##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-51567
 NxStage Medical, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State or Other Jurisdiction of Incorporation or Organization)
    
    04-3454702(I.R.S. Employer Identification No.)439 S. Union St., 5thFloor, Lawrence, MA(Address of Principal Executive Offices)
    
    01843(Zip Code)
 (978) 687-4700
( Registrants Telephone Number, Including Area Code)
(Former Name, Former Address, and Former Fiscal year, If Changed Since Last Report)
 þ   o
 o  o
  Large accelerated filero
    
    Accelerated filerþ
    
    Non-accelerated filero
    
    Smaller reporting companyo(Do not check if a smaller reporting company)
 o   þ




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##### 



NXSTAGE MEDICAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1A. Risk Factors
    
    
    23Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2
  2




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NXSTAGE MEDICAL, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
 September 30,
    
    
    December 31,2010
    
    
    2009(In thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,974
    
    
    $
    21,720Accounts receivable, net
    
    
    14,651
    
    
    
    14,238Inventory
    
    
    31,957
    
    
    
    28,117Prepaid expenses and other current assets
    
    
    1,839
    
    
    
    1,227Total current assets
    
    
    70,421
    
    
    
    65,302Property and equipment, net
    
    
    8,630
    
    
    
    10,336Field equipment, net
    
    
    15,434
    
    
    
    21,726Deferred cost of revenues
    
    
    37,327
    
    
    
    27,799Intangible assets, net
    
    
    26,111
    
    
    
    28,208Goodwill
    
    
    42,698
    
    
    
    42,698Other assets
    
    
    521
    
    
    
    909Total assets
    
    $
    201,142
    
    
    $
    196,978LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,289
    
    
    $
    19,827Accrued expenses
    
    
    13,092
    
    
    
    9,377Current portion of long-term debt
    
    
    59
    
    
    
    61Total current liabilities
    
    
    29,440
    
    
    
    29,265Deferred revenues
    
    
    52,577
    
    
    
    38,490Long-term debt
    
    
    39,779
    
    
    
    37,854Other long-term liabilities
    
    
    1,833
    
    
    
    1,923Total liabilities
    
    
    123,629
    
    
    
    107,532Commitments and contingencies (Note 12)Stockholders equity:Undesignated preferred stock: par value $0.001, 5,000,000 shares authorized;
no shares issued and outstanding as of September 30, 2010 and December 31, 2009
    
    
    
    
    
    
    Common stock: par value $0.001, 100,000,000 shares authorized; 49,310,143
shares issued as of September 30, 2010 and 46,795,859 shares issued and
outstanding as of December 31, 2009
    
    
    49
    
    
    
    47Additional paid-in capital
    
    
    381,585
    
    
    
    365,548Accumulated deficit
    
    
    (302,133
    )
    
    
    (276,714
    )Accumulated other comprehensive income
    
    
    244
    
    
    
    565Treasury stock, at cost: 204,334 shares as of September 30, 2010
    
    
    (2,232
    )
    
    
    Total stockholders equity
    
    
    77,513
    
    
    
    89,446Total liabilities and stockholders equity
    
    $
    201,142
    
    
    $
    196,978
  3




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NXSTAGE MEDICAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands)
    
    
    (In thousands)2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    45,033
    
    
    $
    38,033
    
    
    $
    129,449
    
    
    $
    108,166Cost of revenues
    
    
    30,073
    
    
    
    28,488
    
    
    
    88,914
    
    
    
    82,749Gross profit
    
    
    14,960
    
    
    
    9,545
    
    
    
    40,535
    
    
    
    25,417Operating expenses:Selling and marketing
    
    
    8,452
    
    
    
    7,449
    
    
    
    25,034
    
    
    
    22,091Research and development
    
    
    3,132
    
    
    
    2,707
    
    
    
    9,369
    
    
    
    7,380Distribution
    
    
    3,788
    
    
    
    3,267
    
    
    
    10,831
    
    
    
    10,476General and administrative
    
    
    6,023
    
    
    
    4,808
    
    
    
    16,604
    
    
    
    14,512Total operating expenses
    
    
    21,395
    
    
    
    18,231
    
    
    
    61,838
    
    
    
    54,459Loss from operations
    
    
    (6,435
    )
    
    
    (8,686
    )
    
