is cleared by the
United States Food and Drug Administration (the FDA)
and sold commercially in the United States for the treatment of
acute and chronic kidney failure patients and fluid overload.
The System One consists of an electromechanical medical device
(cycler), a disposable blood tubing set and a dialyzer (filter)
pre-mounted in a disposable, single-use cartridge, and fluids
used in conjunction with therapy.
During 2004, the Company commenced significant commercial
activities and was no longer considered to be in the development
stage. The Companys growth has been funded through a
combination of private equity, bank debt, lease financing and,
since November 1, 2005, through proceeds from its initial
public offering of common stock. As of December 31, 2005,
the Company had approximately $61.2 million of unrestricted
cash and the Company believes that it has sufficient cash to
meet its funding requirements at least through 2006. The Company
has experienced and continues to experience negative operating
margins and negative cash flows from operations and there can be
no assurance as to the availability or terms upon which
additional financing may be available in the future.
|
|
2.
|
Summary
of Significant Accounting Policies
|
(a) Unaudited
Interim Financial Information
The accompanying interim consolidated balance sheet as of
March 31, 2006, the consolidated statements of operations
and cash flows for the three months ended March 31, 2005
and 2006, and the consolidated statement of redeemable
convertible preferred stock and stockholders equity
(deficit) for the three months ended March 31, 2006 are
unaudited. These unaudited interim consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States. In the
opinion of the Companys management, the unaudited interim
consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements (with the
exception of the impact of adopting Statement of Financial
Accounting Standards (SFAS)
No. 123R Share-Based Payment. See
Stock-Based Compensation below) and include all
adjustments consisting of normal recurring adjustments necessary
for the fair presentation of the Companys financial
position at March 31, 2006 and its results of operations
and cash flows for the three months ended March 31, 2005
and 2006. The results of operations for the three months ended
March 31, 2006 are not necessarily indicative of the
results to be expected for any other interim period or for the
year ended December 31, 2006.
(b) Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
material intercompany transactions and balances have been
eliminated in consolidation. Certain amounts in previously
issued consolidated financial statements have been reclassified
to conform to the current presentation.
On September 15, 2005, the Companys board of
directors (the Board) declared a
one-for-1.3676
reverse stock split of the outstanding shares of common stock
and adjusted conversion ratios of Series B, Series C,
Series D, Series E, Series F and
Series F-1
redeemable convertible preferred stock to reflect the
F-7
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
one-for-1.3676
reverse stock split of the common stock. All references in the
consolidated financial statements to the number of shares
outstanding, per share amounts, and stock option data of the
Companys common stock have been retroactively adjusted to
reflect the effect of the reverse stock split for all periods
presented.
(c) Use
of Estimates
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Foreign
Currency Translation and Transactions
Assets and liabilities of the Companys foreign operations
are translated in accordance with SFAS No. 52, Foreign
Currency Translation. In accordance with
SFAS No. 52, assets and liabilities of the
Companys foreign operations are translated into
U.S. dollars at current exchange rates, and income and
expense items are translated at average rates of exchange
prevailing during the year. Gains and losses realized from
transactions, including intercompany balances not considered
permanent investments, are denominated in foreign currencies and
are included in the consolidated statements of operations and
were not material for the periods presented.
(e) Cash,
Cash Equivalents, Short-Term Investments and Marketable
Securities
The Company considers all highly-liquid investments purchased
with original maturities of 90 days or less to be cash
equivalents. Cash equivalents include amounts invested in
commercial paper and money market funds. Cash equivalents are
stated at cost plus accrued interest, which approximates market
value. Short-term investments represent commercial paper with an
original maturity date of more than 90 days, but less than
180-days.
Short-term investments have been classified as held-to-maturity
and carried at amortized cost as the Company has the intent and
the ability to hold the investments to maturity.
The Company accounts for its investments in marketable
securities in accordance with Statement of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments in marketable
securities as
available-for-sale
for the year ended December 31, 2004; there were no
marketable securities at December 31, 2005 or
March 31, 2006. Marketable securities are reported at their
fair value, with any unrealized gains and losses excluded from
earnings and reported as a separate component of
stockholders equity (deficit) as other comprehensive
income (loss).
(f) Fair
Value of Financial Instruments and Concentration of Credit
Risk
Financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable,
accounts payable and long-term debt. The estimated fair value of
these instruments approximates their carrying value due to the
short period of time to their maturities. The fair value of the
Companys debt is estimated based on the current rates
offered to the Company for debt of the same remaining
maturities. The carrying amount of long-term debt approximates
fair value.
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. Management
believes that the financial institutions that hold the
Companys cash are financially sound and, accordingly,
minimal credit risk exists with respect to these balances.
F-8
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All of the Companys revenues are derived from the sale of
the System One and related products, which cannot be used with
any other dialysis system. If the System One is not a successful
product or is withdrawn from the market for any reason, the
Company does not have other products in development.
The Company uses and is dependent upon four single source
suppliers of components, subassemblies and finished goods. The
Company is dependent on the ability of its suppliers to provide
products on a timely basis and on favorable pricing terms. The
loss of certain principal suppliers or a significant reduction
in product availability from principal suppliers could have a
material adverse effect on the Company. The Company believes
that its relationships with its suppliers are satisfactory.
The Company reduces gross trade accounts receivable with an
allowance for doubtful accounts. The allowance for doubtful
accounts is the Companys best estimate of the amount of
probable credit losses in the existing accounts receivable. The
Company reviews its allowance for doubtful accounts on a monthly
basis and all past due balances are reviewed individually for
collectability. Account balances are charged off against the
allowance after significant collection efforts have been made
and potential for recovery is considered remote. Provisions for
allowance for doubtful accounts are recorded in general and
administrative expenses in the accompanying consolidated
statements of operations. Activity related to allowance for
doubtful accounts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of Period
|
|
|
Provision
|
|
|
Write-Offs
|
|
|
End of Period
|
|
|
Year ended December 31, 2003
|
|
$
|
9,599
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,599
|
|
Year ended December 31, 2004
|
|
|
9,599
|
|
|
|
24,750
|
|
|
|
(12,416
|
)
|
|
|
21,933
|
|
Year ended December 31, 2005
|
|
|
21,933
|
|
|
|
15,750
|
|
|
|
(25,417
|
)
|
|
|
12,266
|
|
Three months ended March 31,
2006 (unaudited)
|
|
$
|
12,266
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,266
|
|
The following table summarizes the number of customers who
individually comprise greater than 10% of total revenue and
total accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Accounts Receivable
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Number of
|
|
|
Total
|
|
|
Number of
|
|
|
Total Accounts
|
|
Year Ended
|
|
Customers
|
|
|
Revenue
|
|
|
Customers
|
|
|
Receivable
|
|
|
December 31, 2003
|
|
|
2
|
|
|
|
63%
|
|
|
|
1
|
|
|
|
44%
|
|
December 31, 2004
|
|
|
3
|
|
|
|
37%
|
|
|
|
3
|
|
|
|
35%
|
|
December 31, 2005
|
|
|
3
|
|
|
|
33%
|
|
|
|
2
|
|
|
|
25%
|
|
March 31, 2006 (unaudited)
|
|
|
1
|
|
|
|
13%
|
|
|
|
2
|
|
|
|
29%
|
|
(g) Inventory
Inventory is stated at the lower of cost (weighted-average) or
market (net realizable value). The Company regularly reviews its
inventory quantities on hand and related cost and records a
provision for any excess or obsolete inventory based on its
estimated forecast of product demand and existing product
configurations. The medical device industry is characterized by
rapid development and technological advances that could result
in obsolescence of inventory. Additionally, the Companys
estimates of future product demand may prove to be inaccurate.
(h) Property
and Equipment and Field Equipment
Property and equipment and field equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of the
related assets using the straight-line method for financial
statement purposes. The Company uses other depreciation methods
(generally, accelerated depreciation methods) for tax purposes
F-9
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
where appropriate. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the
improvements.
Construction in process is stated at cost, which includes the
cost of construction and other direct costs attributable to the
construction. No provision for depreciation is made on
construction in process until such time as the relevant assets
are completed and put into use. Construction in process at
December 31, 2005 represents machinery and equipment under
installation.
Repairs and maintenance are expensed as incurred. Expenditures
that increase the value or productive capacity of assets are
capitalized. When property and equipment are retired, sold, or
otherwise disposed of, the assets carrying amount and
related accumulated depreciation are removed from the accounts
and any gain or loss is included in operations.
The estimated service lives of property and equipment and field
equipment are as follows:
|
|
|
|
|
Estimated
|
|
|
Useful Life
|
|
Leasehold improvements
|
|
Lesser of 5 years or lease
term
|
Computer and office equipment
|
|
3 years
|
Machinery, equipment and tooling
|
|
5 years
|
Furniture
|
|
7 years
|
Field equipment
|
|
5 years
|
(i) Revenue
Recognition
The Company recognizes revenue from product sales and services
when earned in accordance with Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, and Emerging Issues Task
Force
(EITF) 00-21,
Revenue Arrangements with Multiple Deliverables. Revenues
are recognized when: (a) there is persuasive evidence of an
arrangement, (b) the product has been shipped or services
and supplies have been provided to the customer, (c) the
sales price is fixed or determinable and (d) collection is
reasonably assured. In the critical care market, sales are
structured as direct product sales or as a disposables
based-program in which a customer acquires the equipment through
the purchase of a specific quantity of disposables over a
specific period of time. In the chronic care market, revenues
are realized using short-term rental arrangements.
In the critical care market, the Company recognizes revenue from
direct product sales at the later of the time of shipment or, if
applicable, delivery in accordance with contract terms. For the
chronic care market, the Company recognizes revenue derived from
short-term rental arrangements ratably over the rental period.
