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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 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 March 31, 2005 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.
Yes þ No o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ. Common stock, $0.01 par value, outstanding at May 6, 2005: 20,555,503 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 March 31, 2005 and December 31, 2004
    
    3Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    4Consolidated Statement of Stockholders Equity for the three months ended March 31, 2005
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    6Notes to Consolidated Financial Statements
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    20Item 4.
    
    Controls and Procedures
    
    20PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    21Item 3.
    
    Defaults Upon Senior Securities
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    22Item 5.
    
    Other Information
    
    22Item 6.
    
    Exhibits
    
    22SIGNATURESCERTIFICATION BY PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A)CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)/15D-14(A)CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial
Statements
 ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Balance Sheets (unaudited) March 31, 2005
    
    
    December 31, 2004(in thousands, except share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    21,967
    
    
    $
    30,867Accounts receivable, net of allowance for doubtful accounts
of $1,941 in 2005 and $1,702 in 2004
    
    
    23,739
    
    
    
    22,382Inventories
    
    
    12,438
    
    
    
    10,924Prepaid expenses and other current assets
    
    
    2,634
    
    
    
    1,378Total current assets
    
    
    60,778
    
    
    
    65,551Property and equipment, net
    
    
    8,013
    
    
    
    6,780Deposits and other assets
    
    
    3,554
    
    
    
    3,654Total assets
    
    $
    72,345
    
    
    $
    75,985Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt
    
    $
    292
    
    
    $
    398Accounts payable
    
    
    6,613
    
    
    
    4,430Accrued expenses
    
    
    5,896
    
    
    
    4,077Total current liabilities
    
    
    12,801
    
    
    
    8,905Other liabilities
    
    
    1,781
    
    
    
    1,820Long-term debt
    
    
    218
    
    
    
    254Total liabilities
    
    
    14,800
    
    
    
    10,979Commitments and contingenciesStockholders equity:Series A, B, and C Preferred stock, $0.01 par value; authorized
10,000,000 shares; none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value; authorized 100,000,000 shares; issued
and outstanding 20,544,504 shares in 2005 and 20,022,765 in 2004
    
    
    205
    
    
    
    200Additional paid-in capital
    
    
    167,653
    
    
    
    164,784Deferred compensation
    
    
    (124
    )
    
    
    (142
    )Accumulated deficit
    
    
    (110,189
    )
    
    
    (99,836
    )Total stockholders equity
    
    
    57,545
    
    
    
    65,006Total liabilities and stockholders equity
    
    $
    72,345
    
    
    $
    75,985
 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 March 31,2005
    
    
    2004(in thousands, except share and per share data)Net revenues
    
    $
    19,348
    
    
    $
    4,837Operating expenses:Cost of products sold
    
    
    8,083
    
    
    
    2,941Research and development expenses
    
    
    1,721
    
    
    
    1,437Selling, general and administrative expenses
    
    
    10,742
    
    
    
    8,439Purchased in-process research and development
    
    
    9,265
    
    
    
    Total operating expenses
    
    
    29,811
    
    
    
    12,817Loss from operations
    
    
    (10,463
    )
    
    
    (7,980
    )Interest income
    
    
    156
    
    
    
    1Interest expense
    
    
    (46
    )
    
    
    (105
    )Net loss
    
    $
    (10,353
    )
    
    $
    (8,084
    )Basic and diluted net loss attributable to common stockholders
per share
    
    $
    (0.51
    )
    
    $
    (2.01
    )Weighted average shares  basic and diluted
    
    
    20,284,824
    
    
    
    4,022,208
 The accompanying notes are an integral part of the consolidated financial statements. 4




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ANIMAS CORPORATION AND SUBSIDIARIES 
 Consolidated Statement of Stockholders Equity Three Months Ended March 31, 2005(in thousands, except share and per share data) (unaudited) Additional
    
    
    
    
    
    
    
    
    
    
    TotalPreferred stock
    
    
    Common stock
    
    
    paid-in
    
    
    Deferred
    
    
    Accumulated
    
    

stockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    compensation
    
    
    deficit
    
    
    equityBalance, December 31, 2004
    
    
    
    
    
    
    $
    
    
    
    20,022,765
    
    
    $
    200
    
    
    $
    164,784
    
    
    $
    (142
    )
    