    
    (21,303
    )
    
    
    (29,042
    )Other expense:Interest income
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    32Interest expense
    
    
    (1,176
    )
    
    
    (1,130
    )
    
    
    (3,432
    )
    
    
    (5,502
    )Other (expense) income, net
    
    
    (341
    )
    
    
    (59
    )
    
    
    (128
    )
    
    
    20(1,517
    )
    
    
    (1,182
    )
    
    
    (3,560
    )
    
    
    (5,450
    )Net loss before income taxes
    
    
    (7,952
    )
    
    
    (9,868
    )
    
    
    (24,863
    )
    
    
    (34,492
    )Provision for income taxes
    
    
    212
    
    
    
    179
    
    
    
    556
    
    
    
    298Net loss
    
    $
    (8,164
    )
    
    $
    (10,047
    )
    
    $
    (25,419
    )
    
    $
    (34,790
    )Net loss per share, basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.22
    )
    
    $
    (0.54
    )
    
    $
    (0.75
    )Weighted-average shares outstanding, basic and diluted
    
    
    48,049
    
    
    
    46,672
    
    
    
    47,501
    
    
    
    46,600
  4




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NXSTAGE MEDICAL, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
 Nine Months EndedSeptember 30,2010
    
    
    2009(In thousands)Cash flows from operating activities:Net loss
    
    $
    (25,419
    )
    
    $
    (34,790
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    16,879
    
    
    
    15,367Stock-based compensation
    
    
    10,985
    
    
    
    6,392Other
    
    
    1,750
    
    
    
    1,977Changes in operating assets and liabilities:Accounts receivable
    
    
    (303
    )
    
    
    337Inventory
    
    
    (20,504
    )
    
    
    (3,707
    )Prepaid expenses and other assets
    
    
    (327
    )
    
    
    682Accounts payable
    
    
    (3,376
    )
    
    
    25Accrued expenses and other liabilities
    
    
    3,980
    
    
    
    1,455Deferred revenues
    
    
    14,087
    
    
    
    (653
    )Net cash used in operating activities
    
    
    (2,248
    )
    
    
    (12,915
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (981
    )
    
    
    (1,073
    )Decrease in other assets
    
    
    
    
    
    
    (340
    )Net cash used in investing activities
    
    
    (981
    )
    
    
    (1,413
    )Cash flows from financing activities:Proceeds from stock option and purchase plans
    
    
    5,552
    
    
    
    279Purchase of treasury stock
    
    
    (1,741
    )
    
    
    Proceeds from loans and lines of credit
    
    
    
    
    
    
    39,895Net repayments on loans and lines of credit
    
    
    (42
    )
    
    
    (30,523
    )Net cash provided by financing activities
    
    
    3,769
    
    
    
    9,651Foreign exchange effect on cash and cash equivalents
    
    
    (286
    )
    
    
    130Increase
(decrease) in cash and cash equivalents
    
    
    254
    
    
    
    (4,547
    )Cash and cash equivalents, beginning of period
    
    
    21,720
    
    
    
    26,642Cash and cash equivalents, end of period
    
    $
    21,974
    
    
    $
    22,095Noncash Investing ActivitiesTransfers from inventory to field equipment
    
    $
    15,612
    
    
    $
    5,410Transfers from field equipment to deferred cost of revenues
    
    $
    15,999
    
    
    $
    1,957
  5




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NXSTAGE MEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Nature of Operations
    Basis of Presentation
  2. Summary of Significant Accounting Policies
 Principles of Consolidation and Basis of Presentation
  Use of Estimates
  Concentration of Credit Risk
  6




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Warranty Costs
  Balance at December 31, 2009
    
    $
    205Provision
    
    
    306Usage
    
    
    (285
    )Balance at September 30, 2010
    
    $
    226
 Recent Accounting Pronouncements
 Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities Consolidation of Variable Interest Entities (revised)
  Multiple-Deliverable Revenue Arrangements Certain Revenue Arrangements That Include Software Elements
 3. Significant Revenue Contracts
 National Service Provider Agreement and Stock Purchase Agreement with DaVita, Inc., or DaVita
    Revenue Recognition
 7




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4. Inventory
  September 30,
    
    
    December 31,2010
    
    
    2009Purchased components
    
    $
    17,856
    
    
    $
    14,214Work in process
    
    
    2,067
    
    
    