These rental arrangements combine the use of a system with a
specified number of disposable products supplied to customers
for a fixed amount per month. Revenue is recognized on a monthly
basis in accordance with agreed upon contract terms and pursuant
to customer purchase orders with fixed payment terms. Customer
contracts are generally cancelable on
30-days
notice and there are no purchase requirements from customers
under the Companys chronic agreements.
Under a disposables-based program, the customer is granted the
right to use the equipment for a period of time, during which
the customer commits to purchase a minimum number of disposable
cartridges or fluids at a price that includes a premium above
the otherwise average selling price of the cartridges or fluids
to recover the purchase of the equipment and provide for a
profit. Upon reaching the contractual minimum purchases,
ownership of the equipment transfers to the customer. Revenues
under these arrangements are recognized over the term of the
arrangement as disposables are delivered. The Company records
the cost of the equipment in inventory and amortizes the cost of
the equipment through charges to cost of revenues consistent
with the customers minimum purchase requirement.
F-10
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When the Company enters into a multiple-element arrangement, it
allocates the total fee to all elements of the arrangement based
on their respective fair values. Fair value is determined by the
price charged when each element is sold separately. The
Companys most common multiple-element arrangements are
products sold under a disposables-based program in the critical
care market as described above. The Company accounts for the
disposables-based program as a single economic transaction and
has determined that it does not have a basis to separate the
transaction into multiple elements to recognize revenue at the
time of shipment of each element. Rather, the Company recognizes
revenue related to all elements over the term of the arrangement
as the disposables are delivered.
The Companys contracts provide for training, technical
support and warranty services to its customers. The Company
recognizes training revenue when the related services are
performed. In the case of extended warranty, the revenue is
recognized ratably over the warranty period.
(j) Stock-Based
Compensation
Until December 31, 2005, the Company accounted for
stock-based employee compensation in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense was recorded for stock options
awarded to employees and directors to the extent that the option
exercise price was less than the fair market value of the
Companys common stock on the date of grant, where the
number of shares and exercise price were fixed. The difference
between the fair value of the Companys common stock and
the exercise price of the stock option, if any, was recorded as
deferred compensation and was amortized to compensation expense
over the vesting period of the underlying stock option. All
stock-based awards to nonemployees were accounted for at their
fair value in accordance with SFAS No. 123 and related
interpretations.
On January 1, 2006, the Company adopted SFAS No. 123R
using a combination of the prospective and the modified
prospective transition methods. Under the prospective method,
the Company will not recognize the remaining compensation cost
for any stock option awards which had previously been valued
using the minimum value method, which was allowed until the
Companys initial filing with the Securities and Exchange
Commission (SEC) for the sale of securities (i.e., stock options
granted prior to July 19, 2005). Under the modified
prospective method, the Company has (a) recognized
compensation expense for all share-based payments granted after
January 1, 2006 and (b) recognized compensation
expense for awards granted to employees between July 19,
2005 and December 31, 2005 that remained unvested as of
December 31, 2005. The adoption of SFAS No. 123R
resulted in incremental stock-based compensation of $443,350, or
$0.02 per basic and diluted share, for the three months
ended March 31, 2006.
The Company recognized the full impact of its share-based
payment plans in the condensed consolidated statement of
operations for the three months ended March 31, 2006 under
SFAS No. 123R. The following table presents the
captions in which share-based compensation expenses are included
in the
F-11
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys condensed consolidated statement of operations,
including stock-based compensation recorded in accordance with
APB No. 25:
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31, 2006
|
|
|
|
(Unaudited)
|
|
|
Cost of revenues
|
|
$
|
11,250
|
|
Research and development
|
|
|
28,036
|
|
Selling and marketing
|
|
|
112,069
|
|
Distribution
|
|
|
2,297
|
|
General and administrative
|
|
|
341,754
|
|
|
|
|
|
|
Total
|
|
$
|
495,406
|
|
|
|
|
|
|
The Company had previously adopted only the disclosure
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the statement of
operations based on their fair values. In addition, SFAS
No. 123R requires the use of the prospective method for any
outstanding stock options that were previously valued using the
minimum value method. Accordingly, with the adoption of
SFAS No. 123R, the Company will not recognize the
remaining compensation cost for any stock option awards which
had previously been valued using the minimum value method. In
addition, SFAS No. 123R prohibits the use of pro forma
disclosures for stock option awards valued under the minimum
value method (i.e., the Companys pre-July 19, 2005
stock option awards). Stock option awards granted prior to
July 19, 2005 that are subsequently modified, repurchased
or cancelled after January 1, 2006 shall be subject to the
provisions of SFAS No. 123R.
The Company filed a registration statement on Form S-1 for
an initial public offering of its common stock on July 19,
2005 and closed the initial public offering on November 1,
2005. Stock options granted prior to July 19, 2005 were
valued using the minimum value method, while stock options
granted after July 19, 2005 were valued using the
Black-Scholes option-pricing model. The minimum value method
excludes the impact of stock volatility, whereas the
Black-Scholes option-pricing model includes a stock volatility
assumption in its calculation. The inclusion of a stock
volatility assumption, the principal difference between the two
methods, ordinarily yields a higher fair value.
The weighted-average grant date fair value of options granted
during the three months ended March 31, 2006 was $9.06. The
fair value of options at date of grant was estimated with the
following assumptions:
|
|
|
|
|
Three Months
|
|
|
Ended
|
|
|
March 31, 2006
|
|
|
(Unaudited)
|
|
Expected life of the options
|
|
4.75 years(1)
|
Risk-free interest rate
|
|
4.35% 4.75%(2)
|
Expected stock price volatility
|
|
85%(3)
|
Expected dividend yield
|
|
|
|
|
(1)
|
The expected term was determined using the simplified method for
estimating expected option life of plain-vanilla
options.
|
|
(2)
|
The risk-free interest rate for each grant is equal to the
U.S. Treasury rate in effect at the time of grant for
instruments with an expected life similar to the expected option
term.
|
F-12
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(3) |
Because the Company has no options that are traded publicly and
because of its limited trading history as a public company, the
stock volatility assumption is based on an analysis of the stock
volatility of comparable companies in the medical device and
technology industries.
|
The Company has estimated expected forfeitures of stock options
with the adoption of SFAS No. 123R. In developing a
forfeiture rate estimate, the Company considered its historical
experience, its growing employee base and the limited liquidity
of its common stock.
(k) Warranty
Costs
For a period of one year following the delivery of products to
its critical care customers, the Company provides for product
repair or replacement if it is determined that there is a defect
in material or manufacture of the product. For sales into the
critical care market, the Company accrues estimated warranty
costs at the time of shipment based on contractual rights and
historical experience.
(l) Distribution
Expenses
Distribution expenses consist of the costs incurred in shipping
products to customers and are charged to operations as incurred.
Prior to 2004, the Company did not charge any distribution costs
to its customers. Starting in 2004, shipping and handling costs
charged to customers are included in revenues, and totaled
$25,754 and $42,801 for the years ended December 31, 2004
and 2005, respectively, and $9,206 and $15,397 for the three
months ended March 31, 2005 and March 31, 2006,
respectively.
(m) Research
and Development Costs
Research and development costs are charged to operations as
incurred.
(n) Income
Taxes
The Company accounts for federal and state income taxes in
accordance with SFAS No. 109, Accounting for Income
Taxes. Under the liability method specified by
SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial
statement and tax basis of assets and liabilities, as measured
by the enacted tax rates. The Companys provision for
income taxes represents the amount of taxes currently payable,
if any, plus the change in the amount of net deferred tax assets
or liabilities. A valuation allowance is provided against net
deferred tax assets if recoverability is uncertain on a more
likely than not basis.
(o) Net
Loss per Share
The Company calculates net loss per share in accordance with
SFAS No. 128, Earnings per Share, and
EITF 03-6,
Participating Securities and the Two Class Method under
FASB Statement No. 128, Earnings per Share.
EITF 03-6
clarifies the use of the two-class method of
calculating earnings per share as originally prescribed in
SFAS No. 128. Effective for periods beginning after
March 31, 2004,
EITF 03-6
provides guidance on how to determine whether a security should
be considered a participating security for purposes
of computing earnings per share and how earnings should be
allocated to a participating security when using the two-class
method for computing earnings per share. The Company has
determined that its redeemable preferred stock represents a
participating security because it may participate in dividends
with common stock and, therefore, has calculated net loss per
share consistent with the provisions of
EITF 03-6
for all periods in which its redeemable preferred stock was
outstanding.
Net loss per share is calculated based on the weighted average
number of shares of common stock outstanding, excluding unvested
shares of restricted common stock. The following potential
common stock
F-13
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equivalents were not included in the computation of diluted net
loss per share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Options to purchase common stock
|
|
|
1,290,817
|
|
|
|
1,690,561
|
|
|
|
2,683,286
|
|
|
|
2,541,381
|
|
|
|
1,028,514
|
|
Warrants to purchase common stock
|
|
|
130,165
|
|
|
|
203,625
|
|
|
|
169,736
|
|
|
|
203,625
|
|
|
|
169,736
|
|
Unvested shares of common stock
subject to repurchase
|
|
|
16,625
|
|
|
|
402
|
|
|
|
|
|
|
|
236
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
7,717,172
|
|
|
|
10,165,879
|
|
|
|
10,098,497
|
|
|
|
10,165,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,154,779
|
|
|
|
12,060,467
|
|
|
|
12,951,519
|
|
|
|
12,911,162
|
|
|
|
1,198,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(p) Comprehensive
Income (Loss)
SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting comprehensive income
(loss) and its components in the body of the financial
statements. Comprehensive income (loss) consists of net income
(loss) and other comprehensive income (loss). Other
comprehensive income (loss) includes certain changes in equity
that are excluded from results of operations. Specifically,
foreign currency translation adjustments and unrealized gains
and losses on
available-for-sale
marketable securities are included in accumulated other
comprehensive income in the accompanying consolidated statements
of redeemable convertible preferred stock and stockholders
equity (deficit).
