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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2004 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 000-50674 ANIMAS CORPORATION  DELAWARE
    
    23-2860912(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 200 LAWRENCE DRIVE, WEST CHESTER, PA
    
    19380(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (610) 644-8990 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). o x
 Common stock, $0.01 par
value, outstanding at November 11, 2004: 19,670,684 shares




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ANIMAS CORPORATION AND SUBSIDIARIES
FORM 10-Q INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2004
    
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23SIGNATURE2004 EQUITY INCENTIVE PLAN INCENTIVE STOCK OPTION GRANT2004 EQUITY INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AGREEMENTCERTIFICATION BY PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A)CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A)CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements
 ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Balance Sheets
 (unaudited)
 September 30, 2004
    
    December 31, 2003(in thousands except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    48,608
    
    
    $
    384Accounts receivable, net of allowance for doubtful accounts
of $1,645 in 2004 and $1,285 in 2003
    
    
    20,410
    
    
    
    13,178Inventories
    
    
    8,083
    
    
    
    3,335Cost associated with deferred revenue
    
    
    
    
    
    
    1,025Prepaid expenses and other current assets
    
    
    1,309
    
    
    
    575Total current assets
    
    
    78,410
    
    
    
    18,497Property and equipment, net
    
    
    5,681
    
    
    
    3,899Deposits and other assets
    
    
    93
    
    
    
    297Restricted cash
    
    
    
    
    
    
    550Total assets
    
    $
    84,184
    
    
    $
    23,243Liabilities and Stockholders EquityCurrent liabilities:Line of credit
    
    $
    
    
    
    $
    2,657Current portion of long-term debt
    
    
    502
    
    
    
    462Accounts payable
    
    
    5,683
    
    
    
    2,752Accrued expenses
    
    
    4,595
    
    
    
    3,283Deferred revenue
    
    
    592
    
    
    
    5,179Total current liabilities
    
    
    11,372
    
    
    
    14,333Other liabilities
    
    
    876
    
    
    
    1,140Long-term debt
    
    
    294
    
    
    
    467Total liabilities
    
    
    12,542
    
    
    
    15,940Commitments and contingenciesStockholders equity:Series A, B, and C Preferred stock, $0.01 par value; authorized 8,353,200
shares; none issued and outstanding in 2004 and 7,097,724 in 2003
    
    
    
    
    
    
    71Common stock, $0.01 par value; authorized 100,000,000 shares in 2004
and 24,000,000 shares in 2003; issued and outstanding 19,230,283 shares in 2004 and 3,987,282 in 2003
    
    
    192
    
    
    
    40Additional paid-in capital
    
    
    157,422
    
    
    
    90,544Deferred compensation
    
    
    (169
    )
    
    
    (178
    )Accumulated deficit
    
    
    (85,803
    )
    
    
    (83,174
    )Total stockholders equity
    
    
    71,642
    
    
    
    7,303Total liabilities and stockholders equity
    
    $
    84,184
    
    
    $
    23,243
 The accompanying notes are an integral part of the consolidated financial statements. 3




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Operations
 (unaudited)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands except share and per share data)Net revenues
    
    $
    22,654
    
    
    $
    11,291
    
    
    $
    47,911
    
    
    $
    27,876Operating expenses:Cost of products sold
    
    
    8,805
    
    
    
    4,602
    
    
    
    19,338
    
    
    
    12,934Research and development expenses
    
    
    1,723
    
    
    
    1,244
    
    
    
    4,395
    
    
    
    3,732Selling, general and administrative expenses
    
    
    9,403
    
    
    
    7,612
    
    
    
    26,715
    
    
    
    22,472Total operating expenses
    
    
    19,931
    
    
    
    13,458
    
    
    
    50,448
    
    
    
    39,138Income (loss) from operations
    
    
    2,723
    
    
    
    (2,167
    )
    
    
    (2,537
    )
    
    
    (11,262
    )Interest income
    
    
    155
    
    
    
    4
    
    
    
    209
    
    
    
    19Interest expense
    
    
    (59
    )
    
    
    (49
    )
    
    
    (301
    )
    
    
    (143
    )Net income (loss)
    
    
    2,819
    
    
    
    (2,212
    )
    
    
    (2,629
    )
    
    
    (11,386
    )Deemed dividend  beneficial conversion feature of
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,063
    )Net income (loss) attributable to common stockholders
    
    $
    2,819
    
    
    $
    (2,212
    )
    
    $
    (2,629
    )
    
    $
    (16,449
    )Basic net income (loss) attributable to common stockholders per share
    
    $
    0.15
    
    
    $
    (0.57
    )
    
    $
    (0.23
    )
    
    $
    (4.25
    )Diluted net income (loss) attributable to common stockholders per share
    
    $
    0.14
    
    
    $
    (0.57
    )
    
    $
    (0.23
    )
    
    $
    (4.25
    )Weighted average shares  basic
    
    
    19,215,289
    
    
    
    3,870,716
    
    
    
    11,453,535
    
    
    
    3,869,429Weighted average shares  diluted
    
    
    20,804,281
    
    
    
    3,870,716
    
    
    
    11,453,535
    
    
    
    3,869,429
 The accompanying notes are an integral part of the consolidated financial statements. 4




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity
 Nine Months Ended September 30, 2004
 (unaudited)
 Preferred stock
    
    Common stock
    
    Additional
    
    
    
    
    
    
    
    
    
    Totalpaid-in
    
    Deferred
    
    Accumulated
    
    stockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    compensation
    
    deficit
    
    equity(in thousands except share and per share data)Balance, December 31, 2003
    
    
    7,097,724
    
    
    $
    71
    
    
    
    3,987,282
    
    
    $
    40
    
    
    $
    90,544
    
    
    $
    (178
    )
    
    $
    (83,174
    )
    
    $
    7,303Exercise of stock warrants to purchase
preferred stock
    
    
    55,084
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    406
    
    
    
    
    
    
    
    
    
    
    
    407Conversion of preferred stock into common stock
    
    
    (7,152,808
    )
    
    
    (72
    )
    
    
    9,522,604
    
    
    
    95
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    Sale of common stock at $15.00 per share, net
of offering costs
    
    
    
    
    
    
    
    
    
    
    4,887,500
    
    
    
    49
    
    
    
    65,696
    
    
    
    
    
    
    
    
    
    
    
    65,745Cashless exchange of warrants
    
    
    
    
    
    
    
    
    
    
    637,378
    
    
    
    6
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options and warrants to
purchase common stock
    
    
    
    
    
    
    
    
    
    
    190,186
    
    
    
    2
    
    
    
    729
    
    
    
    
    
    
    
    
    
    
    
    731Deferred compensation associated with stock grants
    
    
    
    
    
    
    
    
    
    
    5,333
    
    
    
    
    
    
    
    76
    
    
    
    (76
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,629
    )
    
    
    (2,629
    )Balance, September 30, 2004
    
    
    
    
    
    $
    
    
    
    
    19,230,283
    
    
    $
    192
    
    
    $
    157,422
    
    
    $
    (169
    )
    
    $
    (85,803
    )
    
    $
    71,642
 The accompanying notes are an integral part of the consolidated financial statements. 5




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
 (unaudited)
 Nine Months Ended September 30,2004
    
    2003(in thousands)Cash flows from operating activities:Net loss
    
    $
    (2,629
    )
    
    $
    (11,386
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    1,583
    
    
    
    1,168Non-cash compensation and interest expense
    
    
    85
    
    
    
    494Bad debt expense
    
    
    729
    
    
    
    1,104Other
    
    
    12
    
    
    
    (8
    )Changes in net assets and liabilities:Accounts receivable, net
    
    
    (7,961
    )
    
    
    (4,489
    )Inventories
    
    
    (4,748
    )
    
    
    (980
    )Prepaid expenses and other current assets
    
    
    (734
    )
    
    
    (197
    )Deposits and other assets
    
    
    204
    
    
    
    11Restricted cash
    
    
    550
    
    
    
    Cost associated with deferred revenue
    
    
    1,025
    
    
    
    Accounts payable
    
    
    2,931
    
    
    
    1,321Accrued expenses and other liabilities
    
    
    1,048
    
    
    
    1,191Deferred revenue
    
    
    (4,587
    )
    
    
    Net cash used in operating activities
    
    
    (12,492
    )
    
    
    (11,771
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (3,100
    )
    