    1,640Finished goods
    
    
    12,034
    
    
    
    12,263$
    31,957
    
    
    $
    28,117
 5. Property and Equipment and Field Equipment
  6. Intangible Assets
  7. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (8,164
    )
    
    $
    (10,047
    )
    
    $
    (25,419
    )
    
    $
    (34,790
    )Foreign currency translation adjustment
    
    
    256
    
    
    
    43
    
    
    
    (321
    )
    
    
    90Comprehensive loss
    
    $
    (7,908
    )
    
    $
    (10,004
    )
    
    $
    (25,740
    )
    
    $
    (34,700
    )
 8. Net Loss per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Options to purchase common stock
    
    
    3,268
    
    
    
    966
    
    
    
    2,817
    
    
    
    362Restricted stock
    
    
    748
    
    
    
    
    
    
    
    716
    
    
    
    Warrants to purchase common stock
    
    
    1,076
    
    
    
    122
    
    
    
    933
    
    
    
    Total
    
    
    5,092
    
    
    
    1,088
    
    
    
    4,466
    
    
    
    362
 9. Debt
  8




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10. Segment Disclosures
       System One
    
    
    In-Center
    
    
    Unallocated
    
    
    TotalThree Months Ended September 30, 2010Revenues from external customers
    
    $
    29,163
    
    
    $
    15,870
    
    
    $
    
    
    
    $
    45,033Segment (loss) profit
    
    
    464
    
    
    
    2,256
    
    
    
    (9,155
    )
    
    
    (6,435
    )Segment assets
    
    
    84,053
    
    
    
    15,316
    
    
    
    101,773
    
    
    
    201,142Three Months Ended September 30, 2009Revenues from external customers
    
    $
    22,028
    
    
    $
    16,005
    
    
    $
    
    
    
    $
    38,033Segment (loss) profit
    
    
    (4,116
    )
    
    
    2,945
    
    
    
    (7,515
    )
    
    
    (8,686
    )Segment assets
    
    
    69,908
    
    
    
    18,258
    
    
    
    107,304
    
    
    
    195,470Nine Months Ended September 30, 2010Revenues from external customers
    
    $
    81,732
    
    
    $
    47,717
    
    
    $
    
    
    
    $
    129,449Segment (loss) profit
    
    
    (1,626
    )
    
    
    6,296
    
    
    
    (25,973
    )
    
    
    (21,303
    )Segment assets
    
    
    84,053
    
    
    
    15,316
    
    
    
    101,773
    
    
    
    201,142Nine Months Ended September 30, 2009Revenues from external customers
    
    $
    61,295
    
    
    $
    46,871
    
    
    $
    
    
    
    $
    108,166Segment (loss) profit
    
    
    (14,733
    )
    
    
    7,583
    
    
    
    (21,892
    )
    
    
    (29,042
    )Segment assets
    
    
    69,908
    
    
    
    18,258
    
    
    
    107,304
    
    
    
    195,470
   9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Customer A
    
    
    22
    %
    
    
    22
    %
    
    
    22
    %
    
    
    22
    %Customer B
    
    
    16
    %
    
    
    27
    %
    
    
    17
    %
    
    
    33
    %Customer C
    
    
    12
    %
    
    
    
    
    
    
    13
    %
    
    
    
   September 30,
    
    
    December 31,2010
    
    
    2009Total segment assets
    
    $
    99,369
    
    
    $
    91,880Corporate assets:Cash and cash equivalents
    
    
    21,974
    
    
    
    21,720Property and equipment, net
    
    
    8,630
    
    
    
    10,336Intangible assets, net
    
    
    26,111
    
    
    
    28,208Goodwill
    
    
    42,698
    
    
    
    42,698Prepaid expenses and other assets
    
    
    2,360
    
    
    
    2,136Total assets
    
    $
    201,142
    
    
    $
    196,978
 11. Income Taxes
  12. Commitments and Contingencies
  13. Stock-Based Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of revenues
    
    $
    629
    
    
    $
    434
    
    
    $
    1,644
    
    
    $
    1,098Selling and marketing
    
    
    1,460
    
    
    
    1,046
    
    
    
    3,940
    
    
    
    2,497Research and development
    
    
    587
    
    
    