    $
    (99,836
    )
    
    $
    65,006Exercise of stock options to purchase common
stock
    
    
    
    
    
    
    
    
    
    
    492,002
    
    
    
    5
    
    
    
    2,551
    
    
    
    
    
    
    
    
    
    
    
    2,556Issuance of common stock upon exercise of
warrants
    
    
    
    
    
    
    
    
    
    
    17,500
    
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    160Issuance of common stock under employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    12,237
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    18Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,353
    )
    
    
    (10,353
    )Balance, March 31, 2005
    
    
    
    
    
    $
    
    
    
    
    20,544,504
    
    
    $
    205
    
    
    $
    167,653
    
    
    $
    (124
    )
    
    $
    (110,189
    )
    
    $
    57,545
 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) Three Months Ended March 31,2005
    
    
    2004(in thousands)Cash flows from operating activities:Net loss
    
    $
    (10,353
    )
    
    $
    (8,084
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    661
    
    
    
    554Non-cash compensation and interest expense
    
    
    18
    
    
    
    28Write-off of in-process research and development
    
    
    9,265
    
    
    
    Bad debt expense
    
    
    268
    
    
    
    208Other
    
    
    
    
    
    
    11Changes in net assets and liabilities:Accounts receivable, net
    
    
    (1,625
    )
    
    
    663Inventories
    
    
    (1,368
    )
    
    
    (1,626
    )Cost associated with deferred revenue
    
    
    
    
    
    
    (1,115
    )Prepaid expenses and other current assets
    
    
    (1,256
    )
    
    
    339Deposits and other assets
    
    
    115
    
    
    
    121Restricted cash
    
    
    
    
    
    
    550Accounts payable
    
    
    2,183
    
    
    
    2,660Accrued expenses and other liabilities
    
    
    1,780
    
    
    
    5,002Net cash used in operating activities
    
    
    (312
    )
    
    
    (689
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (693
    )
    
    
    (582
    )Payment for acquisition
    
    
    (10,627
    )
    
    
    Net cash used in investing activities
    
    
    (11,320
    )
    
    
    (582
    )Cash flows from financing activities:Proceeds from lines of credit
    
    
    
    
    
    
    6,104Repayments on lines of credit
    
    
    
    
    
    
    (4,794
    )Proceeds from issuance of common stock, net of offering costs
    
    
    2,874
    
    
    
    115Proceeds from long-term debt
    
    
    
    
    
    
    Repayments on long-term debt
    
    
    (142
    )
    
    
    (129
    )Proceeds from sale of preferred stock
    
    
    
    
    
    
    147Net cash provided by financing activities
    
    
    2,732
    
    
    
    1,443Net increase (decrease) in cash and cash equivalents
    
    
    (8,900
    )
    
    
    172Cash and cash equivalents at beginning of period
    
    
    30,867
    
    
    
    384Cash and cash equivalents at end of period
    
    $
    21,967
    
    
    $
    556
 The accompanying notes are an integral part of the consolidated financial statements. 6




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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 December 2004, the Company received clearance
for its newest pump, the IR 1250, and began shipping it in February 2005. 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, the Republic of 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. (2) Summary of Significant Accounting Policies Unaudited Interim Results.The accompanying consolidated financial statements for the three months
ended March 31, 2005 and 2004 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 months
ended March 31, 2005 and March 31, 2004 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 months
ended March 31, 2005 are not necessarily indicative of the results to be expected for the year
ending December 31, 2005 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 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 $1,941 and $1,702 at March 31,
2005 and December 31, 2004, respectively. Bad debt expense was $268 and $208 for the three months
ended March 31, 2005 and March 31, 2004, respectively. The related write-offs of accounts
receivable were $29 and $89 for the three months ended March 31, 2005 and March 31, 2004,
respectively. 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. 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 March 31, 2005 and December 31,
2004, accrued product warranties totaled $1,942 and $1,349, respectively, and are classified as a
current liability in accrued expenses ($962 and $350, respectively) and as a long-term liability
in other liabilities ($980 and $999, 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. 7




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A tabular reconciliation of the changes in the Companys product warranty liability is as follows: Three Months Ended March 31,2005
    
    
    2004Balance at beginning of period
    
    $
    1,349
    
    
    $
    1,734Warranty expense
    
    
    1,113
    
    
    