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Foreign currency translation
adjustments
|
|
$
|
98,811
|
|
|
$
|
(71,777
|
)
|
|
$
|
(25,537
|
)
|
Unrealized gain on marketable
securities
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
122,811
|
|
|
$
|
(71,777
|
)
|
|
$
|
(25,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(q) Segment
Reporting
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information regarding operating segments in annual
financial statements. Operating segments are identified as
components of an enterprise about which separate discrete
financial information is available for evaluation by the chief
operating decision-maker in making decisions on how to allocate
resources and assess performance. The Company views its
operations and manages its business as one operating segment.
All revenues were generated in the U.S. and substantially all
assets are located in the U.S.
The Company sells products into two markets, critical care and
chronic care. The critical care market consists of hospitals or
facilities that treat patients that have suddenly, and possibly
temporarily, lost kidney
F-14
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
function. The chronic care market consists of dialysis centers
and hospitals that provide treatment options for patients that
have end-stage renal disease (ESRD). Revenues recognized in
these markets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Years Ended
December 31,
|
|
|
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Critical care market
|
|
$
|
268,576
|
|
|
$
|
1,332,053
|
|
|
$
|
2,829,960
|
|
|
$
|
661,769
|
|
|
$
|
1,583,597
|
|
Chronic care market
|
|
|
17,378
|
|
|
|
552,516
|
|
|
|
3,163,779
|
|
|
|
372,023
|
|
|
|
1,817,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
285,954
|
|
|
$
|
1,884,569
|
|
|
$
|
5,993,739
|
|
|
$
|
1,033,792
|
|
|
$
|
3,400,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, all of the Companys marketable
securities were classified as
available-for-sale.
There were no marketable securities at December 31, 2005 or
March 31, 2006. Marketable securities are carried on the
balance sheet at their fair market value.
The following table summarizes the Companys marketable
securities at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
Weighted-Average
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Date to Maturity
|
|
|
Debt
|
|
$
|
7,500,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,500,000
|
|
|
|
< 1 year
|
|
Fixed income
|
|
|
2,376,000
|
|
|
|
24,000
|
|
|
|
|
|
|
|
2,400,000
|
|
|
|
< 1 year
|
|
Certificates of deposit
|
|
|
2,595,000
|
|
|
|
|
|
|
|
|
|
|
|
2,595,000
|
|
|
|
< 1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,471,000
|
|
|
$
|
24,000
|
|
|
$
|
|
|
|
$
|
12,495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on
available-for-sale
securities in the amount of $24,000 were included in accumulated
other comprehensive income at December 31, 2004. During the
year ended December 31, 2005,
available-for-sale
securities were sold for total proceeds of $12,495,000. The
gross realized gains on these sales totaled $24,000 in 2005. For
purposes of determining gross realized gains, the cost of
securities sold is based on specific identification. As a result
of the sale of these securities, there are no unrealized holding
gains on
available-for-sale
securities at December 31, 2005 in accumulated other
comprehensive income.
The inventory balance consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Purchased components
|
|
$
|
2,926,114
|
|
|
$
|
2,026,986
|
|
|
$
|
2,013,932
|
|
Finished goods
|
|
|
1,484,139
|
|
|
|
3,929,350
|
|
|
|
5,497,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,410,253
|
|
|
$
|
5,956,336
|
|
|
$
|
7,510,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory is shown net of a valuation allowance of approximately
$722,000, $646,000 and $518,000 at December 31, 2004,
December 31, 2005 and March 31, 2006, respectively.
F-15
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Property
and Equipment and Field Equipment
|
The cost and accumulated depreciation of property and equipment
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Computer and office equipment
|
|
$
|
611,423
|
|
|
$
|
829,298
|
|
|
$
|
904,133
|
|
Machinery, equipment and tooling
|
|
|
1,014,055
|
|
|
|
1,613,359
|
|
|
|
1,748,749
|
|
Furniture
|
|
|
241,491
|
|
|
|
279,815
|
|
|
|
417,894
|
|
Leasehold improvements
|
|
|
276,403
|
|
|
|
930,213
|
|
|
|
964,902
|
|
Construction-in-process
|
|
|
34,550
|
|
|
|
246,639
|
|
|
|
391,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,177,922
|
|
|
|
3,899,324
|
|
|
|
4,426,853
|
|
Less accumulated depreciation and
amortization
|
|
|
(1,418,914
|
)
|
|
|
(1,828,937
|
)
|
|
|
(1,987,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
759,008
|
|
|
$
|
2,070,387
|
|
|
$
|
2,439,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for property and equipment was $369,000,
$342,000 and $469,000 for the years ended December 31,
2003, 2004 and 2005, respectively, and $92,000 and $149,000 for
the three months ended March 31, 2005 and March 31,
2006, respectively.
The cost and accumulated depreciation of field equipment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Field equipment
|
|
$
|
1,154,378
|
|
|
$
|
5,521,359
|
|
|
$
|
8,387,865
|
|
Less accumulated depreciation and
amortization
|
|
|
(113,115
|
)
|
|
|
(677,961
|
)
|
|
|
(1,026,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Field equipment, net
|
|
$
|
1,041,263
|
|
|
$
|
4,843,398
|
|
|
$
|
7,361,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for field equipment was $2,000, $111,000
and $565,000 for the years ended December 31, 2003, 2004
and 2005, respectively, and $63,000 and $349,000 for the three
months ended March 31, 2005 and March 31, 2006,
respectively.
F-16
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Payroll and related benefits
|
|
$
|
200,271
|
|
|
$
|
769,364
|
|
|
$
|
843,363
|
|
Deferred revenue
|
|
|
25,720
|
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
|
35,401
|
|
|
|
62,071
|
|
|
|
106,363
|
|
Accrued interest on debt
|
|
|
|
|
|
|
351,869
|
|
|
|
416,718
|
|
Accrued audit, legal and
consulting fees
|
|
|
235,315
|
|
|
|
311,700
|
|
|
|
271,033
|
|
Accrued inventory purchases
|
|
|
|
|
|
|
|
|
|
|
460,075
|
|
Clinical trial costs
|
|
|
217,000
|
|
|
|
25,894
|
|
|
|
28,286
|
|
Deferred straight-line rent
|
|
|
46,446
|
|
|
|
139,697
|
|
|
|
151,328
|
|
Costs relating to initial public
offering
|
|
|
|
|
|
|
225,434
|
|
|
|
|
|
Research and development expenses
|
|
|
153,034
|
|
|
|
101,828
|
|
|
|
26,000
|
|
General and administrative expenses
|
|
|
19,980
|
|
|
|
171,824
|
|
|
|
28,706
|
|
Selling and marketing expenses
|
|
|
112,979
|
|
|
|
184,637
|
|
|
|
446,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,046,146
|
|
|
$
|
2,344,318
|
|
|
$
|
2,778,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Financing
Arrangements
|
Debt
In December 2004, the Company entered into a debt agreement in
the principal amount of $5.0 million, which is payable
monthly over a three-year term and is secured by all the assets
of the Company. Interest accrues at a rate of 7.0% annually and
monthly principal and interest payments are made in advance. In
addition, a final interest payment of $650,000 is due at the
maturity date in December 2007, or if the loan is prepaid in
advance. This additional interest payment is accrued on a
monthly basis using the interest method over the
36-month
life of the loan and is included in accrued expenses in the
accompanying consolidated balance sheets.
In connection with the debt agreement, the Company issued the
lender a warrant to purchase 82,416 shares of Series F
redeemable convertible preferred stock (Series F Preferred
Stock) at an exercise price of $7.28 per share
(Note 12). The Company estimated the value of the warrant
at $422,500 using the Black-Scholes option-pricing model with an
estimated volatility factor of 85%. This amount was recorded as
original issue debt discount and is being amortized as
additional interest expense over the
36-month
life of the loan.
Annual maturities of principal under the Companys debt
obligations and reconciliation to amounts included in the
consolidated balance sheet as of December 31, 2005 are as
follows:
|
|
|
|
|
2006
|
|
$
|
1,654,313
|
|
2007
|
|
|
1,773,904
|
|
|
|
|
|
|
Total future principal payments
|
|
|
3,428,217
|
|
Less: unamortized original issue
debt discount
|
|
|
(281,667
|
)
|
|
|
|
|
|
|
|
|
3,146,550
|
|
Less: current portion of long-term
debt
|
|
|
(1,513,480
|
)
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,633,070
|
|
|
|
|
|
|
F-17
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Commitments
and Contingencies
|
The Company maintains its corporate headquarters and principal
operating activities in a leased building located in Lawrence,
Massachusetts. During 2005, the Company renewed the lease
agreement through 2012. The new lease agreement includes a
tenant improvement allowance paid by the landlord of $614,798,
which has been recorded as both a leasehold improvement and a
deferred rent obligation.
The future minimum rental payments as of December 31, 2005
under the Companys operating leases are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
2006
|
|
$
|
510,596
|
|
2007
|
|
|
505,967
|
|
2008
|
|
|
531,437
|
|
2009
|
|
|
541,242
|
|
2010
|
|
|
552,005
|
|
Thereafter
|
|
|
891,824
|
|
|
|
|
|
|
Total
|
|
$
|
3,533,071
|
|
|
|
|
|
|
Rent expense was $508,000, $510,000 and $461,000 for the years
ended December 31, 2003, 2004 and 2005, respectively, and
$116,000 and $126,000 for the three months ended March 31,
2005 and March 31, 2006, respectively.