    232
    
    
    
    1,618
    
    
    
    545General and administrative
    
    
    1,434
    
    
    
    802
    
    
    
    3,783
    
    
    
    2,252$
    4,110
    
    
    $
    2,514
    
    
    $
    10,985
    
    
    $
    6,392
 Stock Options
  Performance  Based Plans
  10




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14. Stockholders Equity
  15. Fair Value Measurements
    11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Special Note Regarding Forward Looking Statements
   Overview
    12




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13




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Statement of Operations Components
 Revenues
       14




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Cost of Revenues
  Operating Expenses
 Selling and Marketing.
 Research and Development.
 15




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Distribution.
 General and Administrative.
 Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    67
    %
    
    
    75
    %
    
    
    69
    %
    
    
    77
    %Gross profit
    
    
    33
    %
    
    
    25
    %
    
    
    31
    %
    
    
    23
    %Operating expenses:Selling and marketing
    
    
    19
    %
    
    
    19
    %
    
    
    19
    %
    
    
    20
    %Research and development
    
    
    7
    %
    
    
    7
    %
    
    
    7
    %
    
    
    7
    %Distribution
    
    
    8
    %
    
    
    9
    %
    
    
    8
    %
    
    
    10
    %General and administrative
    
    
    13
    %
    
    
    13
    %
    
    
    13
    %
    
    
    13
    %Total operating expenses
    
    
    47
    %
    
    
    48
    %
    
    
    47
    %
    
    
    50
    %Loss from operations
    
    
    (14
    %)
    
    
    (23
    %)
    
    
    (16
    %)
    
    
    (27
    %)Other expense:Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    (3
    %)
    
    
    (3
    %)
    
    
    (3
    %)
    
    
    (5
    %)Other income (expense), net
    
    
    (1
    %)
    
    
    
    
    
    
    
    
    
    
    (4
    %)
    
    
    (3
    %)
    
    
    (3
    %)
    
    
    (5
    %)Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    Net loss
    
    
    (18
    %)
    
    
    (26
    %)
    
    
    (20
    %)
    
    
    (32
    %)
 Comparison of the Three and Nine Months Ended September 30, 2010 and 2009
 Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009System One segmentHome
    
    $
    22,346
    
    
    
    50
    %
    
    $
    16,356
    
    
    
    43
    %
    
    $
    62,204
    
    
    
    48
    %
    
    $
    45,914
    
    
    
    43
    %Critical Care
    
    
    6,817
    
    
    
    15
    %
    
    
    5,672
    
    
    
    15
    %
    
    
    19,528
    
    
    
    15
    %
    
    
    15,381
    
    
    
    14
    %Total System One segment
    
    
    29,163
    
    
    
    65
    %
    
    
    22,028
    
    
    
    58
    %
    
    
    81,732
    
    
    
    63
    %
    
    
    61,295
    
    
    
    57
    %In-Center segment
    
    
    15,870
    
    
    
    35
    %
    
    
    16,005
    
    
    
    42
    %
    
    
    47,717
    
    
    
    37
    %
    
    
    46,871
    
    
    
    43
    %Total
    
    $
    45,033
    
    
    
    100
    %
    
    $
    38,033
    
    
    
    100
    %
    
    $
    129,449
    
    
    
    100
    %
    
    $
    108,166
    
    
    
    100
    %
 16




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Gross Profit
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    %
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    %2010
    
    
    Revenues
    
    
    2009
    
    
    Revenues
    
    
    2010
    
    
    Revenues
    
    
    2009
    
    
    RevenuesSystem One segment
    
    $
    10,978
    
    
    
    38
    %
    
    $
    5,336
    
    
    
    24
    %
    
    $
    29,373
    
    
    
    36
    %
    
    $
    14,045
    
    
    
    23
    %In-Center segment
    
    
    3,982
    
    
    
    25
    %
    
    
    4,209
    
    
    
    26
    %
    
    
    11,162
    
    
    
    23
    %
    
    
    11,372
    
    
    
    24
    %Gross Profit
    
    $
    14,960
    
    
    
    33
    %
    
    $
    9,545
    
    
    
    25
    %
    
    $
    40,535
    
    
    
    31
    %
    
    $
    25,417
    
    
    