    596Warranty claims settled
    
    
    (520
    )
    
    
    (587
    )Balance at end of period
    
    $
    1,942
    
    
    $
    1,743
 Comprehensive Loss.Comprehensive loss represents all changes in stockholders equity except those
resulting from investments or contributions by stockholders. No separate statement of comprehensive
loss has been presented because comprehensive loss was equal to net loss in the three months ended
March 31, 2005 and March 31, 2004. 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 three months ended March 31, 2005, approximately 72% 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. 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 28% of the Companys products during the three months ended March
31, 2005. 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, 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. 8




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Had the Company determined compensation cost for options granted during the three months ended
March 31, 2005 and 2004 and the employee stock purchase plan in 2005, based on the fair value
method at the grant date under SFAS No. 148, the Companys net loss and net loss per share would
have been reported as follows: Three Months Ended March 31,2005
    
    
    2004Net loss attributable to common stockholders, as reported
    
    $
    (10,353
    )
    
    $
    (8,084
    )Add  Non-cash employee compensation, as reported
    
    
    8
    
    
    
    8Deduct  Total stock-based employee compensation expense
determined under fair value-based method
    
    
    (626
    )
    
    
    (121
    )Pro forma net loss attributable to common stockholders
    
    $
    (10,971
    )
    
    $
    (8,197
    )Loss attributable to common stockholders per share:Basic and diluted, as reported
    
    $
    (0.51
    )
    
    $
    (2.01
    )Basic and diluted, pro forma
    
    $
    (0.54
    )
    
    $
    (2.04
    )
 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, inventory obsolescence, and the warranty accrual. Actual amounts
could differ from those estimates. Reclassifications.Certain amounts in the prior year have been reclassified to conform to the
current year presentation. New Accounting Pronouncements.In November 2004, the FASB issued SFAS No. 151 (SFAS 151),
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 amends the guidance in ARB No.
43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material should be recognized as current period charges and
requires the allocation of fixed production overheads to inventory based on the normal capacity of
the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Early adoption is permitted for inventory costs incurred during
fiscal years beginning after the date SFAS 151 was issued. SFAS 151 should be applied
prospectively. The Company does not expect the adoption of this standard to have a material impact
on the consolidated financial position, results of operations and cash flows. In December 2004, the FASB issued SFAS No. 123(R) (SFAS 123(R)), Share-Based Payment. SFAS
123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS
123(R) will require compensation costs related to share-based payment transactions to be recognized
in the financial statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability instruments issued.
Compensation cost will be recognized over the period that an employee provides service in exchange
for the award. This statement, as amended, is effective as of the beginning of the fiscal year
that begins after June 15, 2005. The full impact of adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in the future. However,
had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated
the impact of SFAS 123 as described in the disclosure of pro forma net loss and loss per share
noted above under Stock-Based Compensation. SFAS 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is unable to estimate what those amounts will be in the future because they depend on, among other
things, when employees exercise stock options. 9




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(3) Acquired Technology In March 2005, the Company acquired certain assets of Cygnus, Inc. for $10,627 in cash. The assets
include substantially all of Cygnus intellectual property rights, fixed assets, supplier,
manufacturing and license agreements, inventory and tangible personal property. The assets acquired
were accounted for as an asset purchase as the acquired assets did not constitute a business. The
purchase price was allocated as follows: Inventories
    
    $
    146Property and equipment
    
    
    1,201Patents
    
    
    15Purchased in-process research and development
    
    
    9,265$
    10,627
 The $9,265 of purchased in-process research and development was immediately charged to expense as
the technology acquired will be used to develop products that have not been approved for sale by
regulatory authorities, and the in-process projects to which the patents apply had not yet reached
technological feasibility and had no alternative future uses. (4) Inventories Inventories consist of the following as of: March 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    2,337
    
    
    $
    2,225Work in process
    
    
    5,549
    
    
    
    5,367Finished goods
    
    
    5,086
    
    
    
    3,914Less reserve for excess and obsolete inventory
    
    
    (534
    )
    
    
    (582
    )$
    12,438
    
    
    $
    10,924
 (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 18% of net revenues for the three months ended March 31, 2005. 10




