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| CDIC > SEC Filings for CDIC > Form 10-Q on 15-Oct-2008 | All Recent SEC Filings |
15-Oct-2008
Quarterly Report
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. This filing includes statements regarding our plans,
goals, strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and based upon a reasonable basis when made, but there
can be no assurance that these expectations will be achieved or accomplished.
Sentences in this document containing verbs such as "believe," "plan," "intend,"
"anticipate," "target," "estimate," "expect," and the like, and/or future-tense
or conditional constructions ("will," "may," "could," "should," etc.) constitute
forward-looking statements that involve risks and uncertainties. Items
contemplating or making assumptions about actual or potential future sales,
capital needs, market size, collaborations, trends or operating results also
constitute such forward-looking statements.
Although forward-looking statements in this Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in, or anticipated by, the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed in our Annual Report on Form 10-K for the year ended November 30, 2007. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Report. Readers are urged to carefully review and consider the various disclosures made in our Annual Report on Form 10-K for the year ended November 30, 2007 in which we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and cash flows.
The following discussion should be read along with the Financial Statements and Notes to our audited financial statements for the fiscal year ended November 30, 2007, as well as interim unaudited financial information for the current fiscal year.
OPERATING SEGMENTS AND RECLASSIFICATIONS
Previously, our business had two operating segments, the impedance cardiography ("ICG") segment and the electrocardiography ("ECG") segment. On August 31, 2007, we sold our ECG segment (Vermed) based in Bellows Falls, Vermont to Medical Device Partners, Inc ("MDP"). The sale of Vermed allowed us to focus our resources on our proprietary ICG business, which we believe holds the highest growth potential, while maintaining a long-term relationship with MDP for ICG sensors. We now report as one operating segment, as defined in Financial Accounting Standards Board No. 131. The results of the ECG segment are reported as "discontinued operations" within the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
On May 8, 2008, our shareholders approved a one-for-seven reverse stock split of our common stock and proportionate reductions in the number of authorized shares of our common and preferred stock, which became effective on May 9, 2008. All references to share and per-share data for all periods presented have been adjusted to give effect to this reverse split.
RESULTS OF OPERATIONS
(Quarters referred to herein are fiscal quarters ended August 31, 2008 and August 31, 2007)
Overview
CardioDynamics is the innovator and market leader of an important medical technology called impedance cardiography. We develop, manufacture and market noninvasive ICG devices, and proprietary ICG sensors. Unlike some other traditional cardiac function monitoring technologies, our monitors are noninvasive (without cutting into the body). Our BioZ ICG Systems obtain data in a safe, efficient, and cost-effective manner not previously available in the physician office and hospital setting.
Just as electrocardiography noninvasively measures the heart's electrical function, ICG makes it possible to noninvasively measure the heart's mechanical function. Our ICG devices measure 12 hemodynamic (blood flow) parameters which describe the blood flow the heart pumps, the resistance from the blood vessels that the heart is pumping against, the strength of heart contraction, and the amount of fluid in the chest.
Our lead products, the BioZ Dx, BioZ ICG Monitor and the BioZ ICG Module for GE Healthcare patient monitoring systems, have received FDA 510(k) clearance and carry the CE Mark, which is a required certification of environmental and safety compliance by the European Community for sale of electronic equipment.
The aging of the worldwide population along with continued cost containment pressures on healthcare systems and the desire of clinicians and administrators to use less invasive (or noninvasive) procedures are important trends that are helping drive adoption of our BioZ ICG Systems. These trends are likely to continue into the foreseeable future and should provide continued growth prospects for our Company.
There is often a slow adoption of new technologies in the healthcare industry, even technologies that ultimately become widely accepted. Conducting clinical trials, making physicians aware of the availability and clinical benefits of a new technology, changing physician habits, and securing adequate reimbursement levels are all factors that tend to affect the adoption rate of medical technologies. We have invested, and continue to invest, a significant amount of our resources in clinical trials, which, if results prove successful, should contribute to further physician acceptance and market adoption of our technology. As with all clinical trials, there is no assurance of achieving the desired positive outcome.