    
    (1,224
    )Net cash used in investing activities
    
    
    (3,100
    )
    
    
    (1,224
    )Cash flows from financing activities:Proceeds from lines of credit
    
    
    12,102
    
    
    
    2,500Repayments on lines of credit
    
    
    (14,759
    )
    
    
    (500
    )Proceeds from issuance of common stock
    
    
    66,476
    
    
    
    23Repayments on long-term debt
    
    
    (410
    )
    
    
    (361
    )Proceeds from sale of preferred stock
    
    
    407
    
    
    
    11,727Net cash provided by financing
activities
    
    
    63,816
    
    
    
    13,389Net increase in cash and cash
equivalents
    
    
    48,224
    
    
    
    394Cash and cash equivalents at beginning of period
    
    
    384
    
    
    
    1,134Cash and cash equivalents at end of period
    
    $
    48,608
    
    
    $
    1,528
 The accompanying notes are an integral part of the consolidated financial statements. 6




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##### Table of Contents



ANIMAS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited) (1) Organization and Description of Business Animas Corporation (the Company) manufactures and distributes insulin pumps
as well as ancillary pump supplies required for the use of the pump. The
Company, a Delaware corporation founded in 1996, is located in West Chester,
Pennsylvania. The Company received clearance from the Food and Drug
Administration (the FDA) for its first insulin pump in February 2000 and
began shipping this product in July 2000. The Company received clearance for
its third-generation pump, the IR 1200, in October 2003 and began shipping it
in April 2004. In the United States, the Company generally markets its products
through both a direct sales force and distributors. All of the Companys
operations are located in the United States. Although most of the Companys
sales of product to patients occur in the United States, it has contracted with
independent distributors to sell products in Australia, Austria, Canada, the
Czech Republic, France, Finland, Greece, Germany, Hungary, Ireland, Israel,
Italy, New Zealand, Spain, Sweden and the United Kingdom. The Company is also
developing an implantable glucose sensor for people with insulin-requiring
diabetes. In May 2004, the Company completed its initial public offering (IPO) in which
it sold 4,887,500 shares of its common stock at $15 per share. Net proceeds to
the Company were approximately $65.7 million. As of the closing date of the
offering, all of the convertible preferred stock previously outstanding was
converted into 9,522,604 shares of common stock. A summary of the terms of this
offering can be found in the Registration Statement on Form S-1 as filed with
the Securities and Exchange Commission (Commission file number 333-113008). As of September 30, 2004, the Company had cash and cash equivalents of $48.6
million. The Company expects to have negative cash flows from operations for
the remainder of 2004. The Company believes that its current cash, lines of
credit, and cash anticipated to be generated from future operations, will be
sufficient to meet anticipated cash needs for working capital and capital
expenditures into 2005 and the foreseeable future. (2) Summary of Significant Accounting Policies Unaudited Interim Results.The accompanying consolidated financial statements
for the three and nine months ended September 30, 2004 and 2003 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and the results of operations and cash
flows for the three and nine months ended September 30, 2004 and 2003 have been
made. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or eliminated. The results for the
three and nine months ended September 30, 2004 are not necessarily indicative
of the results to be expected for the year ending December 31, 2004 or for any
other interim period. Principles of Consolidation.The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents.The Company considers all highly liquid debt
instruments with an original maturity of three months or less when purchased to
be a cash equivalent. Cash and cash equivalents include money market funds and
various deposit accounts. Accounts ReceivableAllowance for Doubtful Accounts.Accounts receivable
consist of amounts due from third party payors (governmental and
non-governmental), distributors, and patients. In estimating the collectability
of our accounts receivable, the Company analyzes historical bad debts, payor
and patient concentrations, payor and patient credit-worthiness, and current
economic trends. These allowances are recorded in the period when the revenue
is recorded. Allowances are adjusted currently for any changes in estimated
collections. Accounts receivable are net of allowances for doubtful accounts of $1,645 and
$1,285 at September 30, 2004 and December 31, 2003, respectively. Bad debt
expense was $287 and $729 for the three and nine months ended September 30,
2004 and $295 and $1,104 for the three and nine months ended September 30,
2003, respectively. The related write-offs of accounts receivable were $89,
$369, $94 and $152 for these periods, respectively. 7




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##### Table of Contents



Inventories.Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for all inventories. Cost for
pumps includes material, labor and manufacturing overhead. Ancillary supplies
inventory and raw materials inventory include material costs only. Obsolete
inventory is written off monthly. Product Warranties.The Company provides a four-year warranty on its insulin
pumps. Warranty expense is recorded in the period that product shipment occurs.
The expense is based on historical experience and projected trends of warranty
claims and the estimated cost to settle the claims. At September 30, 2004 and
December 31, 2003, accrued product warranties totaled $1,607 and $1,734,
respectively, and are classified as a current liability in accrued expenses
($737 and $608, respectively) and as a long-term liability in other
liabilities ($870 and $1,126, respectively) in the accompanying consolidated
balance sheets. Given the four-year warranty period of the Companys insulin
pumps, the portion of the warranty accrual classified as long-term represents
the Companys estimate of costs to settle warranty claims to be incurred in
excess of one year from the balance sheet date. A tabular reconciliation of the changes in the Companys product warranty
liability is as follows: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,737
    
    
    $
    1,529
    
    
    $
    1,734
    
    
    $
    1,775Warranty expense
    
    
    856
    
    
    
    294
    
    
    
    1,661
    
    
    
    458Warranty claims settled
    
    
    (986
    )
    
    
    (228
    )
    
    
    (1,788
    )
    
    
    (638
    )Balance at end of period
    
    $
    1,607
    
    
    $
    1,595
    
    
    $
    1,607
    
    
    $
    1,595
 Comprehensive Income (Loss).Comprehensive income (loss) represents all changes
in stockholders equity except those resulting from investments or
contributions by stockholders. No separate statement of comprehensive income
(loss) has been presented because comprehensive income (loss) was equal to net
income (loss) in the three and nine months ended September 30, 2004 and 2003. Revenue Recognition.Revenues are generated primarily from the sale of insulin
pumps and ancillary supplies. Customers do not have any right of return or any
right to cancel or terminate the sale once the pumps or ancillary supplies are
shipped. Pump and ancillary supplies net revenues are recognized upon shipment
in accordance with Staff Accounting Bulletin No. 104 (SAB 104). In accordance
with EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, (EITF 00-21) in instances where the Company provides pump
operation training, the Company defers the fair value of the training until it
has been delivered. The Company bases the fair value of the training on the
historical amount the Company has paid to independent service providers for
training patients on the operation of the pump. Though the insulin pump has
standalone value, there is no objective evidence as to the pumps fair value
since the Company is reimbursed the same amount with or without training. As a
result, the residual method under EITF 00-21 is utilized. The Company defers
revenues associated with training until it has been delivered. During the nine months ended September 30, 2004, approximately 82% of the
Companys products were sold directly to patients. The Company bills these
patients directly or bills their healthcare payors. Levels of reimbursements
from third party payors vary depending upon the specific benefits provided
under each patients coverage. At the time of sale, the Company records revenue
net of a contractual allowance which represents the difference between the
established billing rate and third party payor payments. As noted above, in October 2003, the Company received FDA clearance for its IR
1200 pump. The Company began shipping the IR 1200 in April 2004. During the
period of November 1, 2003 to March 31, 2004, the Company initiated an upgrade
program in which the Company offered to each new patient purchasing an IR 1000
pump the option to upgrade to the IR 1200 pump at no additional charge. As
required by SAB 104, the Company deferred the recognition of net revenues on
all pump shipments with an upgrade obligation. As of September 30, 2004, the
Company had completed the upgrade program. As a result of this program, the
Companys net revenues for the second and third quarter of 2004 were increased
by the recognition of revenues deferred from previous quarters, as the Company
shipped upgraded pumps or patients declined the upgrade. Revenues from products sold directly to domestic and international distributors
are recognized upon shipment, and are approximately 18% of the Companys
products during the nine months ended September 30, 2004. Distributors have no
right of return. The Company has no post-shipment obligations to its
distributors. Stock-Based Compensation.In December 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure. This
standard amends the transition and disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted by SFAS No. 148, the
Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, 8




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##### Table of Contents



Accounting for Stock Issued to Employees, and related
interpretations to account for its stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. As allowed by
SFAS No. 148, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted only the
disclosure requirements of SFAS No. 148. Had the Company determined compensation cost for options granted during the
three and nine months ended September 30, 2004 and 2003, based on the fair
value method, at the grant date under SFAS No. 148, the Companys net income
(loss) and net income (loss) per share would have been reported as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
attributable to
common
stockholders, as
reported
    