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(6) Loss per Share The table below sets forth the reconciliation of the numerators and the denominators of the
Companys basic and diluted loss per share computations for the
three months ended March 31, 2005 and
2004. Three Months Ended March 31,Per ShareNet Loss
    
    
    Shares
    
    
    Amount2005Basic
    
    $
    (10,353
    )
    
    
    20,284,824
    
    
    $
    (0.51
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Diluted
    
    $
    (10,353
    )
    
    
    20,284,824
    
    
    $
    (0.51
    )2004Basic
    
    $
    (8,084
    )
    
    
    4,022,208
    
    
    $
    (2.01
    )Dilutive effect of:Stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Diluted
    
    $
    (8,084
    )
    
    
    4,022,208
    
    
    $
    (2.01
    )
 For the three months ended March 31, 2005 and 2004, 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 March 31, 2005, 2,079,601 common stock options
and 130,640 common warrants were excluded from the diluted calculation because the effect would be
anti-dilutive. For the three months ended March 31, 2004,
2,559,868 common stock options, 1,211,998
Series C warrants and 269,500 common warrants were excluded from the diluted calculation because
the effect would be anti-dilutive. (7) Subsequent event In April 2005, the Company issued a recall of the IR 1250 pump due to a software bug involving use
of the food database. The Company identified the software bug as a result of an investigation of a
complaint from a customer regarding the use of the food database. There have been no reported
adverse events as a result of this software bug. Approximately $326,000 was charged to expense for the
recall and is included in the Consolidated Statements of Operations for the three months ended March 31, 2005. The Company fixed this software bug and started shipping IR 1250 pumps with modified software on
April 25, 2005. The Company has started replacing existing pumps for this recall and anticipates
that in the next several months this recall should be completed. 11




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##### Table of Contents



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:  
    failure to comply with any FDA or foreign regulations;
    technical issues relating to the IR 1250 or the IR 1200 or any of the Companys ancillary supplies;
    competition;
    the failure to sell any of the approximately $1.5 million of inventory of IR 1000 used pumps as a result of our upgrade
program and warranty repair;
    any significant disruption with vendors;
    any failure to achieve and then maintain profitability;
    an inability to attract and retain personnel;
    the failure to successfully develop and commercialize the technologies acquired from Cygnus, Inc. and Debiotech, SA;
    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 capture recurring purchases of ancillary supplies by patients using our pumps;
    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. 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. 12




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##### Table of Contents



Overview We design, develop, manufacture, and sell external insulin pumps for people with diabetes. We were
incorporated in Delaware in July 1996 and introduced our first generation pump in July 2000. We
began shipping our third generation pump, the IR 1200, in April 2004 and in February 2005, we
began to ship the IR 1250. The IR 1250 utilizes the IR 1200 platform but includes additional
software which incorporates a food database of up to 500 items and tunes for alerts. We believe
that the IR 1200 and the IR 1250 are the smallest full-featured insulin pumps on the market. The IR
1200 and 1250 pumps have a large display, long battery life, precise insulin delivery, and enhanced
waterproof integrity. We also provide ancillary supplies on an ongoing basis for patients using our
pumps, including insulin cartridges, infusion sets, batteries, and various accessories. We provide
extensive education programs and services to people with diabetes. Our approximately 50 person direct sales force promotes our pump in the United States to healthcare
professionals and patients. In addition, our approximately 70 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. 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. As of September 30, 2004, all obligations to ship upgrade pumps under
this program were completed. At this time, we do not anticipate the need for additional product
upgrade programs, of this nature, in the foreseeable future. In accordance with U.S. 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 during the Period 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. Cost of Products Sold.Cost of products sold includes 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 West Chester, 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 charged to expense 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. 13




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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 the 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. Management has discussed the development and selection of
our critical accounting estimates and related disclosures with the Audit Committee of our Board of
Directors. 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 three months ended March 31, 2005, approximately 72% 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. 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 has provided a full valuation
allowance for the deferred tax assets. 14




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##### Table of Contents



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. 15




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##### Table of Contents



Three Months Ended March 31, 2005 and 2004 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 March 31,2005
    
    
    2004
    
    
    Change, 2005/2004$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %(in thousands)Consolidated Statements of OperationsNet revenues
    
    $
    19,348
    
    
    
    100.0
    %
    
    $
    4,837
    
    
    