We have developed strategic partnerships to increase the presence and adoption of ICG technology. Our principal strategic partners include GE Healthcare, Philips and Mindray, all of which are among the premier medical technology companies in the world and have a substantial installed base of medical devices. We are currently selling the BioZ ICG Module through GE Healthcare and Mindray and co-developed the BioZ Dx with Philips, the latest generation ICG monitor. These strategic relationships further validate the importance of our technology to the clinical community and provide additional distribution channels for our systems. We intend to seek additional strategic partnerships over time to accelerate the validation, distribution, and adoption of our technology.
We believe that the greatest risks in executing our business plan in the near term include: an adverse change in U.S. reimbursement policies for our technology, inability to meet our capital needs, negative clinical trial results, competition from emerging ICG companies or other new technologies that could yield similar or superior clinical outcomes at reduced cost, and the inability to hire, train, and retain the necessary sales and clinical personnel to meet our growth objectives. Our management team devotes a considerable amount of time mitigating these and other risks to the greatest extent possible. Please refer to Part I, Item 1A of our Annual Report on Form 10-K for the year ended November 30, 2007 for addition information regarding the risks we face.
Following is a summary of several key financial results in our third quarter of 2008 as compared with the third quarter of 2007, as well as some important milestones we achieved during the third quarter:
• 7th consecutive quarter of revenue growth
• Net sales increased 8% to $6.1 million, up from $5.6 million
• International business continued strong with 35% growth
• Gross profit margin was 75%, up from 72%
• Operating expenses were reduced $0.4 million to $4.8 million
• Loss from operations was reduced 78% to $254,000 from $1,162,000
• Net loss from continuing operations was $432,000, or $0.06 per diluted share, down from $1,349,000, or $0.19 per diluted share
• Net operating cash used in continuing operations was $461,000, down 61% from $1,167,000
Additional key operating milestones for the third quarter of 2008:
• ICG capital sales totaled 220 units, up 12% from 197
• 8,456 ICG monitors and modules were sold cumulatively to date, up 12% from 7,532 one year ago
• ICG sensor revenue totaled $1.7 million, or 28% of net sales
• Released latest version of BioZport ICG data management software which integrates BioZ ICG data from the BioZ Dx to General Electric Healthcare's Centricity electronic medical record system
Operating Segments
The ICG business consists primarily of the development, manufacture and sales of our BioZ Dx, BioZ and Niccomo ICG Monitors, BioZ ICG Module and associated BioZtect sensors. These devices use ICG technology to noninvasively measure the heart's mechanical function and are used principally by physicians to assess, diagnose, and treat cardiovascular disease and are sold to physicians, hospitals, researchers, and international distributors throughout the world.
We derive most of our revenue from the sale of our ICG devices but also sell the associated disposable ICG sensors, which are consumed each time an ICG test is performed. For the three months ending August 31, 2008, 28% of our revenue came from our disposable ICG sensors. ICG sensor revenue, as a percentage of net sales, has grown from 6% in 2000, to a high of 31% in 2007. We have now shipped over 6.9 million ICG sensor sets to customers since introducing the BioZ ICG Monitor in 1998. We employ a workforce of 25 clinical application specialists ("CAS") who are responsible for interacting with and training our customers on the use of the BioZ ICG Systems.
In January 2004, the Center for Medicare & Medicaid Services ("CMS") issued an updated national coverage determination for ICG. Of the six indications previously covered, five were substantially unchanged. One indication, "suspected or known cardiovascular disease," was revised to specifically allow CMS contractor discretion in the coverage of resistant hypertension. Resistant hypertension is defined by CMS to include patients with uncontrolled blood pressure on three or more anti-hypertensive medications, including a diuretic. This change served to significantly reduce the number of patients within this indication eligible for CMS reimbursement for ICG monitoring which in turn negatively impacted our sales of ICG Monitors and sensors.
In March 2006, we published the results of our multi-center CONTROL study in a leading hypertension journal, Hypertension, which showed that clinician use of BioZ technology helped patients reach targeted blood pressure levels twice as effectively as standard clinical practice. Based on the results of this study, CMS opened a reconsideration review in response to our request to evaluate whether to broaden ICG hypertension coverage.
In November 2006, CMS announced that their hypertension reimbursement policy for ICG would remain unchanged and CMS local contractors would continue to have the discretion whether or not to cover ICG for hypertension. Some private insurers cover the BioZ ICG test, including Aetna, Humana, and Blue Cross Blue Shield as well as others (in select states). We continue to have active discussions with local Medicare contractors and private insurers in an effort to maintain and expand local reimbursement coverage for ICG.