At December 31, 2004 and 2005, deferred income tax assets
and liabilities resulted from differences in the recognition of
income and expense items for tax and financial reporting
purposes. The sources and tax effects of these temporary
differences are presented below:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
21,460,000
|
|
|
$
|
30,600,000
|
|
Capitalized
start-up
costs
|
|
|
932,000
|
|
|
|
457,000
|
|
Research and development credits
|
|
|
2,699,000
|
|
|
|
3,329,000
|
|
Other
|
|
|
355,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
Gross deferred income tax assets
|
|
|
25,446,000
|
|
|
|
34,736,000
|
|
Valuation allowance
|
|
|
(25,446,000
|
)
|
|
|
(34,736,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the Company had federal and state
net operating loss carryforwards of approximately
$79.1 million and $71.6 million, respectively,
available to offset future taxable income, if any. The federal
net operating loss carryforwards will expire between 2019 and
2025, while the state net operating loss carryforwards will
expire between 2006 and 2010. The Company also had combined
federal and state research and development credit carryforwards
of approximately $3.3 million, at December 31, 2005,
which begin to expire in 2019 if not utilized. A full valuation
allowance has been recorded in the accompanying consolidated
financial statements to offset the Companys deferred tax
assets because the future realizability of such assets is
uncertain. Utilization of the net operating loss carryforwards
may be subject to an annual limitation due to the ownership
percentage change limitations provided by the Internal Revenue
Code Section 382 and similar state provisions. In the event
of a deemed change in control under Internal Revenue
F-18
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Code Section 382, an annual limitation imposed on the
utilization of net operating losses may result in the expiration
of net operating loss carryforwards.
A reconciliation of the federal statutory rate to the
Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
Federal statutory benefit rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Research and development credits
|
|
|
2.8
|
|
|
|
2.5
|
|
|
|
1.7
|
|
Valuation allowance
|
|
|
(34.3
|
)
|
|
|
(35.1
|
)
|
|
|
(34.8
|
)
|
Other, net
|
|
|
(2.5
|
)
|
|
|
(1.4
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax benefit rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
The Company maintains the 1999 Stock Option and Grant Plan (1999
Plan) under which the issuance of 4,085,009 shares of
common stock were authorized for the granting of incentive stock
options (ISOs) and nonqualified stock options to employees,
officers, directors, advisors, and consultants of the Company.
ISOs under the 1999 Plan were granted only to employees, while
nonqualified stock options under the 1999 Plan were granted to
officers, employees, consultants and advisors of the Company.
The Board determined the option exercise price for incentive and
nonqualified stock options, grants, and in no event were the
option exercise prices of an ISO less than 100% of the fair
market value of common stock at the time of grant, or less than
110% of the fair market value of the common stock in the event
that the employee owned 10% or more of the Companys
capital stock. All stock options issued under the 1999 Plan
expire 10 years from the date of grant and the majority of
these grants were exercisable upon the date of grant into
restricted common stock, which vests over a period of four
years. Prior to the adoption of the 1999 Plan, the Company
issued non-qualified options to purchase 55,252 shares of
common stock, of which 51,013 shares remain outstanding at
December 31, 2005. Effective upon the closing of the
Companys initial public offering, no further grants were
or will be made under the 1999 Plan.
In October 2005, the Company adopted the 2005 Stock Incentive
Plan (2005 Plan) which became effective upon the closing of the
initial public offering. Concurrently, the Company ceased
granting stock options and other equity incentive awards under
the 1999 Plan and 971,495 shares, which were then still
available for grant under the 1999 Plan, were transferred and
became available for grant under the 2005 Plan. The number of
shares available for grant under the 2005 Plan will be increased
annually beginning in 2007 by the lesser of
(a) 600,000 shares, or (b) 3% of the then
outstanding shares of the Companys common stock, or
(c) a number determined by the board. Unless otherwise
specified by the Board or Compensation Committee, stock options
issued to employees under the 2005 Plan expire seven years from
the date of grant and generally vest over a period of four
years. At December 31, 2005, options for the purchase of
717,001 shares of common stock are available for future grant
under the 2005 Plan.
During 2004, the Company granted a consultant options to
purchase 14,624 shares of common stock at an exercise price
of $5.47 per share and during 2005, the Company granted a
consultant options to purchase 5,849 shares of common stock
at an exercise price of $6.84 per share. The fair value of
the 2004 and 2005 option grants was $4.69 and $5.88 per
share, respectively, which has been recorded as deferred
compensation and is being recognized as compensation expense
ratably over the awards vesting period. Further, these
warrants will be marked to market over their vesting period
based upon changes in fair value. During 2004 the unvested
portion of a previous option grant to a consultant was
determined to have increased in fair market value resulting in
additional compensation expense of approximately $76,000 which
is being recognized ratably over the remaining vesting term of
the option.
F-19
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of options granted to consultants is estimated on
the date of grant using the Black-Scholes option-pricing model.
The following assumptions were used for grants made in 2004 and
2005: dividend yield of zero percent for each year; expected
volatility of 85% for each year; risk free interest rates
ranging from 4.65 to 4.68 percent; and expected life of
10 years for each year. Stock-based compensation expense
related to stock options granted to consultants was $38,904,
$78,426 and $181,620 for 2003, 2004 and 2005, respectively, and
$36,810 and $31,321 for the three months ended March 31,
2005 and March 31, 2006, respectively, and is included in
general and administrative expenses in the accompanying
consolidated statements of operations.
With the exception of one stock option grant award, all stock
option awards granted to employees during 2003, 2004 and 2005
were made at exercise prices equal to or greater than the then
fair value of the Companys company stock. The Company
granted 208,962 stock options to a newly hired executive officer
on October 25, 2004 with an exercise price of $4.10, which
was lower than the fair value at the date of grant of $5.47. The
intrinsic value of $1.37 per option has been recorded as
deferred compensation and is being recognized as compensation
expense over the four-year vesting period.
For stock option grants between July 1, 2004 and the
initial public offering that closed on November 1, 2005,
the Company determined the fair value of its common stock based
on a number of factors including independent valuation analyses
as well as the prices for recent issuances of preferred stock.
The Company believes that the methodologies and approaches used
were consistent with the recommendations in the Technical
Practice Aid of American Institute of Certified Public
Accountants, or AICPA, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation.
A summary of the Companys stock plan activity is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
Three Months Ended
March 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Fixed Options
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at beginning of period
|
|
|
1,084,480
|
|
|
$
|
3.53
|
|
|
|
1,290,814
|
|
|
$
|
3.63
|
|
|
|
1,690,556
|
|
|
$
|
3.97
|
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
Granted
|
|
|
232,519
|
|
|
$
|
4.10
|
|
|
|
487,879
|
|
|
$
|
4.90
|
|
|
|
1,217,970
|
|
|
$
|
9.02
|
|
|
|
50,700
|
|
|
$
|
13.25
|
|
Exercised
|
|
|
(4,582
|
)
|
|
$
|
2.86
|
|
|
|
(1,455
|
)
|
|
$
|
3.62
|
|
|
|
(128,729
|
)
|
|
$
|
4.14
|
|
|
|
(7,733
|
)
|
|
$
|
1.97
|
|
Forfeited
|
|
|
(21,603
|
)
|
|
$
|
3.72
|
|
|
|
(86,682
|
)
|
|
$
|
4.18
|
|
|
|
(96,511
|
)
|
|
$
|
5.03
|
|
|
|
(3,248
|
)
|
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,290,814
|
|
|
$
|
3.63
|
|
|
|
1,690,556
|
|
|
$
|
3.97
|
|
|
|
2,683,286
|
|
|
$
|
6.22
|
|
|
|
2,723,005
|
|
|
$
|
6.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
1,290,814
|
|
|
|
|
|
|
|
865,116
|
|
|
|
|
|
|
|
1,448,571
|
|
|
|
|
|
|
|
1,797,193
|
|
|
$
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
options granted during the period
|
|
$
|
0.85
|
|
|
|
|
|
|
$
|
2.07
|
|
|
|
|
|
|
$
|
5.15
|
|
|
|
|
|
|
$
|
9.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.34 to $0.55
|
|
|
107,293
|
|
|
|
3.3 years
|
|
|
$
|
0.37
|
|
|
|
107,293
|
|
|
$
|
0.37
|
|
$1.37
|
|
|
2,924
|
|
|
|
4.4 years
|
|
|
$
|
1.37
|
|
|
|
2,924
|
|
|
$
|
1.37
|
|
$2.74 to $4.10
|
|
|
1,175,182
|
|
|
|
6.7 years
|
|
|
$
|
3.94
|
|
|
|
936,371
|
|
|
$
|
3.90
|
|
$5.47 to $6.84
|
|
|
413,528
|
|
|
|
8.7 years
|
|
|
$
|
6.34
|
|
|
|
294,983
|
|
|
$
|
6.52
|
|
$8.21 to $9.10
|
|
|
746,909
|
|
|
|
7.7 years
|
|
|
$
|
8.56
|
|
|
|
|
|
|
|
|
|
$12.59
|
|
|
237,450
|
|
|
|
6.2 years
|
|
|
$
|
12.59
|
|
|
|
107,000
|
|
|
$
|
12.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.34 to $12.59
|
|
|
2,683,286
|
|
|
|
7.1 years
|
|
|
$
|
6.22
|
|
|
|
1,448,571
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding at March 31, 2006 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Outstanding
|
|
|
(in years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.34-$0.55
|
|
|
102,035
|
|
|
|
3.1
|
|
|
$
|
0.37
|
|
|
|
102,035
|
|
|
$
|
0.37
|
|
$1.37
|
|
|
2,924
|
|
|
|
4.2
|
|
|
$
|
1.37
|
|
|
|
2,924
|
|
|
$
|
1.37
|
|
$2.74-$4.10
|
|
|
965,072
|
|
|
|
5.1
|
|
|
$
|
3.91
|
|
|
|
965,072
|
|
|
$
|
3.91
|
|
$5.47-$6.84
|
|
|
620,839
|
|
|
|
8.3
|
|
|
$
|
6.04
|
|
|
|
615,640
|
|
|
$
|
6.04
|
|
$8.21-$9.10
|
|
|
743,985
|
|
|
|
7.4
|
|
|
$
|
8.56
|
|
|
|
3,289
|
|
|
$
|
8.21
|
|
$12.28-$13.65
|
|
|
288,150
|
|
|
|
6.1
|
|
|
$
|
12.71
|
|
|
|
108,233
|
|
|
$
|
12.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.34-$13.65
|
|
|
2,723,005
|
|
|
|
6.5
|
|
|
$
|
6.46
|
|
|
|
1,797,193
|
|
|
$
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the status of the Companys
nonvested shares since December 31, 2005 (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
Fixed Options
|
|
Shares
|
|
|
Price
|
|
|
Nonvested at December 31, 2005
|
|
|
1,234,251
|
|
|
$
|
7.87
|
|
Granted
|
|
|
50,700
|
|
|
$
|
13.25
|
|
Vested
|
|
|
(53,506
|
)
|
|
$
|
5.35
|
|
Forfeited
|
|
|
(3,248
|
)
|
|
$
|
8.25
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006
|
|
|
1,228,197
|
|
|
$
|
7.82
|
|
|
|
|
|
|
|
|
|
|
Certain outstanding stock option awards are subject to an early
exercise provision. Upon exercise, the award is subject to a
repurchase right in favor of the Company. Except with respect to
a stock option to purchase 208,392 shares of common stock, these
repurchase rights terminated upon the closing of the
Companys initial public offering.