    $
    2,819
    
    
    $
    (2,212
    )
    
    $
    (2,629
    )
    
    $
    (16,449
    )Add  Non-cash
employee
compensation, as
reported
    
    
    8
    
    
    
    
    
    
    
    24
    
    
    
    464Deduct  Total
stock-based
employee
compensation
expense determined
under fair
value-based method
    
    
    (154
    )
    
    
    (108
    )
    
    
    (433
    )
    
    
    (299
    )Pro forma net
income (loss)
attributable to
common stockholders
    
    $
    2,673
    
    
    $
    (2,320
    )
    
    $
    (3,038
    )
    
    $
    (16,284
    )Income (loss)
attributable to
common stockholders
per share:Basic, as reported
    
    $
    0.15
    
    
    $
    (0.57
    )
    
    $
    (0.23
    )
    
    $
    (4.25
    )Basic, pro forma
    
    $
    0.14
    
    
    $
    (0.60
    )
    
    $
    (0.27
    )
    
    $
    (4.21
    )Diluted, as reported
    
    $
    0.14
    
    
    $
    (0.57
    )
    
    $
    (0.23
    )
    
    $
    (4.25
    )Diluted, pro forma
    
    $
    0.13
    
    
    $
    (0.60
    )
    
    $
    (0.27
    )
    
    $
    (4.21
    )
 Use of Estimates.The preparation of financial statements in conformity with
U.S. generally accepted accounting principles 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. Some of the more significant estimates include the
allowance for doubtful accounts, contractual allowances, and the warranty
accrual. Actual amounts could differ from those estimates. (3) Inventories Inventories consist of the following as of: September 30, 2004
    
    December 31, 2003Raw Material
    
    $
    1,569
    
    
    $
    1,064Work in process
    
    
    3,396
    
    
    
    423Finished goods
    
    
    3,118
    
    
    
    1,848$
    8,083
    
    
    $
    3,335
 (4) Deemed Dividend  Beneficial Conversion Feature of Preferred Stock In accordance with EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments (EITF No. 00-27), the issuance costs
associated with the sale of the Series C Convertible Preferred Stock (Series
C) in 2003 were not offset against the proceeds in calculating the intrinsic
value of the conversion option but were considered in the calculation of the
amount shown on the consolidated balance sheet. After considering the
allocation of the proceeds based on the relative fair values, it was determined
that the Series C had a beneficial conversion feature (BCF) in accordance
with EITF No. 98-5 and EITF No. 00-27. Accordingly, a BCF adjustment of $5,063
was recorded with respect to the issuance of Series C from January through
April 2003 closings. The value of the BCF was recorded in a manner similar to a
dividend, and since the Series C had no maturity date and was convertible at
the date of issuance, the BCF was charged to the statement of operations. 9




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##### Table of Contents



(5) Business Segment A single management team reporting to the President and Chief Executive Officer
comprehensively manages the business operations of the Company. The Company
does not operate separate lines of business or separate business entities with
respect to any of its products. In addition, the Company does not conduct any
operations outside the United States. The Company does not prepare discrete
financial statements with respect to separate product areas. Accordingly, the
Company does not have separately reportable segments as defined by SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
International sales were less than 10% of net revenues, and the Company has no
foreign operations. (6) Income (Loss) per Share The table below sets forth the reconciliation of the numerators and the
denominators of the Companys basic and diluted income (loss) per share
computations for the three and nine months ended September 30, 2004 and 2003. Three Months Ended September 30,
    
    Nine Months Ended September 30,Net Income
    
    
    
    
    
    Per Share
    
    Net Income
    
    
    
    
    
    Per Share(Loss)
    
    Shares
    
    Amount
    
    (Loss)
    
    Shares
    
    Amount2004Basic
    
    $
    2,819
    
    
    
    19,215,289
    
    
    $
    0.15
    
    
    $
    (2,629
    )
    
    
    11,453,535
    
    
    $
    (0.23
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    1,491,007
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    97,985
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    $
    2,819
    
    
    
    20,804,281
    
    
    $
    0.14
    
    
    $
    (2,629
    )
    
    
    11,453,535
    
    
    $
    (0.23
    )2003Basic
    
    $
    (2,212
    )
    
    
    3,870,716
    
    
    $
    (0.57
    )
    
    $
    (16,449
    )
    
    
    3,869,429
    
    
    $
    (4.25
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    $
    (2,212
    )
    
    
    3,870,716
    
    
    $
    (0.57
    )
    
    $
    (16,449
    )
    
    
    3,869,429
    
    
    $
    (4.25
    )
 For the nine months ended September 30, 2004 and the three and nine months
ended September 30, 2003, diluted loss per share is identical to basic loss per
share as the Company is in a net loss position and the common equivalent shares
are considered anti-dilutive. For the three months ended September 30, 2004,
2,334 common stock options were excluded from the diluted calculation because
the effect would be anti-dilutive. For the nine months ended September 30,
2004, 2,513,232 common stock options and 159,693 common warrants were excluded
from the diluted calculation because the effect would be anti-dilutive. For the
three and nine months ended September 30, 2003, 2,584,356 common stock options,
863,762 Series C warrants and 318,135 common warrants were excluded from the
diluted calculation because the effect would be anti-dilutive. (7) Subsequent Event On October 29, 2004, the Company announced that it entered into license and
development agreements with Debiotech, SA for certain technology and
intellectual property. The Company acquired the exclusive worldwide license to
make, use, and sell products utilizing the intellectual property portfolio
owned by Debiotech, SA relating to micro-pumps and micro-needles for use
related to insulin administration and in-vivo glucose sensing. The Company paid
$12.0 million in cash and issued 400,000 restricted shares of the Companys
common stock. Additionally, the Company agreed to pay (i) a license fee up to $2.0
million upon the receipt of the requisite deliverables for 510(k) approval from
the FDA for the micro-pump, providing receipt of such deliverables occurs prior
to certain dates, and (ii) royalties on sales of products resulting from these
agreements. It is expected that a portion of the upfront license fee will be
taken as an operating charge in the fourth quarter of 2004, and the remainder
of the upfront license fee will be capitalized, and upon project success,
expensed ratably over the life of the technology. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995: This report and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this report and the documents
incorporated herein by reference, the words anticipate, believe,
estimate, may, expect, intend, and similar expressions are generally
intended to identify forward-looking statements. These forward-looking
statements include, among others, the statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations about our:  
    
    estimate of the length of time that our existing cash and cash
equivalents, expected revenue, and interest income will be adequate to
finance our operating and capital requirements;
    
    expected losses;
    
    expectations for future capital requirements;
    
    expectations for increases in operating expenses;
    
    expectations for increases in research and development, and
marketing, general and administrative expenses in order to develop
products, manufacture commercial quantities of reagents and products,
and commercialize our technology;
    
    expectations for the development of an improved insulin pump;
    
    expectations for generating revenue; and
    
    expectations regarding new or expanded collaborations and for the
performance of our existing collaboration partners regarding the
development and commercialization of products incorporating our
technologies. Our actual results could differ materially from the results expressed in,
or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:  
    
    technical issues relating to the IR 1200 or any of the Companys ancillary supplies;
    
    failure to capture recurring purchases of ancillary supplies by patients using our pumps;
    
    any significant disruption with vendors;
    
    the failure to successfully develop and commercialize the technologies licensed from Debiotech, SA;
    
    any failure to achieve and then maintain profitability;
    
    the failure of our ezSet infusion set to be fully-developed or commercially accepted;
    
    technological breakthroughs in diabetes monitoring, treatment, or prevention that could render our products obsolete;
    
    failure to comply with any FDA or foreign regulations;
    
    an inability to attract and retain personnel;
    
    competition;
    
    an inability to adequately protect our intellectual property;
    
    product liability lawsuits;
    
    the failure to secure or retain third party coverage or reduced reimbursement for our products by third party payors; and,
    
    general economic conditions. These and other risks and uncertainties that could affect our actual
results are discussed in this report and in our other filings with the
Securities and Exchange Commission, particularly the section entitled Risk
Factors in our Registration Statement onForm S-1which went effective on May
19, 2004. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance, or achievements. We do not assume
responsibility for the accuracy and completeness of the forward-looking
statements other than as required by applicable law. We do not undertake any duty to update after the date of this report any of the
forward-looking statements in this report to conform them to actual results. 11