    100.0
    %
    
    $
    14,511
    
    
    
    300.0
    %Operating expenses:Cost of products sold
    
    
    8,083
    
    
    
    41.8
    
    
    
    2,941
    
    
    
    60.8
    
    
    
    5,142
    
    
    
    174.8Research and development expenses
    
    
    1,721
    
    
    
    8.9
    
    
    
    1,437
    
    
    
    29.7
    
    
    
    284
    
    
    
    19.8Selling, general and administrative expenses
    
    
    10,742
    
    
    
    55.5
    
    
    
    8,439
    
    
    
    174.5
    
    
    
    2,303
    
    
    
    27.3Purchased in-process research and development
    
    
    9,265
    
    
    
    47.9
    
    
    
    
    
    
    
    
    
    
    
    9,265
    
    
    
    Total operating expenses
    
    
    29,811
    
    
    
    154.1
    
    
    
    12,817
    
    
    
    265.0
    
    
    
    16,994
    
    
    
    132.6Loss from operations
    
    
    (10,463
    )
    
    
    (54.1
    )
    
    
    (7,980
    )
    
    
    (165.0
    )
    
    
    (2,483
    )
    
    
    (31.1
    )Interest income
    
    
    156
    
    
    
    0.8
    
    
    
    1
    
    
    
    
    
    
    
    155
    
    
    NMInterest expense
    
    
    (46
    )
    
    
    (0.2
    )
    
    
    (105
    )
    
    
    (2.1
    )
    
    
    59
    
    
    
    56.2Net loss
    
    $
    (10,353
    )
    
    
    (53.5
    )%
    
    $
    (8,084
    )
    
    
    (167.1)
    %
    
    $
    (2,269
    )
    
    
    (28.1
    )%
 Three Months Ended March 31,2005
    
    
    2004
    
    
    Change, 2005/2004$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %(in thousands)Net Revenues, Cost of Products Sold and Gross MarginNet revenues (dollars and as a percent of total)Insulin pumps
    
    $
    12,710
    
    
    
    65.7
    %
    
    $
    1,171
    
    
    
    24.2
    %
    
    $
    11,539
    
    
    
    985.4
    %Ancillary supplies
    
    
    6,638
    
    
    
    34.3
    
    
    
    3,666
    
    
    
    75.8
    
    
    
    2,972
    
    
    
    81.1Total
    
    $
    19,348
    
    
    
    100.0
    %
    
    $
    4,837
    
    
    
    100.0
    %
    
    $
    14,511
    
    
    
    300.0
    %Cost of products sold (dollars and as a percent of total)Insulin pumps
    
    $
    4,379
    
    
    
    54.2
    %
    
    $
    834
    
    
    
    28.4
    %
    
    $
    3,545
    
    
    
    425.1
    %Ancillary supplies
    
    
    3,704
    
    
    
    45.8
    
    
    
    2,107
    
    
    
    71.6
    
    
    
    1,597
    
    
    
    75.8Total
    
    $
    8,083
    
    
    
    100.0
    %
    
    $
    2,941
    
    
    
    100.0
    %
    
    $
    5,142
    
    
    
    174.8
    %Gross margin (dollars and as a percent of total)Insulin pumps
    
    $
    8,331
    
    
    
    74.0
    %
    
    $
    337
    
    
    
    17.8
    %
    
    $
    7,994
    
    
    
    2,372.1
    %Ancillary supplies
    
    
    2,934
    
    
    
    26.0
    
    
    
    1,559
    
    
    
    82.2
    
    
    
    1,375
    
    
    
    88.2Total
    
    $
    11,265
    
    
    
    100.0
    %
    
    $
    1,896
    
    
    
    100.0
    %
    
    $
    9,369
    
    
    