F-21
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2006, approximately $3.8 million of
unrecognized stock compensation cost related to nonvested awards
(net of estimated forfeitures) is expected to be recognized over
a weighted-average period of 3.8 years.
Employee
Stock Purchase Plan
The Companys 2005 Employee Stock Purchase Plan (2005
Purchase Plan) authorizes the issuance of up to
50,000 shares of common stock to participating employees
through a series of periodic offerings. Each six-month offering
period begins in January or July. The first offering under the
2005 Purchase Plan extends from January 3, 2006 through
June 30, 2006. An employee becomes eligible to participate
in the 2005 Purchase Plan once he or she has been employed for
at least six months and is regularly employed for at least
20 hours per week for more than five months in a calendar
year. Beginning with the second offering scheduled to commence
in July 2006, the length of employment eligibility requirement
has been reduced to three months from six months and from five
months to three months for employees working at least
20 hours per week. The price at which employees can
purchase common stock in an offering is 95 percent of the
closing price of the common stock on the Nasdaq National Market
on the day the offering terminates, unless otherwise determined
by the Board or Compensation Committee.
The weighted-average fair value of stock purchase rights granted
as part of the Companys 2005 Purchase Plan during the
three months ended March 31, 2006 was $2.45. The fair value
of the employees stock purchase rights was estimated using
the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(Unaudited)
|
|
|
Expected life of the purchase
rights
|
|
|
6 months
|
|
Risk-free interest rate
|
|
|
4.42
|
%
|
Expected stock price volatility
|
|
|
50.9
|
%
|
Expected dividend yield
|
|
|
|
|
The Company recognized stock-based compensation expense of
$12,000 for the three months ended March 31, 2006 relating
to the 2005 Purchase Plan.
At December 31, 2005, the Company has reserved
3,400,287 shares of common stock for issuance upon exercise
of stock options, 50,000 shares for issuance under the 2005
Purchase Plan and 169,736 shares for issuance upon exercise
of warrants.
|
|
11.
|
Employee
Benefit Plan
|
The Company has a 401(k) retirement plan (401(k) Plan) for the
benefit of eligible employees, as defined. Each participant may
elect to contribute up to 25% of his or her compensation to the
401(k) Plan each year, subject to certain Internal Revenue
Service (IRS) limitations. The Company contributes 100% of the
first 3% of the employees contribution and 50% of the next
2% of the employees contribution. The Company contributed
$186,000, $214,000 and $363,000 for the years ended
December 31, 2003, 2004 and 2005, respectively, and $66,000
and $121,000 for the three months ended March 31, 2005 and
March 31, 2006, respectively.
F-22
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Redeemable
Convertible Preferred Stock and Stockholders
Equity
|
Common
and Preferred Stock
On November 1, 2005, the Company completed its initial
public offering of 6,325,000 shares of its common stock at
a price of $10.00 per share. The Company received
approximately $56.5 million in net proceeds from the
offering. In connection with the initial public offering, all
shares of all series of the Companys outstanding preferred
stock were automatically converted into an aggregate of
12,124,840 shares of common stock.
Concurrent with the initial public offering, the Company amended
and restated its certificate of incorporation to authorize
100,000,000 shares of common stock, par value
$0.001 per share. On July 8, 2005, the Company amended
its certificate of incorporation to (a) increase the number
of authorized shares of preferred stock to
15,759,660 shares and (b) designate
2,197,801 shares of
Series F-1
Preferred Stock. On September 19, 2005, the Company amended
its certificate of incorporation to authorize
30,000,000 shares of common stock. On October 14,
2005, the Company authorized 5,000,000 shares of
undesignated preferred stock.
Prior to the initial public offering, the Company had authorized
several series of $0.001 par value preferred stock, of
which 1,875,000 shares were designated as Series B,
1,155,169 shares were designated as Series C,
5,011,173 shares were designated as Series D,
2,690,846 shares were designated as Series E,
2,829,671 shares were designated as Series F and
2,197,801 shares were designated as
Series F-1.
During 1999, the Company sold 1,875,000 shares of
Series B Preferred Stock at $2.67 per share, resulting
in net proceeds of $4,968,250. Upon the closing of the
Series B Preferred Stock financing, all shares of the
Companys Series A Preferred Stock converted into an
equal number of shares of the Companys common stock. On
January 22, 2000, the Company sold 1,151,632 shares of
Series C Preferred Stock at $5.21 per share, resulting
in net proceeds of $5,957,891. On May 21, 2001, the Company
sold 4,857,622 shares of Series D Preferred Stock at
$5.97 per share, resulting in net proceeds of $24,218,379.
On April 15, 2003, the Company sold 2,669,908 shares
of Series E Preferred Stock at $5.97 per share,
resulting in net proceeds of $15,892,537. On August 18,
2004, the Company sold 2,747,253 shares of Series F
Preferred Stock at $7.28 per share, resulting in net proceeds of
$19,968,522. On July 8, 2005 and July 15, 2005, the
Company sold an aggregate of 2,197,801 shares of
Series F-1
Preferred Stock at $7.28 per share, resulting in net
proceeds of approximately $15,965,003.
The rights, preferences and privileges of the previously
outstanding Series B, Series C, Series D,
Series E, Series F and
Series F-1
Preferred Stock are described below.
Dividends
No dividends were declared by the Board of Directors on the
preferred stock while it was outstanding and dividends were not
cumulative.
Voting
Rights
The preferred stockholders were entitled to vote on all matters
with the common stockholders as if they were one class of stock.
Limited special voting rights applied to the Series D, E, F
and F-1 Preferred Stock. The preferred stockholders were
entitled to the number of votes equal to the number of shares of
common stock into which each share of the Series B,
Series C, Series D, Series E, Series F and
Series F-1
Preferred Stock was then convertible. For so long as at least
100,000 shares of Series B, Series C,
Series D, Series E, Series F
and/or
Series F-1
Preferred Stock remained outstanding, the vote of at least
two-thirds of the outstanding shares of preferred stock was
required to effect or validate certain material corporate
F-23
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transactions and equity issuances defined in the Companys
Certificate of Incorporation, as amended and restated.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or
winding-up
of the Company, as defined, the holders of the Preferred Stock
then outstanding would have been entitled to be paid an amount
equal to the original issue price per share, plus any dividends
declared but unpaid on such shares prior to any payment to
common stockholders. Amounts remaining after the preference
payments to the holders of Series B, Series C,
Series D, Series E, Series F and
Series F-1
Preferred Stock, if any, would have been shared on a
proportional basis among all stockholders, including the
preferred stockholders, whose portion would have been determined
based on the number of shares of common stock into which the
Preferred Stock was then convertible.
Upon the closing of a sale of substantially all the assets of
the Company or an acquisition of the Company, in which the total
consideration per share to be received by the holders of
Series F Preferred Stock was less than 1.7 times the
effective Series F Preferred Stock conversion price, the
Series F Preferred Stock conversion price would have been
reduced to the higher of (a) the total consideration per
share to be received by the holders of the Series F
Preferred Stock divided by 1.7, and (b) $8.16. The
potential reduction in the conversion price of the Series F
Preferred Stock described above represented a contingent
beneficial conversion feature which was resolved upon the
closing of the Companys initial public offering on
November 1, 2005. Based on the initial public offering
price of $10.00 per share, the beneficial conversion
feature was deemed to have no value; consequently, no dividend
was recognized relating to this feature.