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##### Table of Contents



Overview We design, develop, manufacture, and sell external insulin pumps for people
with diabetes. We introduced our first generation pump in July 2000. We began
shipping our third generation pump, the IR 1200, in April 2004. We also provide
ancillary supplies necessary for pump therapy, including insulin cartridges,
infusion sets, batteries, and various accessories. Our approximately 50-person direct sales force promotes our pump in the United
States to healthcare professionals and patients. In addition, our approximately
65 diabetes educators, or clinical managers, train and provide clinical support
to patients in the United States. We use domestic and international
distributors to market, sell, and service our products. Financial Operations Overview Net Revenues.We generate revenues primarily from the sale of our external
insulin pumps and ancillary supplies, including insulin cartridges and infusion
sets. In the nine months ended September 30, 2004, approximately 82% our
products were sold directly to patients. We invoice patients either directly or
through their healthcare payors, such as insurance companies and health
maintenance organizations. Levels of reimbursement from healthcare payors vary
depending upon the specific benefits provided under each patients coverage.
Net revenues for a particular product are the difference between the
established billing rate for such product and the contractual allowance given
to the healthcare payor. Pump Upgrade Program.During the period November 1, 2003 to March 31, 2004 (the
Period), we implemented a program that allowed patients in the United States,
at their option and at no additional cost, to upgrade their IR 1000 pump
purchased during the Period to the IR 1200 pump when it became available. In
anticipation of the shipment of the IR 1200 in April 2004, we stopped domestic
shipments of the IR 1000 for the last three weeks of March 2004. We began
shipping the IR 1200 pump in April 2004, and as of
September 30, 2004, the shipment of upgrade pumps under this
program was completed; we are however awaiting the return of $577,000
of pumps from patients participating in the program. We do not anticipate the
need for additional product upgrade programs in the foreseeable
future where we exchange an older generation pump for a newer
generation pump. In accordance with generally accepted accounting principles, we deferred the
recognition of all net revenues for IR 1000 pumps shipped under the upgrade
program. We did not recognize the net revenue on an IR 1000 pump shipped under
this program until either the IR 1200 replacement pump was shipped to the
patient requesting an upgrade or the patient declined the upgrade. All IR 1000
pumps shipped to new patients domestically between November 1, 2003 and March
31, 2004 were subject to this upgrade program. We also deferred the associated
cost of products sold on shipments of pumps under the upgrade program. Net
revenues were recognized when we shipped the IR 1200 pump to the patient or
when the patient declined to be part of the upgrade program. The deferred cost
represented the estimated recoverable inventory costs of the IR 1000 pumps when
they were returned to us. When we shipped an IR 1200 as a replacement pump, we
recorded the cost of the IR 1200 pump as cost of products sold at that time. As a result of this program, our net revenues for the three and nine months
ended September 30, 2004 increased by the recognition of net revenues deferred
from previous quarters. Cost of Products Sold.Cost of products sold include material costs, other
direct and indirect manufacturing costs, shipping and handling costs, and
product warranty expense. We purchase components and raw materials from third
party vendors and assemble them into insulin pumps at our manufacturing
facility in southeastern Pennsylvania. Insulin cartridges and certain other
supplies are manufactured for us in Asia and Europe, as well as in the United
States under agreements with third party suppliers. All purchases sourced from
vendors or suppliers outside the United States are invoiced in U.S. dollars. Direct and indirect manufacturing costs include material costs, labor costs,
electricity and other utilities, maintenance expenses, depreciation and other
fixed and variable costs required to operate our plant. Since the commercial
introduction of our first pump in July 2000, the average unit cost of our pump
has declined due to improved manufacturing efficiencies and increased
absorption of fixed and semi-fixed overhead costs. Like most of our competitors, we offer a four-year warranty on our pumps.
Warranty expense is recorded in the period that product shipment occurs. The
expense is based on historical experience and projected trends of warranty
claims and the estimated cost to settle the claims. Research and Development Expenses.Research and development expenses include
costs associated with the design, development and testing of new and existing
products. Such costs are expensed as incurred and include salaries and related
personnel costs, fees paid to outside consultants, and other direct and
indirect costs related to research and product development. 12




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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses include salaries, commissions and related personnel
expenses for employees in sales, marketing, clinical, patient service and
administrative functions, as well as overhead costs associated with these
activities. Also included are costs associated with promotional literature and
videos, trade show participation, education and training and the cost of
providing demo pumps and supplies, which are charged to expense as incurred. Critical Accounting Policies and Estimates The 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 U.S. generally accepted accounting principles.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, net revenues and expenses, and related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. Our significant accounting policies are
more fully described in our accompanying consolidated financial statements. The
critical accounting policies described below are those which we believe require
estimates based on assumptions that are uncertain at the time the estimates are
made, and for which different accounting estimates that management could have
reasonably used would have had a material impact on reported financial
information. Revenue Recognition.Revenues are generated primarily from the sale of insulin
pumps and ancillary supplies. Customers do not have any right of return or any
right to cancel or terminate the sale once the pumps or ancillary supplies are
shipped. Pump and ancillary supplies net revenues are recognized upon shipment
in accordance with Staff Accounting Bulletin No. 104 (SAB 104). In accordance
with EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables (EITF 00-21), in instances where we provide pump operation
training, we defer the fair value of the pump operation training until the
training is delivered. We base the fair value of pump operation training on the
historical amount we have paid to independent service providers for training
patients on the operation of our pumps. Though the insulin pump has standalone
value, there is no objective evidence as to the pumps fair value since we are
reimbursed the same amount with or without pump operation training. As a
result, the residual method under EITF 00-21 is utilized. During the nine months ended September 30, 2004, approximately 82% of our
products were sold directly to patients. We bill these patients directly or
bill their healthcare payors. Levels of reimbursements from third party payors
vary depending upon the specific benefits provided under each patients
coverage. At the time of sale, we record revenues net of third party
contractual allowances, which represent the difference between the established
billing rate and third party payor payments. Consistent with SAB 104, net revenues for products sold directly to
distributors are recognized upon shipment. Distributors have no right of
return, and we have no post-shipment obligations. Accounts Receivable/Allowance for Doubtful Accounts.In estimating the
collectability of our accounts receivable, we analyze historical bad debts,
payor concentrations, payor and patient credit-worthiness, current economic
trends, and changes in patient and/or payor payment terms. These allowances are
recorded in the period when the net revenues are recognized based on
anticipated future events. If there are unanticipated future events, this
allowance may need to be adjusted. Inventories.Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method for all inventories. Costs for
pumps include material, labor, and manufacturing overhead. Ancillary supplies
inventory and raw materials inventory include material costs only. We review
our inventory balances monthly for obsolete inventory. We manage the risk of
inventory obsolescence through validating product designs prior to product
introduction, as well as through planning of inventory with respect to
anticipated design changes. Once inventory is determined to be obsolete, the
inventory is charged to cost of products sold, removed from our stockroom, and
either scrapped or used for non-inventory purposes. Deferred Tax Asset Valuation Allowance.Our estimate for the valuation
allowance for deferred tax assets requires us to make significant estimates and
judgments about our future operating results. Our ability to realize the
deferred tax assets depends on our future taxable income as well as limitations
on their utilization. A deferred tax asset must be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax asset will not be realized prior to its expiration. The
projections of our operating results on which the establishment of a valuation
allowance is based involve significant estimates regarding future demand for
our products, competitive conditions, product development efforts, approvals of
regulatory agencies and product cost. If actual results differ from these
projections, or if our expectations of future results change, it may be
necessary to adjust the valuation allowance. As a result of the
historic losses, the Company 13




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##### Table of Contents



has provided a full
valuation allowance for the deferred tax assets. Warranty Liability.Each of our insulin pumps is sold with a four-year
warranty. Our warranty liability represents the total estimated cost for
expected future warranty claims related to all products shipped. Warranty
expense is accrued in the period that the products are shipped and is based on
historical experience, projected trends of warranty claims, and the expected
costs to settle the claims. As changes occur in expected warranty claim rates
and the estimated cost to settle claims, the warranty liability is adjusted
accordingly. 14