    494.1
    %
 Three Months Ended March 31,2005

    
    2004Gross margin % (as a percent of net revenues)Insulin pumps
    
    
    65.5
    %
    
    
    28.8
    %Ancillary supplies
    
    
    44.2
    %
    
    
    42.5
    %Total
    
    
    58.2
    %
    
    
    39.2
    %
 16




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##### Table of Contents



Net Revenues.Net revenues were $19.3 million and $4.8 million, respectively, for the three
months ended March 31, 2005 and 2004. Net revenues increased by $14.5 million, or 300.0% in the
three months ended March 31, 2005 from the comparable period of 2004. The increase was caused by the
positive reception to the IR 1250 pump launch in the U.S., the positive international market
response of the IR 1200 pump and increased sales of ancillary supplies. In the three months ended
March 31, 2004, net revenues excluded $4.5 million of revenue deferred due to the pump upgrade
program and $2.3 million of revenue delayed as we stopped shipping orders in March 2004 in
anticipation of the launch of the IR 1200 in April 2004. Net revenues from domestic and foreign
sales were $15.9 million and $3.4 million, respectively, in the three months ended March 31, 2005
and $3.9 million and $0.9 million, respectively, in the three months ended March 31, 2004. Pump net
revenues increased by $11.5 million primarily due to increases in unit shipments due to the
continued strong demand for the IR 1250 within the United States and the IR 1200 internationally.
Our average selling price of pumps remained relatively stable over this period. Net revenues from ancillary supplies, consisting of infusion sets, pump cartridges and other
ancillary supplies increased by $3.0 million in the three months ended March 31, 2005 versus the comparable
period of 2004. 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
2005 and our retention of patients from prior years. We anticipate net revenues for pumps and ancillary supplies to continue to increase in 2005 as we
further expand domestically, internationally and grow the ancillary supplies market. Cost of Products Sold.Cost of products sold increased by $5.1 million, or 174.8%, to $8.1 million
in the three months ended March 31, 2005 from $2.9 million in the comparable period of 2004. The
increase was primarily due to the increased volume of sales. However, as a percentage of net
revenues, cost of products sold decreased to 41.8% in the three months
ended March 31, 2005 from 60.8% in the comparable period of 2004. Primary factors that
contributed to the decrease included better absorption of manufacturing overhead costs associated
with increased production volumes and improvement in labor and manufacturing efficiency. Cost of
insulin pumps sold increased by $3.5 million, or 425.1% in the three months ended March 31, 2005 as
compared to the comparable period of 2004. The rate of this increase was lower than the rate of
increase of pump sales due to the economies and efficiencies described above. Gross Margin.Gross margin increased to 58.2% in the three months ended March 31, 2005 from 39.2%
in the comparable period of 2004. Gross margin for pumps increased to 65.5% in the three months ended March 31, 2005 from
28.8% in  the comparable period of 2004 due to better absorption of overhead associated with increased sales volume and lower
cost of raw materials, which offset the adverse effect of the higher international sales and
increased warranty charges. Ancillary supplies gross margin increased
to 44.2% in the three months
ended March 31, 2005 from 42.5% in the comparable period of 2004. Gross margin improvement for ancillary supplies was due to
lower cost sources of supply. It is anticipated that the gross margin and gross margin percentage will continue to improve in
2005. Reasons for this improvement include the introduction of our ezSet infusion system, further
reductions of the costs of our existing disposables, and increased absorption of manufacturing
overheads. Research and Development.Research and development expenses increased $284,000, or 19.8%, to $1.7
million in the three months ended March 31, 2005 from $1.4 million in the comparable period of 2004
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 8.9% in the three
months ended March 31, 2005 from 29.7% in the comparable period of 2004. Although we anticipate a similar increase in research and development costs in 2005 from 2004 as
compared to the increase in 2004 from 2003, we also anticipate a decrease in these costs as the
percentage of net revenues. In 2005, we expect approximately 80% of our research and development
budget to be allocated to the development of next generation pumps and ancillary supplies. We
expect future net revenues from these products to supplant net revenues from existing products. The
remaining approximately 20% of our research and development budget in 2005 is allocated towards
development of long-term products, including micro-needles and continuous glucose sensors. Selling, General and Administrative (SG&A) Expenses.SG&A expenses increased by $2.3 million, or
27.3%, to $10.7 million in the three months ended March 31,
2005 from $8.4 million in the comparable period of 2004.
However, as a percentage of net revenues, SG&A expenses
decreased to 55.5% in the three months ended March 31, 2005 from
174.5% in the comparable period of
2004. Of the increase, $678,000 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 and IR
1250. In addition, higher insurance costs of $334,000, depreciation expense of $138,000, expenses
of approximately $326,000 related to correct the software bug in the IR 1250, and rent expense of $99,000
contributed to higher SG&A costs in the three months ended March
31, 2005. The remaining increase is primarily attributable to
increased marketing and promotional expenses and general and administrative expenses associated
with operating as a public company. 17