Net Sales - Net sales for the three months ended August 31, 2008 were $6,066,000, up 8% from $5,591,000 for the three months ended August 31, 2007. ICG device sales increased 12% to 220 units, up from a total of 197 units in third quarter of 2007. Of the 220 ICG units sold, 87 were ICG Modules and 133 were stand-alone ICG Monitors, including 110 BioZ Dx Systems, 7 BioZ Monitors, and 16 Medis ICG Monitors. In addition to our unit sales growth, we experienced a 10% increase in the average unit sales price of our ICG Monitors compared with the third quarter of 2007 and lower sales return reserve requirements. This increase in average unit selling price is principally due to a proportionately greater number of our higher priced BioZ Dx systems placed during the third quarter of 2008, as compared to the third quarter of 2007.
Net sales for the nine months ended August 31, 2008 were $18,008,000, up 15% from $15,699,000 for the nine months ended August 31, 2007. The sales growth for the nine months ended August 31, 2008 was primarily driven by record sales from our Medis subsidiary, which accounted for $2,919,000 of sales in the first nine months of 2008, up from $1,248,000 in the first nine months of 2007. Total ICG device sales increased 32% to 703 units, up from a total of 531 units in first nine months of 2007. Of the 703 ICG units sold, 219 were ICG Modules and 484 were stand-alone ICG monitors, including 280 BioZ Dx Systems, 27 BioZ Monitors, and 177 Medis ICG Monitors.
Net sales for the three months ended August 31, 2008 by our domestic direct sales force, which targets physician offices and hospitals, increased 9% to $5,255,000, from $4,842,000 in the same quarter last year. Sales headcount totaled 71 associates at August 31, 2008, including 34 U.S. territory managers and 21 clinical application specialists, up from 64 sales associates one year ago.
For the three months ended August 31, 2008, international and new market sales increased by $177,000 or 35% to $690,000, from $513,000 in the same period last year, primarily due to increased new market revenue from pharmaceutical companies. For the nine months ended August 31, 2008, international and new market sales increased by $2,116,000 or 123% to $3,842,000, from $1,726,000 during the first nine months of 2007. The significant increase during the first nine months of 2008 was primarily due to fulfillment of a large order for Niccomo ICG Monitors from an Eastern European hospital purchaser shipped by our Medis subsidiary in the first quarter of 2008. Additionally, the Instituto de Salud del Estado de Mexico, the hospital network of the state of Mexico within the country of Mexico, also purchased over $200,000 of Niccomo monitors during the first quarter of 2008.
Each time our BioZ ICG products are used, disposable sets of four BioZtect sensors are required. This recurring ICG sensor revenue was down 5% in the three months ended August 31, 2008 to $1,690,000, representing 28% of consolidated net sales, compared with $1,775,000 or 32% of consolidated net sales in the same quarter last year. For the nine months ended August 31, 2008, sensor revenue is down $52,000 or 1%, to $4,902,000, representing 27% of consolidated net sales, compared with $4,954,000, or 32% of consolidated net sales in the same nine month period last year.
We believe that sensor revenue growth, to some degree, will be based upon an increasing mix of BioZ Dx Systems in our installed base and the success of our CAS team's focused customer service efforts and increased use of the BioZ Assessment Process ("BAP"). The BAP assists physician offices in appropriately identifying patients who are symptomatic and for whom the physician would benefit by having BioZ data for clinical assessment. To date, there are approximately 3,300 offices that have initiated the BAP into assessment of patients. We believe that successful integration of BAP into physician practices will result in proper utilization and growth in sensor revenue. We also offer a discount sensor program to our domestic customers, which includes considerable discounts
and fixed pricing on sensor purchases in exchange for minimum sensor purchase commitments.
Included in ICG net sales is revenue derived from extended warranty contracts, spare parts, accessories, freight and non-warranty repairs of our BioZ Systems of $208,000 and $138,000 for the three months ended August 31, 2008 and 2007, respectively. For the nine months ended August 31, 2008 and 2007, revenue derived from extended warranty contracts, spare parts, accessories, freight and non-warranty repairs of our BioZ Systems was $490,000 and $472,000, respectively.
Stock-Based Compensation Expense - Stock-based compensation expense for the three months ended August 31, 2008 was $115,000, compared with $84,000 for the three months ended August 31, 2007. Stock-based compensation expense for the nine months ended August 31, 2008 was $297,000, compared with $269,000 for the nine months ended August 31, 2007. Note 1 to the Consolidated Financial Statements segregates the individual operating expense line item amounts.