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##### Table of Contents



Three Months Ended September 30, 2004 and 2003 Results of Operations.The following tables set forth, for the quarters
indicated, certain operational information. A percentage breakdown of net
revenues is presented for certain operational items. The breakdown of cost of
products sold and gross margin is presented as a percentage of these respective
items. Three Months Ended September 30,2004
    
    2003
    
    Change, 2004/2003$
    
    %
    
    $
    
    %
    
    $
    
    %(in thousands)Consolidated Statements of OperationsNet revenues
    
    $
    22,654
    
    
    
    100.0
    %
    
    $
    11,291
    
    
    
    100.0
    %
    
    $
    11,363
    
    
    
    100.6
    %Operating expenses:Cost of products sold
    
    
    8,805
    
    
    
    38.9
    
    
    
    4,602
    
    
    
    40.8
    
    
    
    4,203
    
    
    
    91.3Research and development expenses
    
    
    1,723
    
    
    
    7.6
    
    
    
    1,244
    
    
    
    11.0
    
    
    
    479
    
    
    
    38.5Selling, general and administrative expenses
    
    
    9,403
    
    
    
    41.5
    
    
    
    7,612
    
    
    
    67.4
    
    
    
    1,791
    
    
    
    23.5Total operating expenses
    
    
    19,931
    
    
    
    88.0
    
    
    
    13,458
    
    
    
    119.2
    
    
    
    6,473
    
    
    
    48.1Income (loss) from operations
    
    
    2,723
    
    
    
    12.0
    
    
    
    (2,167
    )
    
    
    (19.2
    )
    
    
    4,890
    
    
    
    225.7Interest income
    
    
    155
    
    
    
    0.7
    
    
    
    4
    
    
    
    
    
    
    
    151
    
    
    
    3775.0Interest expense
    
    
    (59
    )
    
    
    (0.3
    )
    
    
    (49
    )
    
    
    (0.4
    )
    
    
    (10
    )
    
    
    (20.4
    )Net income (loss)
    
    
    2,819
    
    
    
    12.4
    
    
    
    (2,212
    )
    
    
    (19.6
    )
    
    
    5,031
    
    
    
    227.4Deemed dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) attributable to common stockholders
    
    $
    2,819
    
    
    
    12.4
    %
    
    $
    (2,212
    )
    
    
    (19.6
    )%
    
    $
    5,031
    
    
    
    227.4
    %Net Revenues, Cost of Products Sold and Gross MarginNet
Revenues (dollars and as a percent of total)Insulin pumps
    
    $
    17,278
    
    
    
    76.3
    %
    
    $
    8,063
    
    
    
    71.4
    %
    
    $
    9,215
    
    
    
    114.3
    %Ancillary supplies
    
    
    5,376
    
    
    
    23.7
    
    
    
    3,228
    
    
    
    28.6
    
    
    
    2,148
    
    
    
    66.5Total
    
    $
    22,654
    
    
    
    100.0
    %
    
    $
    11,291
    
    
    
    100.0
    %
    
    $
    11,363
    
    
    
    100.6
    %Cost of Products Sold (dollars and as a percent of total)Insulin pumps
    
    $
    5,638
    
    
    
    64.0
    %
    
    $
    2,484
    
    
    
    54.0
    %
    
    $
    3,154
    
    
    
    127.0
    %Ancillary supplies
    
    
    3,167
    
    
    
    36.0
    
    
    
    2,118
    
    
    
    46.0
    
    
    
    1,049
    
    
    
    49.5Total
    
    $
    8,805
    
    
    
    100.0
    %
    
    $
    4,602
    
    
    
    100.0
    %
    
    $
    4,203
    
    
    
    91.3
    %Gross Margin (dollars and as a percent of total)Insulin pumps
    
    $
    11,640
    
    
    
    84.0
    %
    
    $
    5,579
    
    
    
    83.4
    %
    
    $
    6,061
    
    
    
    108.6
    %Ancillary supplies
    
    
    2,209
    
    
    
    16.0
    
    
    
    1,110
    
    
    
    16.6
    
    
    
    1,099
    
    
    
    99.0Total
    
    $
    13,849
    
    
    
    100.0
    %
    
    $
    6,689
    
    
    
    100.0
    %
    
    $
    7,160
    
    
    
    107.0
    %Gross
Margin % (as a percent of net revenues)Insulin pumps
    
    
    
    
    
    
    67.4
    %
    
    
    
    
    
    
    69.2
    %Ancillary supplies
    
    
    
    
    
    
    41.1
    %
    
    
    
    
    
    
    34.4
    %Total
    
    
    
    
    
    
    61.1
    %
    
    
    
    
    
    
    59.2
    %
 Net Revenues.In the three months ended September 30, 2004, net revenues
increased by $11.4 million, or 100.6%, to $22.7 million from $11.3 million in
the comparable period in 2003. The increase in net revenues was a
result of $3.8 million primarily from increased demand, $2.1 million
in increased shipments of ancillary supplies and the
recognition of $5.5 million of revenue deferred in prior periods under the pump
upgrade program. Net revenues from domestic and
foreign sales were $21.9 million and $0.8 million, respectively, in the three
months ended September 30, 2004 and $10.9 million and $0.4 million,
respectively, in the comparable period in 2003. Our average selling price of
pumps remained relatively stable over this period. 15




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##### Table of Contents



Net revenues from ancillary supplies, consisting of infusion sets, pump
cartridges and other ancillary supplies increased by $2.1 million, or 66.5%, in
the three months ended September 30, 2004 versus the same period in 2003. The
increase in net revenues for ancillary supplies was due to increased unit
sales, while prices remained near prior period levels. The growth in net
revenues from sales of ancillary supplies reflected our growth in the number of
patients using our pumps in the comparable three month periods of 2004 and 2003
and our retention of patients from prior years. Cost of Products Sold.Cost of products sold increased $4.2 million, or 91.3%,
to $8.8 million in the three months ended September 30, 2004 from $4.6 million
in the comparable period of 2003. This increase reflected the increase in net
revenues in the three months ended September 30, 2004 from the comparable
period of 2003. However, as a percentage of net revenues, cost of products sold
decreased to 38.9% in 2004 from 40.8% in 2003. Primary factors that contributed
to the decrease included better absorption of manufacturing overhead costs
associated with increased production volumes, improved purchasing efficiencies
for supplies and pump materials, and
improvement in labor and manufacturing efficiency. Cost of insulin pumps sold
increased by $3.2 million, or 127%, in the three months ended September 30,
2004 as compared to the comparable period of 2003. This increase was comprised
of increased costs due to the growth of sales volumes. Additional costs of
approximately $439,000 were incurred during the quarter due to production
ramp-up of the IR 1200. Costs associated with pumps shipped under the pump
upgrade program were $1.3 million in the quarter. Gross Margin.Gross margin increased to 61.1% in the three months ended
September 30, 2004 from 59.2% in the comparable period of 2003. Gross margin
for pumps decreased to 67.4% in 2004 due to the additional costs associated
with production ramp-up of the IR 1200. The pump upgrade program contributed
4.9% to the gross margin for pumps through the better absorption of overhead.
Gross margin for ancillary supplies increased to 41.1% in the three months
ended September 30, 2004 from 34.4% in the comparable period of 2003. Gross
margin improved for ancillary supplies due to lower cost sources of supply. It is anticipated that the gross margin and gross margin percentage will
decline slightly in the fourth quarter due to the decline in units
produced due to the
fulfillment of all pumps associated with the pump upgrade program.
Additionally, it is anticipated the decline will be partially offset by the
expected increase in net revenues from sales of ancillary supplies, as the
patient base expands. Research and Development.Research and development expenses increased $479,000,
or 38.5%, to $1.7 million for the three months ended September 30, 2004 from
$1.2 million in the comparable period of 2003 reflecting increased spending on
activities to improve existing products and develop new products. As a
percentage of net revenues, research and development expenses decreased to 7.6%
for the three months ended September 30, 2004 from 11.0% in the comparable
period of 2003. The percentage decrease in research and development expenses
resulted primarily from the growth of our net revenues. In future quarters, we
expect research and development expenditures as a percentage of net revenues to
decline due to the growth of our net revenues. Selling, General and Administrative Expenses.Selling, general and
administrative (SG&A) expenses increased by $1.8 million, or 23.5%, to $9.4
million in the three months ended September 30, 2004 from $7.6 million in the
comparable period of 2003. However, as a percentage of net revenues, SG&A
expenses decreased to 41.5% for the three months ended September 30, 2004 from
67.4% in the comparable period of 2003. Of the absolute dollar increase, $911,000 was primarily related to higher costs
principally associated with increased headcount in the sales, clinical, and
marketing functions supporting increased selling activity for existing pumps
and ancillary supplies, as well as the launch of the IR 1200. In addition,
higher professional fees of $236,000 and expenses of $145,000 to correct the IR
1200 software bug in September 2004 contributed to higher SG&A costs. The
remaining increase was primarily related to increased insurance expense and
increased administrative personnel costs. We expect SG&A expenses to continue to increase for the remainder of 2004 as
compared to 2003 in absolute dollars as we expand our sales, clinical, and
marketing efforts to support the anticipated growth of our business. Also, we
expect to incur additional costs as we operate as a public company. However, we
expect that SG&A expenses should continue to decline as a percentage of net
revenues as we continue to leverage our SG&A infrastructure. Interest Income.Interest income increased to $155,000 in the three months
ended September 30, 2004 from $4,000 in the comparable period of 2003. The
increase was primarily due to a higher investment balance as a result of the
initial public offering in May 2004. Interest Expense.Interest expense increased to $59,000 in the three months
ended September 30, 2004 from $49,000 in the comparable period of 2003. The
increase reflects higher financing costs associated with increased insurance
premiums. 16