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##### Table of Contents



We expect SG&A expenses to increase in absolute dollars in 2005 from 2004 as we expand our sales,
clinical, and marketing efforts to support our growing business. However, we expect that SG&A
expenses should continue to decline as a percent of net revenues as we continue to leverage our
existing infrastructure. Purchased in-process research and development.In March 2005, we completed our acquisition of
certain assets of Cygnus, Inc. for $10.6 million in cash, of which $9.3 million was immediately
charged to expense to purchased in-process research and development as the technology acquired will
be used to develop products that have not been approved for sale by regulatory authorities, and the
in-process projects to which the patents apply had not yet reached technological feasibility and
had no alternative future uses. Interest Income.Interest income increased to $156,000 in the three months ended March 31, 2005
from $1,000 in the comparable period of 2004. 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 decreased to $46,000 in the three months ended March 31, 2005
from $105,000 in the comparable period of 2004. This reflects a lower outstanding debt balance than in the comparable
period. Net Loss.We reported a net loss of $10.4 million in the
three months ended March 31, 2005 as
compared to a net loss of $8.1 million in the comparable period of
2004. The loss for the three months ended March 31, 2005
was primarily due to the write-off of $9.3 million of the Cygnus asset purchase as purchased
in-process research and development and the charge associated with the recall of the IR 1250 pumps
of $326,000. The net loss for the three months ended 2004 was impacted by the pump upgrade program
and the delay of shipments of pumps from March to April 2004. Seasonality and 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 Results2005
    
    
    20041st Qtr
    
    
    1st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th QtrNet revenues
    
    $
    19,348
    
    
    $
    4,837
    
    
    $
    20,420
    
    
    $
    22,654
    
    
    $
    20,015Gross margin
    
    
    11,265
    
    
    
    1,896
    
    
    
    13,083
    
    
    
    13,988
    
    
    
    11,973Net income (loss)
    
    
    (10,353
    )
    
    
    (8,084
    )
    
    
    2,636
    
    
    
    2,819
    
    
    
    (14,033
    )Basic net income (loss) per share
    
    
    (0.51
    )
    
    
    (2.01
    )
    
    
    0.24
    
    
    
    0.15
    
    
    
    (0.71
    )Diluted net income (loss) per share
    
    
    (0.51
    )
    
    
    (2.01
    )
    
    
    0.14
    
    
    
    0.14
    
    
    
    (0.71
    )
 In the first quarter of 2004, our net revenues were $4.8 million as we deferred $4.5 million
of net revenues 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. Net revenue in the fourth quarter of 2004 fell slightly, despite
increased demand, as we completed the upgrade program during the third quarter of 2004 and there
was no recognition of revenues previously deferred from prior periods. Net revenue in the first
quarter of 2005 fell slightly from fourth quarter 2004 as the first quarter revenues tend to
decline from the prior years fourth quarter as patients typically have met their insurance
deductibles and by the higher proportion of revenues stemming from international sales, which typically have lower selling prices than domestic sales. In the first quarter of 2004, the gross margin percentage was 39.2% 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 64.1% as a result of the increased absorption of overhead due to the increased volume
of pumps from the pump upgrade program and the shipment in the second quarter of the unfulfilled
orders from the first quarter, which combined
contributed 3.7% to the improvement of gross margins. Gross margin in the third quarter of 2004 was
61.7%, which reflected a benefit of approximately 4.9% from the increased volume of the pump
upgrade program, which offset the additional costs of approximately $439,000 due to increased costs
associated with production ramp-up of the IR 1200. Gross margin in the fourth quarter of 2004 was
59.8%, with no benefit from the pump upgrade program as our obligation was completed in September
2004. Gross margin in the first quarter of 2005 was 58.2%. Gross margin was adversely affected by a
higher proportion of revenues stemming from international sales and increased warranty reserve
charges. 18