    23
    %
    Selling and Marketing
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    September 30,
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    ChangeSystem One segment
    
    $
    7,185
    
    
    $
    6,498
    
    
    
    11
    %
    
    $
    21,505
    
    
    $
    19,315
    
    
    
    11
    %In-Center segment
    
    
    1,267
    
    
    
    951
    
    
    
    33
    %
    
    
    3,529
    
    
    
    2,776
    
    
    
    27
    %Total Selling and marketing
    
    $
    8,452
    
    
    $
    7,449
    
    
    
    13
    %
    
    $
    25,034
    
    
    $
    22,091
    
    
    
    13
    %
  17




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Research and Development
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    September 30,
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    ChangeResearch and development
    
    $
    3,132
    
    
    $
    2,707
    
    
    
    16
    %
    
    $
    9,369
    
    
    $
    7,380
    
    
    
    27
    %
  Distribution
  Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    September 30,
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    ChangeSystem One segment
    
    $
    3,329
    
    
    $
    2,954
    
    
    
    13
    %
    
    $
    9,494
    
    
    $
    9,463
    
    
    
    0
    %In-Center segment
    
    
    459
    
    
    
    313
    
    
    
    47
    %
    
    
    1,337
    
    
    
    1,013
    
    
    
    32
    %Total Distribution
    
    $
    3,788
    
    
    $
    3,267
    
    
    
    16
    %
    
    $
    10,831
    
    
    $
    10,476
    
    
    
    3
    %
  General and Administrative
  18




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    %
    
    
    September 30,
    
    
    September 30,
    
    
    %2010
    
    
    2009
    
    
    Change
    
    
    2010
    
    
    2009
    
    
    ChangeGeneral and administrative
    
    $
    6,023
    
    
    $
    4,808
    
    
    
    25
    %
    
    $
    16,604
    
    
    $
    14,512
    
    
    
    14
    %
  Other Income and Expense
    Provision for Income Taxes
  Liquidity and Capital Resources
     st st
 19




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##### Table of Contents



Nine Months EndedSeptember 30,2010
    
    
    2009Net cash used in operating activities
    
    $
    (2,248
    )
    
    $
    (12,915
    )Net cash used in investing activities
    
    
    (981
    )
    
    
    (1,413
    )Net cash provided by financing activities
    
    
    3,769
    
    
    
    9,651Effect of exchange rate changes on cash
    
    
    (286
    )
    
    
    130Net cash flow
    
    $
    254
    
    
    $
    (4,547
    )
 Net Cash Used in Operating Activities.
 Net Cash Used in Investing Activities.
 Net Provided by Financing Activities.
   20




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Contractual Obligations
  Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    One Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsDebt obligations
    
    $
    52,455
    
    
    $
    1,681
    
    
    $
    50,774
    
    
    $
    
    
    
    $
    Operating leases
    
    
    2,573
    
    
    
    1,759
    
    
    
    814
    
    
    
    
    
    
    
    Purchase obligations
    
    
    70,957
    
    
    
    40,895
    
    
    
    26,498
    
    
    
    3,168
    
    
    
    396Total
    
    $
    125,985
    
    
    $
    44,335
    
    
    $
    78,086
    
    
    $
    3,168
    
    
    $
    396
   Summary of Critical Accounting Policies and Estimates
   Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  21




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  Risks Related to our Business
 We expect to derive a significant percentage of our future revenues from the rental or sale of our
System One and a limited number of other products.
  We cannot accurately predict the size of the home hemodialysis market, and it may be smaller, and
may develop more slowly than we expect.
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Current Medicare reimbursement rates, at three times per week, limit the price at which we can
market our home products, and adverse changes to reimbursement would likely negatively affect the
adoption or continued sale of our home products.
   We require significant capital to build our business, and financing may not be available to us on
reasonable terms, if at all.
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We have limited operating experience, a history of net losses and an accumulated deficit of $302.1
million at September 30, 2010. We cannot guarantee if, when and the extent to which we will become
profitable, or that we will be able to maintain profitability if it is achieved.
  Our customers in the System One and In-Center segment are highly consolidated, with concentrated
buying power.
  DaVita is a key customer for our System One and In-Center product lines. The partial or complete
loss of DaVita as a customer would materially impair our financial results, at least in the near
term.
  We entered into a $40.0 million term loan and security agreement with Asahi in May 2009. We are
obligated to pay 50% of the interest on the first day of November and May, beginning on November 1,
2009, and repay the remaining interest and principal upon maturity in May 2013. If we fail to
comply with all terms under this agreement, we may go into default, which could trigger, among
other things, the acceleration of all of our indebtedness thereunder or the sale of our assets.
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We entered into a two year Loan and Security Agreement, the Agreement, dated as of March 10, 2010,
with Silicon Valley Bank, or SVB. The terms of our Agreement may restrict our current and future
operations, which could affect our ability to respond to changes in our business and to manage our
operations.
   We compete against other dialysis equipment manufacturers with much greater financial resources and
established products and customer relationships, which may make it difficult for us to penetrate
the market and achieve significant sales of our products. Our competitors may also introduce new
products or features that could impair the competitiveness of our own product portfolio.
   Our continued growth is dependent on our development and successful commercialization of new and
improved products.
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##### Table of Contents