Upon the closing of a sale of substantially all the assets of
the Company or an acquisition of the Company, in which the total
consideration per share to be received by the holders of
Series F-1
Preferred Stock was less than 1.5 times the effective
Series F-1
Preferred Stock conversion price, the
Series F-1
Preferred Stock conversion price would have been reduced to the
higher of (a) the total consideration per share to be
received by the holders of the
Series F-1
Preferred Stock divided by 1.5, and (b) $8.16. The
potential reduction in the conversion price of the
Series F-1
Preferred Stock described above represented a contingent
beneficial conversion feature which was resolved upon the
closing of the Companys initial public offering on
November 1, 2005. Based on the initial public offering
price of $10.00 per share, the beneficial conversion
feature was deemed to have no value; consequently, no dividend
was recognized relating to this feature.
Conversion
Each share of Preferred Stock was convertible, at any time and
at the option of the holder, into .7312 fully paid and
nonassessable share of common stock, adjusted for certain
dilutive events, as defined. In addition, all shares of
Series B, Series C, Series D, Series E,
Series F and
Series F-1
Preferred Stock would be automatically converted into shares of
common stock upon the vote of holders of at least 70% of the
outstanding shares of Preferred Stock voting together as a
class, or immediately upon the closing of an underwritten public
offering in which the aggregate net proceeds to the Company are
not less than $20.0 million.
In the event of an initial public offering in which the price
per share was less than $16.93, the number of shares of common
stock into which the outstanding shares of Series F
Preferred Stock would convert would increase based on the actual
initial public offering price up to a maximum of an additional
439,925 shares. In addition, in the event of an initial
public offering in which the price per share was less than
$14.93, the number of shares of common stock into which the
outstanding shares of
Series F-1
Preferred Stock would convert would increase based on the actual
initial offering price up to a maximum of an additional
351,940 shares. The potential reduction in the conversion
price of the Series F and F-1 Preferred Stock described
above represented a contingent beneficial feature which was
resolved upon the closing of the
F-24
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys initial public offering on November 1, 2005.
Based on the initial public offering price of $10.00 per
share, the beneficial conversion feature was deemed to have no
value; consequently, no dividend was recognized relating to this
feature. The Company closed its initial public offering on
November 1, 2005 at a price of $10.00 per share. As a
result, an additional 439,925 shares of common stock were
issued to the holders of Series F Preferred Stock and an
additional 351,940 shares of common stock were issued to
the holders of
Series F-1
Preferred Stock on November 1, 2005.
Redemption Rights
The Series B, Series C, Series D, Series E,
Series F and
Series F-1
Preferred Stock were subject to redemption after May 1,
2007, upon written request of 70% of the holders of the
outstanding shares of Preferred Stock voting together as a
class. Upon such a request, the Company would have been required
to redeem, subject to certain conditions, all of the
Series B, Series C, Series D, Series E,
Series F and
Series F-1
Preferred Stock at their original issue price of $2.67, $5.21,
$5.97, $5.97, $7.28 and $7.28 per share, respectively, plus
any accrued but unpaid dividends.
Warrants
At December 31, 2005, warrants for a total of
169,736 shares of common stock were outstanding. These
warrants have a weighted average exercise price of $7.67 and
expire at various dates from 2006 to 2011. During the year ended
December 31, 2005, certain warrant holders exercised
warrants to purchase 31,304 shares of the Companys
common stock for an aggregate exercise price of $223,060.
Four of the Companys significant shareholders invested in
the Companys initial public offering. Three of these
shareholders held warrants to purchase Series D Preferred
Stock, which were due to expire on November 22, 2005,
during the six month
lock-up
period required by the underwriting agreement entered into in
connection with the initial public offering. In November 2005,
the Company offered to extend the exercise period of the
warrants held by these three investors through May 31,
2006. Two of these investors with warrants for a total of
80,968 shares accepted the Companys offer to extend
the exercise period. The extension of the warrants had no net
effect on the financial position or results of operations of the
Company. The fair value on date of modification was calculated
at $478,094 and has been accounted for within the additional
paid-in capital account, as both an increase to the cost of the
initial public offering, offset by a corresponding credit to
reflect the value of the warrant extension.
Notes Receivable
from Stockholders
During 1999 and 2000, the Company entered into note agreements
with four officers of the Company totaling $289,615. These full
recourse notes were issued in connection with the exercise of
stock options by the officers and accrued interest at a range of
5.2% to 5.5%. The notes contained a 25% recourse provision and
were secured by 476,776 shares of the Companys common
stock held by the officers upon exercise of the stock options.
In 2004, these notes were cancelled by the Company and the
amount of the notes was charged to compensation expense.
|
|
13.
|
Related-Party
Transactions
|
The Company purchases completed cartridges, tubing and certain
other components used in the System One disposable cartridge
from Medisystems Corporation, an entity owned by a principal
stockholder and member of the Companys board of directors.
Purchases from Medisystems Corporation totaled $41,000, $232,000
and $896,000 in 2003, 2004, 2005, respectively, and $126,000 and
$759,000 for the three months ended March 31, 2005 and
March 31, 2006, respectively. Amounts owed to Medisystems
Corporation totaled $32,000, $81,000 and $21,780 at
December 31, 2004, December 31, 2005 and
March 31, 2006, respectively, and are included in accounts
payable in the accompanying consolidated balance sheets.
F-25
NXSTAGE
MEDICAL, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
Revenues
|
|
$
|
262,262
|
|
|
$
|
453,819
|
|
|
$
|
441,940
|
|
|
$
|
726,548
|
|
Gross profit (deficit)
|
|
|
(240,345
|
)
|
|
|
(390,964
|
)
|
|
|
(463,605
|
)
|
|
|
(459,349
|
)
|
Net loss
|
|
|
(3,648,561
|
)
|
|
|
(3,445,647
|
)
|
|
|
(3,631,599
|
)
|
|
|
(4,115,874
|
)
|
Net loss per common share, basic
and diluted
|
|
$
|
(1.43
|
)
|
|
$
|
(1.35
|
)
|
|
$
|
(1.42
|
)
|
|
$
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Revenues
|
|
$
|
1,033,792
|
|
|
$
|
1,403,383
|
|
|
$
|
1,496,785
|
|
|
$
|
2,059,779
|
|
Gross profit (deficit)
|
|
|
(748,373
|
)
|
|
|
(657,996
|
)
|
|
|
(774,079
|
)
|
|
|
(1,411,099
|
)
|
Net loss
|
|
|
(4,909,131
|
)
|
|
|
(5,606,652
|
)
|
|
|
(6,589,913
|
)
|
|
|
(7,373,914
|
)
|
Net loss per common share, basic
and diluted
|
|
$
|
(1.91
|
)
|
|
$
|
(2.18
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(0.49
|
)
|
15. Subsequent
Event New Financing Arrangement
On May 15, 2006, the Company entered into an equipment line
of credit agreement for the purpose of financing field equipment
purchases and placements. The line of credit agreement provides
for the availability of up to $20.0 million through
December 31, 2007 and borrowings will bear interest at the
prime rate plus 0.5% (8.5% on May 15, 2006). Under the line
of credit agreement, $8.0 million is available at closing,
with an additional $2.0 million available through
December 31, 2006 and a further $10.0 million
available through December 31, 2007. The availability of
the line of credit is subject to a number of covenants,
including maintaining certain levels of liquidity, adding
specified numbers of patients and operating within net loss
parameters. The Company is also required to maintain operating
and/or investment accounts with the lender in an amount at least
equal to the outstanding debt obligation. In addition, the last
$12.0 million available under the line of credit is subject
to a requirement that the Company raise at least
$40.0 million through the sale of equity securities prior
to January 1, 2007. Borrowings are secured by all assets of
the Company other than intellectual property and are payable
ratably over a three-year period from the date of each
borrowing. Concurrent with entering into the line of credit
agreement, the Company repaid outstanding debt and accrued
interest in the aggregate amount of approximately
$3.4 million. This extinguishment of outstanding debt will
give rise to the early recognition of approximately $233,000 of
interest expense.
F-26
5,613,371 Shares
NxStage Medical, Inc.
Common Stock
PROSPECTUS
|
|
Merrill
Lynch & Co. |
JPMorgan |
|
|
Thomas
Weisel Partners LLC |
JMP
Securities |
,
2006
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table indicates the expenses to be incurred in
connection with the offering described in this Registration
Statement, other than underwriting discounts and commissions,
all of which will be paid by NxStage. All amounts are estimates,
other than the SEC registration fee and the NASD filing fee:
|
|
|
|
|
SEC registration fee
|
|
$
|
8,194
|
|
NASD filing fee
|
|
|
8,158
|
|
Printing and engraving expenses
|
|
|
200,000
|
|
Legal fees and expenses
|
|
|
200,000
|
|
Accounting fees and expenses
|
|
|
100,000
|
|
Transfer agent and registrar fees
and expenses
|
|
|
5,000
|
|
Miscellaneous
|
|
|
149,303
|
|
|
|
|
|
|
Total
|
|
$
|
670,655
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102 of the Delaware General Corporation Law allows
a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director,
except where the director breached his duty of loyalty, failed
to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend
or approved a stock repurchase in violation of Delaware
corporate law or obtained an improper personal benefit. We have
included such a provision in our Restated Certificate of
Incorporation.
Section 145 of the General Corporation Law of Delaware
provides that a corporation has the power to indemnify a
director, officer, employee or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against amounts paid and expenses incurred
in connection with an action or proceeding to which he is or is
threatened to be made a party by reason of such position, if
such person shall have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding,
if such person had no reasonable cause to believe his conduct
was unlawful; provided that, in the case of actions brought by
or in the right of the corporation, no indemnification shall be
made with respect to any matter as to which such person shall
have been adjudged to be liable to the corporation unless and
only to the extent that the adjudicating court determines that
such indemnification is proper under the circumstances.