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##### Table of Contents



Net Income (Loss) Attributable to Common Stockholders.We reported net income
of $2.8 million in the three months ended September 30, 2004 as compared to a
net loss of $2.2 million in the comparable period of 2003. The effect of the
pump upgrade program contributed $4.2 million of income during the three months
ended September 30, 2004. 17




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##### Table of Contents



Nine Months Ended September 30, 2004 and 2003 Results of Operations.The following tables set forth, for the quarters
indicated, certain operational information. A percentage breakdown of net
revenues is presented for certain operational items. The breakdown of cost of
products sold and gross margin is presented as a percentage of these respective
items. Nine Months Ended September 30,2004
    
    2003
    
    Change, 2004/2003$
    
    %
    
    $
    
    %
    
    $
    
    %(in thousands)Consolidated Statements of OperationsNet revenues
    
    $
    47,911
    
    
    
    100.0
    %
    
    $
    27,876
    
    
    
    100.0
    %
    
    $
    20,035
    
    
    
    71.9
    %Operating expenses:Cost of products sold
    
    
    19,338
    
    
    
    40.3
    
    
    
    12,934
    
    
    
    46.4
    
    
    
    6,404
    
    
    
    49.5Research and development expenses
    
    
    4,395
    
    
    
    9.2
    
    
    
    3,732
    
    
    
    13.4
    
    
    
    663
    
    
    
    17.8Selling, general and administrative expenses
    
    
    26,715
    
    
    
    55.8
    
    
    
    22,472
    
    
    
    80.6
    
    
    
    4,243
    
    
    
    18.9Total operating expenses
    
    
    50,448
    
    
    
    105.3
    
    
    
    39,138
    
    
    
    140.4
    
    
    
    11,310
    
    
    
    28.9Loss from operations
    
    
    (2,537
    )
    
    
    (5.3
    )
    
    
    (11,262
    )
    
    
    (40.4
    )
    
    
    8,725
    
    
    
    77.5Interest income
    
    
    209
    
    
    
    0.4
    
    
    
    19
    
    
    
    0.1
    
    
    
    190
    
    
    
    1,000.0Interest expense
    
    
    (301
    )
    
    
    (0.6
    )
    
    
    (143
    )
    
    
    (0.5
    )
    
    
    (158
    )
    
    
    (110.5
    )Net loss
    
    
    (2,629
    )
    
    
    (5.5
    )
    
    
    (11,386
    )
    
    
    (40.8
    )
    
    
    8,757
    
    
    
    76.9Deemed dividend
    
    
    
    
    
    
    
    
    
    
    (5,063
    )
    
    
    (18.2
    )
    
    
    5,063
    
    
    
    100.0Net loss attributable to common stockholders
    
    $
    (2,629
    )
    
    
    (5.5
    )%
    
    $
    (16,449
    )
    
    
    (59.0
    )%
    
    $
    13,820
    
    
    
    84.0
    %Net Revenues, Cost of Products Sold and Gross MarginNet RevenuesInsulin pumps
    
    $
    34,247
    
    
    
    71.5
    %
    
    $
    18,971
    
    
    
    68.1
    %
    
    $
    15,276
    
    
    
    80.5
    %Ancillary supplies
    
    
    13,664
    
    
    
    28.5
    
    
    
    8,905
    
    
    
    31.9
    
    
    
    4,759
    
    
    
    53.4Total
    
    $
    47,911
    
    
    
    100.0
    %
    
    $
    27,876
    
    
    
    100.0
    %
    
    $
    20,035
    
    
    
    71.9
    %Cost of Products SoldInsulin pumps
    
    $
    11,373
    
    
    
    58.8
    %
    
    $
    6,852
    
    
    
    53.0
    %
    
    $
    4,521
    
    
    
    66.0
    %Ancillary supplies
    
    
    7,965
    
    
    
    41.2
    
    
    
    6,082
    
    
    
    47.0
    
    
    
    1,883
    
    
    
    31.0Total
    
    $
    19,338
    
    
    
    100.0
    %
    
    $
    12,934
    
    
    
    100.0
    %
    
    $
    6,404
    
    
    
    49.5
    %Gross MarginInsulin pumps
    
    $
    22,874
    
    
    
    80.1
    %
    
    $
    12,119
    
    
    
    81.1
    %
    
    $
    10,755
    
    
    
    88.7
    %Ancillary supplies
    
    
    5,699
    
    
    
    19.9
    
    
    
    2,823
    
    
    
    18.9
    
    
    
    2,876
    
    
    
    101.9Total
    
    $
    28,573
    
    
    
    100.0
    %
    
    $
    14,942
    
    
    
    100.0
    %
    
    $
    13,631
    
    
    
    91.2
    %Gross Margin %Insulin pumps
    
    
    
    
    
    
    66.8
    %
    
    
    
    
    
    
    63.9
    %Ancillary supplies
    
    
    
    
    
    
    41.7
    %
    
    
    
    
    
    
    31.7
    %Total
    
    
    
    
    
    
    59.6
    %
    
    
    
    
    
    
    53.6
    %
 Net Revenues.In the nine months ended September 30, 2004, net revenues
increased by $20.0 million, or 71.9%, to $47.9 million from $27.9 million in
the comparable period in 2003. The increase in net revenues was a result of the
recognition of $4.7 million of revenue deferred in prior periods associated
with the pump upgrade program, $10.5 million primarily from increased demand
and $4.8 million of increased shipments of ancillary supplies. Net revenues
from domestic and foreign sales were $45.3 million and $2.6 million,
respectively, in the nine months ended September 30, 2004 and $26.3 million and
$1.6 million, respectively, in the comparable period in 2003. Pump net revenues
increased by $15.3 million due to an increase in unit shipments. Our average
selling price of pumps remained relatively stable over this period. 18