The success and growth of our business will depend upon our ability to achieve expanded market
acceptance of our System One.
  
    
    the failure by us to demonstrate to operators of dialysis clinics, hospitals,
nephrologists, dialysis nurses, patients and others
that our products are equivalent or superior to existing therapy options;
 
    
    competition from products sold by companies with longer operating histories and
greater financial resources, more recognizable brand names and better established
distribution networks and relationships with hospitals or dialysis clinics;
 
    
    the failure by us to continue to improve product reliability and the ease of
use of our products;
 
    
    limitations on the existing infrastructure in place to support home
hemodialysis, including without limitation, home hemodialysis training nurses, and the
willingness, cost associated with, and ability of dialysis clinics to build that
infrastructure;
 
    
    the ownership and operation of some dialysis providers by companies that also
manufacture and sell competitive dialysis products;
 
    
    the introduction of competing products or treatments that may be more
effective, easier to use or less expensive than ours;
 
    
    regulations that impose additional burden on patients and their caregivers,
such as the recently adopted Medicare conditions for coverage which impose additional water
testing requirements in connection with the use of our PureFlow SL;
 
    
    the number of patients willing and able to perform therapy independently,
outside of a traditional dialysis clinic, may be smaller than we estimate; and
 
    
    the availability of satisfactory reimbursement from healthcare payors,
including Medicare.
 If we are unable to convince additional hospitals and healthcare providers of the benefits of our
products for the treatment of acute kidney failure and fluid overload, we will not be successful in
increasing our market share in the critical care market.
  Our business and results of operations may be negatively impacted by general economic and financial
market conditions and such conditions may increase other risks that affect our business.
  Healthcare reform legislation could adversely affect our revenue and financial condition.
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As our business continues to grow, we may have difficulty managing our growth and expanding our
operations successfully.
  If we are unable to improve or maintain strong product reliability for our products, our ability to
maintain or grow our business and achieve profitability could be impaired.
  We have a significant amount of System One field equipment, and our inability to effectively manage
this asset could negatively impact our working capital requirements and future profitability.
  If kidney transplantation becomes a viable treatment option for more patients with ESRD, or if
medical or other solutions for renal replacement become viable, the market for our products may be
limited.
  We could be subject to costly and damaging product and professional liability claims and may not be
able to maintain sufficient liability insurance to cover claims against us.
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##### Table of Contents



We maintain insurance at levels deemed adequate by management; however, future claims could exceed
our applicable insurance coverage.
  We face risks associated with having international manufacturing operations, and if we are unable
to manage these risks effectively, our business could suffer.
  We currently rely upon Kawasumi, a third-party manufacturer, to manufacture a significant
percentage of our blood tubing set products using our supplied components and all of our needles.
  Our In-Center segment relies heavily upon third-party distributors.
  Unless we can demonstrate sufficient product differentiation in our blood tubing set business
through Streamline or products that we introduce in the future, we will continue to be susceptible
to further pressures to reduce product pricing and more vulnerable to the loss of our blood tubing
set business to competitors in the dialysis industry.
  The activities of our business involve the import of finished goods into the United States from
foreign countries, subject to customs inspections and duties, and the export of components and
certain other products from other countries into Germany, Mexico and Thailand. To a lesser, but
increasing degree, our business also involves the export of finished goods from the United States
to foreign countries. If we misinterpret or violate these laws, or if laws governing our exemption
from certain duties change, we could be subject to significant fines, liabilities or other adverse
consequences.
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The success of our business depends on the services of each of our senior executives as well as
certain key engineering, scientific, manufacturing, clinical and marketing personnel, the loss of
whom could negatively affect the combined businesses.
  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.
  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.
  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.
  30