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In the first quarter of 2004 the net loss was $8.1 million. Approximately $4.7 million of the net
loss was attributed to the pump upgrade program and the resulting deferral of net revenues and associated costs and 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 demand for both
pumps and ancillary supplies. The net loss in the fourth quarter of 2004 was due to the write-off
of purchased in-process research and development of $14.5 million. Of the $10.4 million of net loss
in the first quarter of 2005, $9.3 million was due to the write-off of the purchased in-process
research and development and $326,000 was due to a charge taken for the recall of the IR 1250 pump. Liquidity and Capital Resources Historically, we have funded our operations primarily through the sale of equity securities. On
May 25, 2004, we closed our IPO of 4,250,000 shares of our
common stock at $15.00 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 $15.00. 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 a line of credit with a bank, totaling $6.0 million, of which no amount was
outstanding at March 31, 2005. Cash Used in Operating Activities.Cash used in operating activities was $312,000 and $689,000 in
the three months ended March 31, 2005 and 2004, respectively. The major use of cash for the three
months ended March 31, 2005 was primarily for working capital and the funding of the loss of $10.4
million, which included the write-off of $9.3 million of purchased in-process research and
development. The major use of cash for the three months ended March 31, 2004 was to fund the loss
of $8.1 million offset by changes in working capital, principally deferred revenue and accounts
payable. Accounts receivable increased by $1.6 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 $1.4 million during the three months ended March 31, 2005 due primarily
to the growth of our business and the introduction of new products. The working capital increases
were partially offset by increases in accounts payable and accrued expense and other liabilities. Cash Used in Investing Activities.Cash used in investing activities was $11.3 million and $582,000
for the three months ended March 31, 2005 and 2004, respectively. The major use of cash during 2005
was primarily for the Cygnus, Inc. technology acquisition. Additionally, investing activities
consisted of the purchase of approximately $693,000 and $582,000 of capital expenditures for the
three months ended March 31, 2005 and 2004, respectively, primarily for manufacturing equipment and
computer equipment to support the growth in our business during the period and to position us for
expected growth in 2005 and beyond. Cash Provided by Financing Activities.Net cash provided by financing activities was $2.7 million
and $1.4 million for the three months ended March 31, 2005 and 2004, respectively. The net cash
provided by financing activities during the three months ended March 31, 2005 was primarily due to
the exercises of stock options and warrants. These amounts were partially offset by the repayment
of debt. The net cash provided by financing activities during the three months ended March 31, 2004
was primarily due to net proceeds of $1.3 million from borrowings. 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 March 31, 2005. 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 and 25% of our eligible inventory. Borrowings
are secured by a pledge of substantially all of our assets. As of March 31, 2005, there was no
amount outstanding on this line of credit. 19




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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 March 31, 2005, the principal
amount outstanding was $140,000. Operating Leases.At March 31, 2005, commitments related to future lease payments under operating
leases, including the lease for our new facility, are $863,000 in 2005, $1.2 million in 2006, $1.2
million in 2007, $1.2 million in 2008, $1.3 million in 2009, and $5.7 million beyond 2009. There
were no material commitments related to future capital expenditures on approved projects at March
31, 2005. At March 31, 2005, we had $550,000 outstanding on a letter of credit for a security
deposit on the lease for our facility. As of March 31, 2005, we had cash and cash equivalents of $22.0 million. We expect to have negative
cash flows for 2005 resulting primarily from the $10.6 million acquisition of the Cygnus
technology. Additionally, we expect increased selling and administrative expenses, as well as, we
continue to increase spending for personnel and infrastructure improvement. We believe that our
current cash, line of credit, and any cash generated from our operations, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures into 2006 and the
foreseeable future. If existing cash and any 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 March
31, 2005, cash equivalents of $19.7 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 March 31, 2005, we had no amounts outstanding under our credit facilities. Although approximately 18% of our net revenues for the three months ended March 31, 2005 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 March 31, 2005, 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 March 31, 2005 which
materially affected, or are reasonable likely to materially affect, our internal control
over financial reporting. 20




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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 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
    
    
    Acquisitions of technology
    
    
    22,868,631Repayment of indebtedness
    
    
    4,767,234Working capital
    
    
    18,361,516Cash equivalents
    
    
    19,747,980$
    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. 21




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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 March 31,
2005. 
 Item 5. Other Information None. 
 Item 6. Exhibits (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).(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.
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Richard BaronRichard BaronVice President, Finance and Chief Financial OfficerDATE: May 16, 2005
    
    Animas Corporation
(Registrant)
 23