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##### Table of Contents



Net revenues from ancillary supplies, consisting of infusion sets, pump
cartridges and other ancillary supplies increased by 53.4% in the nine months
ended September 30, 2004 versus the comparable period of 2003. The increase was
due to increased unit sales, while prices remained near prior period levels.
The growth also reflected our growth in the number of patients using our pumps
in the comparable nine month period of 2004 and 2003 and our retention of
patients from prior years. Cost of Products Sold.Cost of products sold increased by $6.4 million, or
49.5%, to $19.3 million in the nine months ended September 30, 2004 from $12.9
million in the comparable period of 2003 reflecting the increase in net
revenues in the nine months ended September 30, 2004 from the comparable period
of 2003. However, as a percentage of net revenues, cost of products sold
decreased to 40.3% in 2004 from 46.4% in 2003. Primary factors that contributed
to the decrease included better absorption of manufacturing overhead costs
associated with increased production volumes, improved purchasing efficiencies
for supplies and pump materials, better manufacturing yields of our pumps, and
improvement in labor and manufacturing efficiency. Cost of insulin pumps sold
increased by $4.5 million, or 66.0% in the nine months ended September 30, 2004
as compared to the comparable period of 2003. The rate of this increase was
lower than the rate of increase of pump sales due to the economies and
efficiencies described above, which offset the additional costs associated with
the production ramp-up of the IR 1200 incurred during the third quarter of
2004. Costs associated with the additional pumps shipped under the pump upgrade
program were $1.0 million in the nine month period. Gross Margin.Gross margin increased to 59.6% in the nine months ended
September 30, 2004 from 53.6% in the comparable period of 2003. Gross margin
for pumps increased to 66.8% in 2004 due to increases in sales volume, better
absorption of overhead, improved yields and lower cost of raw materials. The
pump upgrade program contributed to the improvement of the gross margin through
the better absorption of overhead. The effect of the shipment of pumps under
the pump upgrade program contributed 2.0% to the improvement of the gross
margin for pumps. Ancillary supplies gross margin increased to 41.7% in the
nine months ended September 30, 2004 from 31.7% in the comparable period of
2003. Gross margin improvement for ancillary supplies was due to lower cost
sources of supply. Research and Development.Research and development expenses increased $663,000,
or 17.8%, to $4.4 million for the nine months ended September 30, 2004 from
$3.7 million in the comparable period of 2003 reflecting increased spending on
activities to improve existing products and develop new products. As a
percentage of net revenues, research and development expenses decreased to 9.2%
for the nine months ended September 30, 2004 from 13.4% in the comparable
period of 2003. The percentage decrease in research and development expenses
resulted primarily from the growth in our net revenues. In future periods, we
expect research and development expenditures as a percentage of net revenues to
decline due to the growth of our net revenues. Selling, General and Administrative Expenses.SG&A expenses increased by $4.2
million, or 18.9%, to $26.7 million in the nine months ended September 30, 2004
from $22.5 million in the comparable period of 2003. However, as a percentage
of net revenues, SG&A expenses decreased to 55.8% for the nine months ended
September 30, 2004 from 80.6% in the comparable period of 2003. Of the absolute dollar increase, $2.1 million was primarily related to higher
costs principally associated with increased headcount in the sales, clinical,
and marketing functions supporting increased selling activity for existing
pumps and ancillary supplies, as well as the launch of the IR 1200. In
addition, higher administrative personnel costs of $440,000 and professional
fees of $316,000 contributed to higher SG&A costs in the nine months ended
September 30, 2004. The remaining increase is primarily attributable to
increased general and administrative expenses associated with operating as a
public company. Interest Income.Interest income increased to $209,000 in the nine months ended
September 30, 2004 from $19,000 in the comparable period of 2003. The increase
was primarily due to a higher investment balance as a result of the initial
public offering in May 2004. Interest Expense.Interest expense increased to $301,000 in the nine months
ended September 30, 2004 from $143,000 in the comparable period of 2003. This
reflects a higher outstanding debt balance than in the comparable period. The
increase in average debt was primarily the result of higher borrowing under our
credit lines during the first half of 2004. Deemed Dividend Beneficial Conversion Feature of Preferred Stock.In
connection with issuances of preferred stock in the nine months ended September
30, 2003, we recorded a non-cash charge of $5.1 million that represented the
deemed dividend relating to the intrinsic value of the beneficial conversion
feature of the preferred stock. There was no similar item in the nine months
ended September 30, 2004. Net Income (Loss) Attributable to Common Stockholders.We reported a net loss
of $2.6 million in the nine months ended September 30, 2004 as compared to a
net loss of $16.4 million in the comparable period of 2003. The effect of the
pump upgrade program contributed 19




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##### Table of Contents



$3.7 million of income during the nine months ended September 30,
2004. Quarterly Results Our business is affected by the reimbursement practices of third party payors.
Many patients defer purchasing discretionary durable medical equipment, such as
our insulin pumps, until they have satisfied their insurance deductibles which
typically occur in the latter half of the calendar year. Quarterly Results 2003
    
    20041st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th Qtr
    
    1st Qtr
    
    2nd Qtr
    
    3rd QtrNet revenues
    
    $
    7,380
    
    
    $
    9,205
    
    
    $
    11,291
    
    
    $
    6,244
    
    
    $
    4,837
    
    
    $
    20,420
    
    
    $
    22,654Gross margin
    
    
    3,751
    
    
    
    4,502
    
    
    
    6,689
    
    
    
    1,786
    
    
    
    1,750
    
    
    
    12,974
    
    
    
    13,849Net income (loss)
    
    
    (4,470
    )
    
    
    (4,704
    )
    
    
    (2,212
    )
    
    
    (6,418
    )
    
    
    (8,084
    )
    
    
    2,636
    
    
    
    2,819Deemed dividend
    
    
    (4,911
    )
    
    
    (152
    )
    
    
    
    
    
    
    (2,815
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
attributable to
common stockholders
    
    $
    (9,381
    )
    
    $
    (4,856
    )
    
    $
    (2,212
    )
    
    $
    (9,233
    )
    
    $
    (8,084
    )
    
    $
    2,636
    
    
    $
    2,819Basic net income
(loss) attributable
to common
stockholders per
share
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01
    )*
    
    $
    0.24
    
    
    $
    0.15Diluted net income
(loss) attributable
to common
stockholders per
share
    
    $
    (2.43
    )
    
    $
    (1.25
    )
    
    $
    (0.57
    )
    
    $
    (2.39
    )
    
    $
    (2.01
    )*
    
    $
    0.14
    
    
    $
    0.14
 *Basic and diluted net loss per share has been revised from ($2.07). Net revenues increased from $7.4 million in the first quarter of 2003 to $11.3
million in the third quarter of 2003. In the fourth quarter of 2003 and the
first quarter of 2004, our net revenues decreased due to our deferral of $5.2
million and $4.5 million of net revenues, respectively, resulting from the pump
upgrade program initiated in November 2003. Additionally, our net revenues, in
the first quarter of 2004, were impacted by our decision to stop shipment of
pumps for the last three weeks in March 2004 in anticipation of the launch of
the IR 1200 in April 2004. Revenue for the second quarter of 2004 benefited
from the shipment of $2.3 million in revenue delayed at the end of the first
quarter and an additional $3.7 million of revenue previously deferred as a
result of the pump upgrade program and due to increased demand for our pumps
and ancillary supplies. Revenue for the third quarter of 2004 benefited from
$5.5 million of revenue previously deferred as a result of the pump upgrade
program and due to increased demand for our pumps and ancillary supplies. Gross margin improved from 50.8% in the first quarter of 2003 to 59.2% in the
third quarter of 2003. The gross margin for the fourth quarter of 2003 and the
first quarter of 2004 dropped to 28.6% and 36.2%, respectively, due to the
deferral of net revenues and associated costs due to the upgrade program and
the decision to stop shipments of pumps for the last three weeks of March 2004.
The gross margin in the second quarter of 2004 increased to 63.5% as a result
of the increased absorption of overhead due to the increased volume of pumps
from the pump upgrade program, the shipment in the second quarter of the
unfulfilled orders from the first quarter and the increased demand and
improvements in the cost of the ancillary supplies. Gross margin in the third
quarter of 2004 decreased to 61.1% as a result of additional costs of
approximately $439,000 due to increased costs associated with production
ramp-up of the IR 1200. Net loss before deemed dividend declined from $4.5 million in the first quarter
of 2003 to $2.2 million in the third quarter of 2003.
Net loss increased in the fourth quarter of 2003 and the first quarter of 2004
to $6.4 million and $8.1 million, respectively, due to the pump upgrade program
and the resulting deferral of net revenues and associated costs. Additionally,
the net loss was increased due to our decision to stop the shipment of pumps
for the last three weeks of March 2004. In the second quarter of 2004, net
income increased to $2.6 million. This was the result of additional revenue
associated with the shipment of additional pumps due to the pump upgrade
program, the shipment in the second quarter of the unfulfilled orders from the
first quarter and the increased demand. Net income increased to $2.8 million in
the third quarter of 2004 due to the additional revenue associated with the
shipment of additional pumps due to the pump upgrade program and the increased 20