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##### Table of Contents




    
    untitled letters, warning letters, fines, injunctions and civil penalties;
 
    
    administrative detention, which is the detention by the FDA of medical devices
believed to be adulterated or misbranded;
 
    
    customer notification, or orders for repair, replacement or refund;
 
    
    voluntary or mandatory recall or seizure of our products;
 
    
    operating restrictions, partial suspension or total shutdown of production;
 
    
    refusal to review pre-market notification or pre-market approval submissions;
 
    
    rescission of a substantial equivalence order or suspension or withdrawal of a
pre-market approval; and
 
    
    criminal prosecution.
 Our products are subject to market withdrawals or product recalls after receiving FDA clearance or
approval, and market withdrawals and product recalls could cause the price of our stock to decline
and expose us to product liability or other claims or could otherwise harm our reputation and
financial results.
  If we or our contract manufacturers fail to comply with FDAs Quality System Regulations, our
manufacturing operations could be interrupted, and our product sales and operating results could
suffer.
   Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our
products outside the United States.
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We have obligations under our contracts with dialysis clinics and hospitals to protect the privacy
of patient 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.
   Foreign governments tend to impose strict price controls, which may adversely affect our future
profitability.
  32




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##### Table of Contents



Failure to comply with the United States Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
  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.
  Risks Related to Operations
 We obtain some of our raw materials or components from a single source or a limited group of
suppliers. We also obtain sterilization services from a single supplier. The partial or complete
loss of one of these suppliers could cause significant production delays, an inability to meet
customer demand and a substantial loss in revenues.
   Resin is a key input material to the manufacture of our products and System One cartridge. Oil
prices affect both the pricing and availability of this material. Escalation of oil prices could
affect our ability to obtain sufficient supply of resin at the prices we need to manufacture our
products at current rates of profitability.
  Distribution costs represent a significant percentage of our overall costs, and these costs are
dependent upon fuel prices. Increases in fuel prices could lead to increases in our distribution
costs, which, in turn, could impair our ability to achieve profitability.
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##### Table of Contents



We have labor agreements with our production employees in Italy and in Mexico. We cannot guarantee
that we will not in the future face strikes, work stoppages, work slowdowns, grievances,
complaints, claims of unfair labor practices, other collective bargaining disputes or in Italy,
anti-union behavior, that may cause production delays and negatively impact our ability to deliver
our products on a timely basis.
  We do not have long-term supply contracts with many of our third-party suppliers.
  Certain of our products are recently developed and we have recently transitioned the manufacturing
of certain of these products to new locations. We, and certain of our third-party manufacturers,
have limited manufacturing experience with these products.
  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.
  
    
    prevent our competitors from duplicating our products;
 
    
    prevent our competitors from gaining access to our proprietary information and
technology; or
 
    
    permit us to gain or maintain a competitive advantage.
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##### Table of Contents



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.
   
    
    cease selling or using any of our products that incorporate the asserted
intellectual property, which would adversely affect our revenues;
 
    
    pay substantial damages for past use of the asserted intellectual property;
 
    
    obtain a license from the holder of the asserted intellectual property, which
license may not be available on reasonable terms, if at all and which could reduce
profitability; and
 
    
    redesign or rename, in the case of trademark claims, our products to avoid
infringing the intellectual property rights of third parties, which may not be possible and
could be costly and time-consuming if it is possible to do so.
 Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
  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.
  Risks Related to our Common Stock
 Our stock price is likely to be volatile, and the market price of our common stock may drop.
  