Our Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary
damages for breach of fiduciary duty as a director, except for
liability:
|
|
|
|
|
for any breach of the directors duty of loyalty to NxStage
or its stockholders;
|
|
|
|
for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
|
|
|
|
under section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
These provisions are permitted under Delaware law. Our Bylaws
provide that:
|
|
|
|
|
we must indemnify our directors and officers to the fullest
extent permitted by Delaware law;
|
II-1
|
|
|
|
|
we may indemnify our other employees and agents to the same
extent that we indemnified our officers and directors, unless
otherwise determined by our Board of Directors; and
|
|
|
|
we must advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the
fullest extent permitted by Delaware law.
|
The indemnification provisions contained in our Certificate of
Incorporation and Bylaws are not exclusive of any other rights
to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise.
In addition to the indemnification provided for in our
Certificate of Incorporation and Bylaws, we have entered into
indemnification agreements with each of our directors and
executive officers. Each indemnification agreement provides that
we will indemnify the director or executive officer to the
fullest extent permitted by law for claims arising in his or her
capacity as a director, officer, employee or agent of ours,
provided that he or she acted in good faith and in a manner that
he or she reasonably believed to be in, or not opposed to, our
best interests and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was
unlawful. If the claim is brought by us or on our behalf, we
will not be obligated to indemnify the director or executive
officer if he or she is found liable to us, unless the court
determines that, despite the adjudication of liability, in view
of all the circumstances of the case the director or executive
officer is fairly and reasonably entitled to be indemnified. In
the event that we do not assume the defense of a claim against a
director or executive officer, we are required to advance his or
her expenses in connection with his or her defense, provided
that he or she undertakes to repay all amounts advanced if it is
ultimately determined that he or she is not entitled to be
indemnified by us.
In addition, we maintain insurance on behalf of its directors
and executive officers insuring them against any liability
asserted against them in their capacities as directors or
officers or arising out of such status.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Set forth below is information regarding shares of common stock
and preferred stock issued, and options and warrants granted, by
the Registrant within the past three years. Also included is the
consideration, if any, received by the Registrant for such
shares, options and warrants and information relating to the
section of the Securities Act, or rule of the Securities and
Exchange Commission under which exemption from registration was
claimed.
|
|
|
|
(1)
|
On August 18, 2004, the Registrant issued and sold an
aggregate of 2,747,253 shares of its Series F
Preferred Stock to a group of 23 investors. Upon the closing of
the Registrants initial public offering, these shares
converted into 2,448,707 shares of common stock. The
investors consisted of David Utterberg, Sprout Capital VIII,
L.P., Sprout Capital IX, L.P., Sprout Plan Investors, LP, Sprout
Venture Capital L.P., Sprout IX Plan Investors, LP, DLJ Capital
Corporation, Sprout Entrepreneurs Fund, L.P., Atlas Venture
Fund V, L.P., Atlas Venture Fund III, L.P., Atlas
Venture Parallel Fund V-A, C.V., Atlas Venture Parallel
Fund V-B, C.V., Atlas Venture Entrepreneurs
Fund V, L.P., Atlas Venture Entrepreneurs
Fund III, L.P., Weiss, Peck & Greer Venture
Associates IV, L.L.C., WPG Enterprise Fund III, L.L.C.,
Weiss, Peck & Greer Venture Associates IV Cayman,
L.P., Marubeni Corporation, Marubeni America Corporation, BVCF
IV, L.P., CSFB Fund Co-Investment Program, L.P., Wasatch Funds,
Inc. for Wasatch Ultra Growth Fund and Paul Brown.
|
|
|
(2)
|
On December 23, 2004, the Registrant issued and sold
warrants to purchase an aggregate of 82,416 shares of
Series F Preferred Stock at an exercise price of
$7.28 per share to Lighthouse Capital Partners V, L.P.
and Lighthouse Capital Partners IV, L.P. Upon the closing of the
Registrants initial public offering, these shares
converted into 73,460 shares of common stock at an exercise
price of $9.96.
|
|
|
(3)
|
On July 8, 2005 and July 15, 2005, the Registrant
issued and sold an aggregate of 2,197,801 shares of its
Series F-1 Preferred Stock to a group of 25 investors. Upon
the closing of
|
II-2
the Registrants initial public offering, these shares
converted into 1,958,961 shares of common stock. These
investors consisted of Healthcare Investment Partners Holdings
LLC, David Utterberg, Sprout Capital VIII, L.P., Sprout Capital
IX, L.P., Sprout Plan Investors, LP, Sprout Venture Capital
L.P., Sprout IX Plan Investors, LP, DLJ Capital Corporation,
Sprout Entrepreneurs Fund, L.P., Atlas Venture Fund V,
L.P., Atlas Venture Fund III, L.P., Atlas Venture Parallel
Fund V-A, C.V., Atlas Venture Parallel
Fund V-B,
C.V., Atlas Venture Entrepreneurs Fund V, L.P., Atlas
Venture Entrepreneurs Fund III, L.P., Weiss,
Peck & Greer Venture Associates IV, L.L.C., WPG
Enterprise Fund III, L.L.C., Weiss, Peck & Greer
Venture Associates IV Cayman, L.P., BVCF IV, L.P., CSFB
Fund Co-Investment Program, L.P., Wasatch Funds, Inc. for
Wasatch Ultra Growth Fund, Wasatch Small Growth Funds, Paul
Brown, Michael J. Carbon and Bander Family Partnership, L.P.
|
|
|
|
(4)
|
From the period beginning May 25, 2003 through May 25,
2006, the Registrant has granted stock options under its stock
option plans for an aggregate of 1,640,579 shares of Common
Stock (net of exercises, expirations and cancellations) at
exercise prices of $4.10 to $13.65 per share. Options to
purchase 140,618 shares of Common Stock have been exercised
for an aggregate purchase price of $607,107.
|
No underwriters were involved in the foregoing sales of
securities. The securities described in paragraphs 1
through 3 of Item 15 were issued to a combination of
foreign and U.S. investors in reliance upon exemptions from
the registration provisions of the Securities Act set forth in
Section 4(2) or Regulation S thereof relative to sales
by an issuer not involving any public offering, to the extent an
exemption from such registration was required. All purchasers of
shares of our convertible preferred stock and warrants described
above represented to us in connection with their purchase that
they were accredited investors and were acquiring the shares for
investment and not distribution, that they could bear the risks
of the investment and could hold the securities for an
indefinite period of time. Such purchasers received written
disclosures that the securities had not been registered under
the Securities Act and that any resale must be made pursuant to
a registration or an available exemption from such registration.
The issuance of stock options and the common stock issuable upon
the exercise of such options as described in paragraph 4 of
Item 15 were issued pursuant to written compensatory plans
or arrangements with our employees, directors and consultants,
in reliance on the exemption provided by Rule 701
promulgated under the Securities Act.
All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act. All certificates
representing the issued shares of common stock described in this
Item 15 included appropriate legends setting forth that the
securities had not been registered and the applicable
restrictions on transfer.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1*
|
|
Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of the Registrant (filed as Exhibit 3.4 to
the Registrants Amendment No. 2 to the Registration
Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the
Registrant (filed as Exhibit 3.5 to the Registrants
Amendment No. 2 to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
4
|
.1
|
|
Specimen Certificate evidencing
shares of common stock (filed as Exhibit 4.1 to the
Registrants Amendment No. 2 to the Registration
Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
5
|
.1
|
|
Opinion of Wilmer Cutler Pickering
Hale and Dorr LLP
|
II-3
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.1
|
|
1999 Stock Option and Grant Plan,
as amended (filed as Exhibit 10.1 to the Registrants
Amendment No. 2 to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.2
|
|
Form of Incentive Stock Option
Agreement under the 1999 Stock Option and Grant Plan (filed as
Exhibit 10.2 to the Registrants Amendment No. 2
to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.3
|
|
Form of Nonstatutory Stock Option
Agreement under the 1999 Stock Option and Grant Plan (filed as
Exhibit 10.3 to the Registrants Amendment No. 2
to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.4
|
|
Loan and Security Agreement dated
December 23, 2004 by and between the Registrant and
Lighthouse Capital Partners V, L.P. (filed as Exhibit 10.4
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.5
|
|
Secured Promissory Note made
December 29, 2004 by Registrant in favor of Lighthouse
Capital Partners V, L.P. (filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.6
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners IV, L.P. (filed as Exhibit 10.6
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.7
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners V, L.P. (filed as Exhibit 10.7
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.8
|
|
Warrant to Purchase Series E
Preferred Stock dated September 26, 2002 issued to Comerica
Bank (filed as Exhibit 10.8 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.9
|
|
Investor Rights Agreement dated
June 30, 1999 between the Registrant and the Investors, as
amended on January 24, 2000, May 24, 2001,
April 15, 2003, August 18, 2004, December 23,
2004 and July 8, 2005 (filed as Exhibit 10.9 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.10
|
|
Standard Form Commercial
Lease dated October 17, 2000 between the Registrant and
Heritage Place, LLC, as amended by Modification to Standard
Form Commercial Lease (filed as Exhibit 10.10 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.11
|
|
Commercial
Tenancy-At-Will
Agreement dated March 14, 2005 between Registrant and
Osgood St., LLC, as amended by Modification to Tenancy at Will
Agreement (filed as Exhibit 10.11 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.12
|
|
Employment Agreement dated
March 22, 1999 between the Registrant and Jeffrey H.
Burbank (filed as Exhibit 10.12 to the Registrants
Amendment No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.13
|
|
Employment Agreement dated
September 17, 2004 between the Registrant and Philip Licari
(filed as Exhibit 10.13 to the Registrants Amendment
No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.14
|
|
Employment Agreement dated
May 15, 2000 between the Registrant and Joseph E. Turk, Jr.