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demand for both pumps and ancillary supplies. The deemed dividend was caused by the sale of preferred stock and warrants from
January through April and in November 2003. The deemed dividend in 2003
increased the net loss attributable to common stockholders for the year ended
December 31, 2003. Additional losses due to deemed dividends in 2004 are not
anticipated. Liquidity and Capital Resources Historically, we have funded our operations primarily through the sale of
equity securities yielding net proceeds of $79.9 million through the quarter
ended March 31, 2004. On May 25, 2004, we closed our IPO of 4,250,000 shares
of our common stock at $15 per share. Additionally, the underwriters exercised
the over-allotment option for the purchase of 637,500 additional shares of our
common stock at the offering price of $15. Net proceeds, including the exercise
of the over-allotment option, were approximately $65.7 million. In addition, we have funded our operations through lines of credit and
long-term debt and lease financing. We have two lines of credit with banks,
totaling $6.3 million, of which no amounts were outstanding at September 30,
2004. We also have an equipment lease financing loan of $335,000 outstanding at
September 30, 2004. Cash Used in Operating Activities.Cash used in operating activities was $12.5
million and $11.8 million in the nine months ended September 30, 2004 and 2003,
respectively. The major use of cash for the nine months ended September 30,
2004 was primarily for working capital and the funding of the loss of $2.6
million. The major use of cash for the nine months ended September 30, 2003
was to fund the loss of $11.4 million. Accounts receivable increased by $8.0
million due primarily to the growth of our business and increased sales to
Medicare and Medicaid patients, which are traditionally slow payment payors.
Our inventory increased by $4.7 million during the nine months ended September
30, 2004 due primarily to the growth of our business and the introduction of
the IR 1200. Additionally, there were proportional increases in other current
assets, although these were offset by increases in accounts payable and accrued
expense and other liabilities. During the three months ended March 31, 2004, the pump upgrade program did not
have a negative effect on liquidity as we billed upon the shipment of all pumps
subject to the upgrade program. However, as we shipped the IR 1200 replacement
pumps during the second and third quarters of 2004, we did not generate any
additional cash due to these upgrade shipments and had to ship the upgrade
pumps to customers. As a result, in 2004, we believe our cash flows from
operating activities were negatively affected by the replacement activity. Cash Used in Investing Activities.Cash used in investing activities consisted
of the purchase of approximately $3.1 million and $1.2 million of capital
expenditures for the nine months ended September 30, 2004 and 2003,
respectively. The capital expenditures were primarily for manufacturing
equipment and computer equipment to support the significant growth in our
business during that period and to position us for expected growth in 2004 and
beyond. Cash Provided by Financing Activities.Net cash provided by financing
activities was $63.8 million and $13.4 million for the nine months ended
September 30, 2004 and 2003, respectively. The net cash provided by financing
activities during the nine months ended September 30, 2004 was primarily due to
our IPO which raised net proceeds of $65.7 million. These amounts were
partially offset by the repayment of debt. The net cash provided by financing
activities during the nine months ended September 30, 2003 was primarily due to
proceeds of $11.7 million from the sale of preferred stock. Bank Credit Facilities.We have a line of credit with a bank under which we can
borrow a maximum of $6.0 million at an interest rate of 1.75% above the banks
prime rate. This line of credit contains a debt covenant that requires that we
maintain a certain net worth throughout the term of this line of credit. We
were in compliance with this covenant at September 30, 2004. Borrowings under
this facility are limited to 75% of our eligible accounts receivable, which
generally consist of our accounts receivable that are less than 120 days old.
Borrowings are secured by a pledge of substantially all of our assets. As of
September 30, 2004, there was no amount outstanding on this line of credit. We
also have a $250,000 line of credit with another bank, which is secured by our
accounts at such bank. The interest rate on borrowings under this line of credit is at 1.5%
above the banks prime rate. As of September 30, 2004, there was no amount
outstanding on this line of credit. Equipment Financing.In November 2002, we entered into an equipment lease loan
with a bank for $1.0 million. This loan bears interest at a rate of 1.5% above
the prime rate and matures on November 4, 2005. The principal is paid in
monthly installments of $28,000. As of September 30, 2004, the principal amount
outstanding was $335,000. 21




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##### Table of Contents



Operating Leases.At September 30, 2004, commitments related to future lease
payments under operating leases, including the lease for our new facility, are
$283,000 in 2004, $1.1 million in 2005, $1.2 million in 2006, $1.2 million in
2007, $1.2 million in 2008, and $6.9 million beyond 2008. There were no
material commitments related to future capital expenditures on approved
projects at September 30, 2004. At September 30, 2004, we had $550,000
outstanding on a letter of credit for a security deposit on the lease for our
new facility. As of September 30, 2004, we had cash and cash equivalents of $48.6 million. We
expect to have negative cash flows from operations for the remainder of 2004.
We expect increased selling and administrative expenses as well as increased
spending for personnel and infrastructure improvement. We believe that our
current cash, lines of credit, and cash generated from our operations, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures into 2005 and the foreseeable future. If existing cash and cash
generated from operations are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or
obtain an additional credit facility. The sale of additional equity or debt
securities could result in dilution to our stockholders. If additional funds
are raised through the issuance of debt securities, these securities could have
rights senior to those associated with our common stock and could contain
covenants that would restrict our operations. Any additional financing may not
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 reduce the
scope of our planned product development and sales and marketing efforts. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks related to our operations result primarily from changes in
interest rates. As of September 30, 2004, cash equivalents of $47.6 million
were maintained in money market funds of short-term duration. The interest rate
on our credit facilities is based off the prime rate of our lenders. As of
September 30, 2004, we had no amounts outstanding under our credit facilities. Although approximately 3.7% and 5.5% of our net revenues for the three and nine
months ended September 30, 2004, respectively were derived from sales outside
of the United States and certain of our product components are sourced from
suppliers outside of the United States, all of our transactions are invoiced in
U.S. dollars. Accordingly, we have no direct exposure to currency exchange
risk. However, future fluctuations in the value of the U.S. dollar may affect
demand for our products sold in foreign countries and the cost of our
foreign-sourced components. As of September 30, 2004, we were not engaged in
any foreign currency hedging activities. 
 Item 4. Controls and Procedures  (a)
    
    Evaluation of disclosure controls and procedures.Our Chief Executive
Officer and Chief Financial Officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as
of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of
the period covered by this report were designed and functioning
effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms.(b)
    
    Changes in internal controls.There were no changes in our internal
control over financial reporting identified in connection with the
evaluation of such internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2004 which
materially affected, or are reasonable likely to materially affect, our
internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  (a)
    
    None.(b)
    
    On May 19, 2004, the Companys Registration Statement on Form S-1
covering the offering of 4,250,000 shares of the Companys common stock,
Commission file number 333-113008 was declared effective (the
Registration Statement). The offering closed on May 25, 2004 and did
not terminate before any securities were sold. As of the date of the
filing of this report, the offering has terminated. The offering was
managed by Piper Jaffray & Co., J.P. Morgan Securities Inc. and Thomas
Weisel Partners LLC as 22




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##### Table of Contents



representatives of the several underwriters named
in the Registration Statement (the Underwriters).The Underwriters exercised an over-allotment option to purchase an
additional 637,500 shares of the Companys common stock. The total price
to the public for the shares offered and sold by the Company, including
the over-allotment, was $73,312,500.The amount of expenses incurred for the Companys account in connection
with the offering is as follows: Underwriting discounts and commissions
    
    $
    5,131,875Finders fees
    
    
    Expenses paid to or for the Underwriters
    
    
    Other expenses
    
    
    2,435,264Total expenses
    
    $
    7,567,139
 All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Companys common stock; or (iii)
affiliates of the Company The net proceeds of the offering, including the exercise of the
over-allotment option, to the Company (after deducting the foregoing
expenses) were $65,745,361. From the effective date of the Registration
Statement, the net proceeds have been used for the following purposes: Purchases of real estate
    
    
    Acquisition of other businesses
    
    
    Repayment of indebtedness
    
    
    4,767,234Working capital
    
    
    13,410,013Cash equivalents
    
    
    47,568,114$
    65,745,361
 All of the foregoing payments were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Companys common stock; or (iii)
affiliates of the Company. There has been no material change in the planned use of proceeds from our
initial public offering as described in our final prospectus filed with
the SEC pursuant to Rule 424(b). (c) None. 
 Item 3. Defaults Upon Senior Securities (a) None. (b) None. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the three
months ended September 30, 2004. 
 Item 5. Other Information None. 
 Item 6. Exhibits (10.1)
    
    2004 Equity Incentive Plan Incentive Stock Option Grant(10.2)
    
    2004 Equity Incentive Plan Non-Qualified Stock Option Agreement(31.1)
    
    Certification by President and Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).(31.2)
    
    Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
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(32.1)
    
    Certification Furnished Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. /s/ Richard BaronRichard BaronVice President  Finance and Chief Financial OfficerDATE: November 15, 2004
    
    Animas Corporation(Registrant)
 24