Gross Margin - Gross margin for the three months ended August 31, 2008 and 2007 was $4,547,000 and $4,037,000, respectively, an increase of $510,000 or 13%. The current quarter increase was largely the result of higher sales volume and lower expenses related to our provision for excess, slow moving or obsolete inventory. As a percentage of net sales, gross margin in the third quarter of 2008 was 75%, up from 72% from the same quarter last year. The increased percentage during the third quarter of 2008 was primarily the result of 10% higher net average unit selling prices, lower sales return reserve requirements and lower expenses related to our provision for excess, slow moving or obsolete inventory. Obsolescence expense was $23,000 for the three months ended August 31, 2008, down from $173,000 for the same period a year ago.
Gross margin for the nine months ended August 31, 2008 and 2007 was $12,942,000 and $10,959,000, respectively, an increase of $1,983,000 or 18%. As a percentage of net sales, gross margin in the first nine months of 2008 was 72%, up from 70% from the same period last year. The increase during the first nine months of 2008 was principally a result of a 10% increase in the average BioZ unit sales price, an $83,000 reduction in expenses related to our provision for excess, slow moving or obsolete inventory and lower material overhead rates resulting from a $192,000 reduction in manufacturing costs.
Research and Development Expenses - We invested $386,000 and $420,000 in research and development for the three months ended August 31, 2008 and 2007, respectively. For the nine months ended August 31, 2008 and 2007, we invested $1,070,000 and $1,317,000, respectively, in research and development. The lower investments in the 2008 periods are primarily due to improved efficiencies and reduced personnel and related expenses as part of our ongoing cost containment focus in support of our plan to regain profitability.
Selling and Marketing Expenses - Selling and marketing expenses decreased by $308,000 or 8% to $3,669,000 during the three months ended August 31, 2008, as compared with $3,977,000 in the comparable quarter last year. The third quarter decrease is primarily due to a $132,000 reduction in bad debt expense write-off and $331,000 lower shared services department allocations. These reductions were partially offset by $124,000 of higher personnel and related costs.
Selling and marketing expenses for the nine months ended August 31, 2008, were $11,112,000, essentially unchanged from $11,101,000 in the nine months ended August 31, 2007. The slight increase during the nine months ended August 31, 2008 is primarily due to $268,000 of increased commissions resulting from higher sales levels, $131,000 higher personnel and related costs and $118,000 of depreciation related to long-term demonstration equipment. These increases were
largely offset by a $189,000 decrease in shared service allocations, $94,000 of lower product marketing costs, $96,000 less expended on clinical studies and $99,000 of lower bad debt expenses.
As a percentage of net sales, we were able to reduce selling and marketing expenses to 60% for the three months ended August 31, 2008, down from 71% for the same quarter last year. For the nine months ended August 31, 2008, selling and marketing expenses, as a percentage of net sales, were held to 62%, down from 71% for the same nine month period last year. The decreased percentage of selling and marketing expenses to net sales in the current three and nine month periods is due primarily to increased productivity of our domestic sales force and a large sale in the first quarter of 2008 to an Eastern European hospital purchaser, which had lower incremental selling costs associated with the transaction.
General and Administrative Expenses - General and administrative expenses for the third quarter of 2008 were $714,000, down $58,000 or 8% from $772,000 for the same quarter last year. The current quarter decrease is primarily due to $98,000 of lower accounting fees partially offset by $44,000 of higher incremental bad debt expense provision. As a percentage of net sales, general and administrative expenses for the quarter ended August 31, 2008 were 12%, down from 14% for the quarter ended August 31, 2007.
General and administrative expenses for the first nine months of 2008 were $2,246,000, down $191,000, or 8%, from $2,437,000 for the same quarter last year. The decrease in the first nine months of 2008 is primarily due to $113,000 of lower personnel and related costs along with a $251,000 reduction in outside accounting fees, principally because we are temporarily exempt from being required to obtain a third party audit of our internal controls over financial reporting until fiscal 2010. These savings were partially offset by $106,000 of higher bad debt reserve provision. As a percentage of net sales, general and administrative expenses for the nine months ended August 31, 2008 and 2007 were 12% and 16%, respectively.