(filed as Exhibit 10.15 to the Registrants Amendment
No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.15
|
|
Employment Agreement dated
November 27, 2000 between the Registrant and Winifred L.
Swan (filed as Exhibit 10.16 to the Registrants
Amendment No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
II-4
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.16
|
|
Supply Agreement dated as of
October 26, 2004 between the Registrant and B. Braun
Medizintechnologie GmbH (filed as Exhibit 10.17 to the
Registrants Amendment No. 3 to Registration Statement
on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.17
|
|
Supply Agreement dated
October 1, 2004 among the Registrant, EIR Medical, Inc. and
Membrana GmbH (filed as Exhibit 10.18 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.18
|
|
Production Agreement dated as of
June 27, 2005 between the Registrant and KMC Systems, Inc.
(filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.19
|
|
Form of Indemnification Agreement
entered into between the Registrant and each of its Directors
and Executive Officers (filed as Exhibit 10.21 to the
Registrants Amendment No. 1 to Registration Statement
on
Form S-1
(File
No. 333-126711),
as originally filed on September 21, 2005, and incorporated
herein by reference)
|
|
10
|
.20
|
|
2005 Stock Incentive Plan,
together with Form of Incentive Stock Option Agreement and Form
of Nonstatutory Stock Option Agreement (filed as
Exhibit 10.22 to the Registrants Amendment No. 2
to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.21
|
|
Employment Agreement dated
October 19, 2005 between the Registrant and David N. Gill
(filed as Exhibit 10.23 to the Registrants Amendment
No. 2 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.22
|
|
Director Compensation Policy
(filed as Exhibit 10.2 to the Registrants
Form 10-Q (File No. 0-51567) for the quarterly period
ended March 31, 2006, and incorporated herein by reference)
|
|
10
|
.23
|
|
Supply Agreement dated
March 27, 2006 between the Registrant and Laboratorios PISA
S.A. de C.V. (filed as Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
(File
No. 000-51567)
for the quarterly period ended March 31, 2006, and
incorporated herein by reference)
|
|
10
|
.24**
|
|
Loan and Security Agreement dated
as of May 15, 2006 between the Silicon Valley Bank and the
Registrant
|
|
10
|
.25**
|
|
Summary of 2006 Executive
Compensation and 2006 Corporate Bonus Plan
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
(filed as Exhibit 21.1 to the Registrants
Form 10-K
(File No. 000-51567) for the annual period ended
December 31, 2005, and incorporated by reference herein).
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP, Independent Registered Public Accountants
|
|
23
|
.2
|
|
Consent of Wilmer Cutler Pickering
Hale and Dorr LLP (included in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (see
page II-5)
|
* To be filed by amendment.
** Previously filed.
Confidential treatment requested as to certain
portions of document.
(b) Financial Statement Schedules.
None
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification by the registrant
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the
II-5
successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to
Registration Statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in Lawrence, Massachusetts on May 25, 2006.
NxStage Medical, Inc.
David N. Gill
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement on
Form S-1
has been signed by the following persons in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Jeffrey
H. Burbank
|
|
Chief Executive Officer and
Director (principal executive officer)
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ David
N. Gill
David
N. Gill
|
|
Chief Financial Officer (principal
financial and accounting officer)
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Philippe
O. Chambon, M.D., Ph.D.
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Jean-Francois
Formela, M.D.
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Daniel
A. Giannini
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Reid
S. Perper
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Peter
P. Phildius
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Craig
W. Moore
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
David
S. Utterberg
|
|
Director
|
|
May 25, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*By:
|
|
/s/ David
N. Gill
David
N. Gill
Attorney-in-fact
|
|
|
|
|
II-7
EXHIBIT
INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
1
|
.1*
|
|
Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of
Incorporation of the Registrant (filed as Exhibit 3.4 to
the Registrants Amendment No. 2 to the Registration
Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the
Registrant (filed as Exhibit 3.5 to the Registrants
Amendment No. 2 to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
4
|
.1
|
|
Specimen Certificate evidencing
shares of common stock (filed as Exhibit 4.1 to the
Registrants Amendment No. 2 to the Registration
Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
5
|
.1
|
|
Opinion of Wilmer Cutler Pickering
Hale and Dorr LLP
|
|
10
|
.1
|
|
1999 Stock Option and Grant Plan,
as amended (filed as Exhibit 10.1 to the Registrants
Amendment No. 2 to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.2
|
|
Form of Incentive Stock Option
Agreement under the 1999 Stock Option and Grant Plan (filed as
Exhibit 10.2 to the Registrants Amendment No. 2
to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.3
|
|
Form of Nonstatutory Stock Option
Agreement under the 1999 Stock Option and Grant Plan (filed as
Exhibit 10.3 to the Registrants Amendment No. 2
to the Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 7, 2005, and incorporated
herein by reference)
|
|
10
|
.4
|
|
Loan and Security Agreement dated
December 23, 2004 by and between the Registrant and
Lighthouse Capital Partners V, L.P. (filed as Exhibit 10.4
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.5
|
|
Secured Promissory Note made
December 29, 2004 by Registrant in favor of Lighthouse
Capital Partners V, L.P. (filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.6
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners IV, L.P. (filed as Exhibit 10.6
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.7
|
|
Warrant to Purchase Series F
Preferred Stock dated December 23, 2004 issued to
Lighthouse Capital Partners V, L.P. (filed as Exhibit 10.7
to the Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.8
|
|
Warrant to Purchase Series E
Preferred Stock dated September 26, 2002 issued to Comerica
Bank (filed as Exhibit 10.8 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.9
|
|
Investor Rights Agreement dated
June 30, 1999 between the Registrant and the Investors, as
amended on January 24, 2000, May 24, 2001,
April 15, 2003, August 18, 2004, December 23,
2004 and July 8, 2005 (filed as Exhibit 10.9 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.10
|
|
Standard Form Commercial Lease
dated October 17, 2000 between the Registrant and Heritage
Place, LLC, as amended by Modification to Standard
Form Commercial Lease (filed as Exhibit 10.10 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.11
|
|
Commercial
Tenancy-At-Will
Agreement dated March 14, 2005 between Registrant and
Osgood St., LLC, as amended by Modification to Tenancy at Will
Agreement (filed as Exhibit 10.11 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.12
|
|
Employment Agreement dated
March 22, 1999 between the Registrant and Jeffrey H.
Burbank (filed as Exhibit 10.12 to the Registrants
Amendment No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.13
|
|
Employment Agreement dated
September 17, 2004 between the Registrant and Philip Licari
(filed as Exhibit 10.13 to the Registrants Amendment
No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.14
|
|
Employment Agreement dated
May 15, 2000 between the Registrant and Joseph E. Turk, Jr.
(filed as Exhibit 10.15 to the Registrants Amendment
No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.15
|
|
Employment Agreement dated
November 27, 2000 between the Registrant and Winifred L.
Swan (filed as Exhibit 10.16 to the Registrants
Amendment No. 3 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.16
|
|
Supply Agreement dated as of
October 26, 2004 between the Registrant and B. Braun
Medizintechnologie GmbH (filed as Exhibit 10.17 to the
Registrants Amendment No. 3 to Registration Statement
on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.17
|
|
Supply Agreement dated
October 1, 2004 among the Registrant, EIR Medical, Inc. and
Membrana GmbH (filed as Exhibit 10.18 to the
Registrants Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.18
|
|
Production Agreement dated as of
June 27, 2005 between the Registrant and KMC Systems, Inc.
(filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on July 19, 2005, and incorporated
herein by reference)
|
|
10
|
.19
|
|
Form of Indemnification Agreement
entered into between the Registrant and each of its Directors
and Executive Officers (filed as Exhibit 10.21 to the
Registrants Amendment No. 1 to Registration Statement
on
Form S-1
(File
No. 333-126711),
as originally filed on September 21, 2005, and incorporated
herein by reference)
|
|
10
|
.20
|
|
2005 Stock Incentive Plan, together
with Form of Incentive Stock Option Agreement and Form of
Nonstatutory Stock Option Agreement (filed as Exhibit 10.22
to the Registrants Amendment No. 2 to Registration
Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.21
|
|
Employment Agreement dated
October 19, 2005 between the Registrant and David N. Gill
(filed as Exhibit 10.23 to the Registrants Amendment
No. 2 to Registration Statement on
Form S-1
(File
No. 333-126711),
as originally filed on October 20, 2005, and incorporated
herein by reference)
|
|
10
|
.22
|
|
Director Compensation Policy (filed
as Exhibit 10.2 to the Registrants Form 10-Q
(File No. 0-51567) for the quarterly period ended
March 31, 2006, and incorporated herein by reference)
|
|
10
|
.23
|
|
Supply Agreement dated
March 27, 2006 between the Registrant and Laboratorios PISA
S.A. de C.V. (filed as Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
(File
No. 000-51567)
for the quarterly period ended March 31, 2006, and
incorporated herein by reference)
|
|
10
|
.24**
|
|
Loan and Security Agreement dated
as of May 15, 2006 between the Silicon Valley Bank and the
Registrant
|
|
10
|
.25**
|
|
Summary of 2006 Executive
Compensation and 2006 Corporate Bonus Plan
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
(filed as Exhibit 21.1 to the Registrants Form 10-K
(File No. 000-51567) for the annual period ended
December 31, 2005, and incorporated herein by reference
herein).
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP, Independent Registered Public Accountants
|
|
23
|
.2
|
|
Consent of Wilmer Cutler Pickering
Hale and Dorr LLP (included in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (see
page II-5)
|
* To be filed by amendment.
** Previously filed.
Confidential treatment requested as to certain
portions of document.