    
    timing of market launch and/or market acceptance of our products;
 
    
    timing of achieving profitability from operations;
 
    
    changes in estimates of our financial results or recommendations by securities
analysts or the failure to meet or exceed securities analysts expectations;
 
    
    actual or anticipated variations in our quarterly operating results;
 
    
    future debt or equity financings;
 
    
    developments or disputes with key vendors or customers;
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##### Table of Contents




    
    disruptions in product supply for any reason, including product recalls, our
failure to appropriately forecast supply or demand, difficulties in moving products across
the border, or the failure of third party suppliers to produce needed products or
components;
 
    
    reports by officials or health or medical authorities, the general media or the
FDA regarding the potential benefits of the System One or of similar dialysis products
distributed by other companies or of daily or home dialysis;
 
    
    announcements by the FDA of non-clearance or non-approval of our products, or
delays in the FDA or other foreign regulatory agency review process;
 
    
    product recalls;
 
    
    defaults under our material contracts, including without limitation our credit
agreement;
 
    
    regulatory developments in the United States and foreign countries;
 
    
    changes in third-party healthcare reimbursements, particularly a decline in the
level of Medicare reimbursement for dialysis treatments;
 
    
    litigation involving our company or our general industry or both;
 
    
    announcements of technical innovations or new products by us or our
competitors;
 
    
    developments or disputes concerning our patents or other proprietary rights;
 
    
    our ability to manufacture and supply our products to commercial standards;
 
    
    significant acquisitions, strategic partnerships, joint ventures or capital
commitments by us or our competitors;
 
    
    departures of key personnel; and
 
    
    investors general perception of our company, our products, the economy and
general market conditions.
  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.
  
    
    a prohibition on actions by our stockholders by written consent;
 
    
    the ability of our board of directors to issue preferred stock without
stockholder approval, which could be used to institute a poison pill that would work to
dilute the stock ownership of a potential hostile acquirer, effectively preventing
acquisitions that have not been approved by our board of directors;
 
    
    advance notice requirements for nominations of directors or stockholder
proposals; and
 
    
    the requirement that board vacancies be filled by a majority of our directors
then in office.
  If there are substantial sales of our common stock in the market by our large existing
stockholders, our stock price could decline.
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##### Table of Contents



We have filed resale registration statement covering shares of our common stock that we sold in a
private placement and are obligated to file a resale registration statement with respect to the
resale by DaVita of any shares issued under its warrant. If the holders of these shares or shares
issued pursuant to the terms of the warrant are unable to sell these shares under the respective
registration statements, we may be obligated to pay them damages, which could harm our financial
condition. Further, these resale registration statements could result in downward pressure on the
price of our common stock and may affect the ability of our stockholders to realize the current
trading price of our common stock.
    Our outstanding warrants, and the provisions of our Term Loan with Asahi, may result in substantial
dilution to our stockholders.
  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.
  
    
    delaying, deferring or preventing a change in control of our company;
 
    
    entrenching our management and/or Board;
 37




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
    
    impeding a merger, consolidation, takeover or other business combination
involving our company; or
 
    
    discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
 We may grow through additional acquisitions, which could dilute our existing shareholders and could
involve substantial integration risks.
  
    
    difficulty in transitioning and integrating the operations and personnel of
the acquired businesses, including different and complex accounting and financial reporting
systems;
 
    
    potential disruption of our ongoing business and distraction of management;
 
    
    potential difficulty in successfully implementing, upgrading and deploying in a
timely and effective manner new operational information systems and upgrades of our
finance, accounting and product distribution systems;
 
    
    difficulty in incorporating acquired technology and rights into our products
and technology;
 
    
    unanticipated expenses and delays in completing acquired development projects
and technology integration;
 
    
    management of geographically remote units both in the United States and
internationally;
 
    
    impairment of relationships with partners and customers;
 
    
    customers delaying purchases of our products pending resolution of product
integration between our existing and our newly acquired products;
 
    
    entering markets or types of businesses in which we have limited experience;
 
    
    potential loss of key employees of the acquired company; and
 
    
    inaccurate assumptions of the acquired companys product quality and/or product
reliability.
  38




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Item 6. Exhibits
 ExhibitNumber*31.1
    
    Certification of Chief Executive Officer pursuant to Exchange
Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Chief Financial Officer pursuant to Exchange
Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to Exchange
Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002.*32.2
    
    Certification of Chief Financial Officer pursuant to Exchange
Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
 
 *
    
    Filed herewith. 39




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SIGNATURES
  NXSTAGE MEDICAL, INC.By:
    /s/ Robert S. BrownRobert S. BrownChief Financial Officer
(Duly authorized officer and principal
financial and accounting officer)  40