Amortization of Intangible Assets - For the three months ended August 31, 2008, amortization expense was $32,000, compared with $30,000 for the same period in fiscal 2007. For the nine months ended August 31, 2008, amortization expense was $96,000, down from $115,000 in the first nine months of 2007. The decrease in the first nine months of 2008 was principally due to an acceleration of previously capitalized patent fees, recorded in the first quarter of 2007.
Other Income (Expense) - Interest income during the three months ended August 31, 2008 and 2007 was $56,000 and $40,000, respectively. Interest income during the nine months ended August 31, 2008 and 2007 was $196,000 and $163,000, respectively. The increase in interest income during each of the 2008 periods is due to higher average cash balances. These higher average cash balances have been partially offset by lower interest rates and fewer internally financed receivables in 2008.
Interest expense was $243,000 and $269,000 in the quarters ended August 31, 2008 and 2007, respectively. For the nine month periods ended August 31, 2008 and 2007, interest expense was $718,000 and $804,000, respectively. The reduction in interest expense during both periods in 2008 is principally due to the retirement of our bank debt on August 31, 2007, partially offset by higher debt discount accretion under the effective interest method on our convertible notes.
For the quarter ended August 31, 2008, we had a $12,000 of foreign currency translation gain, as compared to a foreign currency translation loss of $7,000 for the quarter ended August 31, 2007. For the first nine months of 2008, foreign currency translation losses were $12,000, down from $44,000 for the same period in 2007. Foreign currency translation losses are a result of the quarterly
revaluation of the Medis deferred acquisition liability, which is denominated in Euros, at the current foreign exchange rates in effect on the last day of each reporting period.
Other, net income for the three months ended August 31, 2007 was $4,000. We did not have any other, net income during the three months ended August 31, 2008. Other, net income for the nine month periods ended August 31, 2008 and 2007 was $1,000 and $5,000, respectively.
Minority Interest in Income of Subsidiary - For the three months ended August 31, 2007, we recorded minority interest in the income of our Medis subsidiary, which represents the 20% minority share retained by the sellers, of $11,000. Our Medis subsidiary did not generate any minority interest during the three months ended August 31, 2008. For the nine months ended August 31, 2008, we recorded minority interest in the income of our Medis subsidiary of $145,000, up from $45,000 for the same nine month period in 2007. The increase during the first nine months of 2008 is the result of the significantly higher income earned during the period by our Medis subsidiary, largely related to large Eastern European hospital and Mexico shipments recorded during the first quarter of 2008.
Income Tax Benefit (Provision) - For the quarter ended August 31, 2008, we recorded a tax provision of ($3,000) compared with a tax benefit of $56,000. In each of the reported periods, the tax provisions are based on estimated foreign taxes and estimated minimum U.S. income and franchise taxes. The third quarter of 2007 includes a $120,000 tax benefit related to the reversal of a deferred tax liability created by tax amortization associated with the goodwill of our former Vermed subsidiary. A $120,000 tax provision for this deferred tax liability was recorded during the second quarter of 2007 and subsequently reversed upon the sale of our former Vermed subsidiary in the following quarter.
Since we have a 100% valuation allowance against our deferred tax assets, we do not recognize an income tax benefit against consolidated pre-tax losses. However, because foreign income is not shielded by our deferred tax assets, we record a tax provision based on estimated foreign taxes resulting from the income earned by our Medis subsidiary during the period.
For the nine months ended August 31, 2008, we recorded a tax provision of $519,000, compared with $195,000 for the nine months ended August 31, 2007. In each of the nine month periods, the tax provision is based upon estimated foreign taxes and estimated minimum U.S. income and franchise taxes. The increase during the first nine months of 2008 is the result of the significantly higher income earned during the period by our Medis subsidiary resulting from large Eastern European hospital and Mexico shipments made in the first quarter of 2008.
Income (Loss) from Discontinued Operations, Net of Income Tax - In last year's quarter ended August 31, 2007, we recorded a gain from discontinued operations, net of tax, of $496,000. The gain included a $232,000 reduction in the goodwill write down of our former Vermed subsidiary. There was no discontinued operations activity during the quarter ended August 31, 2008, as we did not incur any expenses relating to the completion of the disposition of this subsidiary.
For the nine months ended August 31, 2008, we recorded income from discontinued operations, net of tax, of $127,000, compared with a loss from discontinued . . .
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