Add
CDIC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CDIC > SEC Filings for CDIC > Form 10-K on 10-Feb-2009 | All Recent SEC Filings |
10-Feb-2009
Annual Report
The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and related Notes, as well as the other financial information included in this Form 10-K. Some of our discussion is forward-looking and involves risks and uncertainties. For information regarding risk factors that could have a material adverse effect on our business, refer to
Results of Operations
CardioDynamics is the innovator and market leader of an important medical technology called impedance cardiography ("ICG"). 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 ("ECG") 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, BioZ ICG Module, and the BioZ ICG OEM Module Kit, 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 slow the rate of adoption for new medical technologies. We have invested and will 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 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, negative clinical trial results, competition from emerging ICG companies or other new technologies that could yield similar or superior clinical outcomes at reduced cost, de-listing from the Nasdaq stock market, 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, some of which are described in the risk factor section in Part I, Item 1A of this Form 10-K, to the greatest extent possible.
Following is a list of several key financial achievements in 2008 compared with 2007:
Net ICG sales increased 12% to $24.5 million, up from $21.9 million
ICG monitor and module sales totaled 994 units, 388 of which were BioZ Dx systems, 36 BioZ monitors, 372 ICG Modules and 198 Medis ICG monitors, up 32% from a total of 752 ICG monitors and modules
International ICG sales grew 73% to $4.7 million, up from $2.7 million
ICG gross profit margin was 72%, up from 68%
Operating loss improved 58% to $2.0 million, down from an operating loss of $4.8 million which includes $1.0 million of non-cash charges for depreciation, amortization and equity compensation in 2008, and $0.9 million in 2007
Operating cash use from continuing operations of $1.5 million, an improvement of $0.8 million, or 35%
Additional key operating milestones in 2008:
Announced results of significant study with nearly three times the national average blood pressure control rates at the American Society of Hypertension annual meeting
Announced two important clinical studies correlating BioZ ICG with Ejection Fraction
Launched Comprehensive Customer Care (C3) program designed to improve ICG customer care, satisfaction and proper utilization
Initiated ICG CERTIFIED program, a global approach to ICG education extending from patients to all call points in physician offices and beyond to insurance payers, medical schools and patient advocacy groups
BioZ ICG technology integrated with General Electric Healthcare's Centricity electronic medical record (EMR) system
Shareholders approved one-for-seven reverse split of Company's common stock and trading in post-split shares began May 9, 2008, reinstating compliance with Nasdaq minimum bid price requirements at that time
Operating Segments
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) 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 former ECG segment are reported as "discontinued operations" within the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
The ICG business consists primarily of the development, manufacture and sales of the BioZ Dx, BioZ ICG Monitor, BioZ ICG Module and associated BioZtect sensors. These devices use ICG technology to noninvasively measure the heart's mechanical function. These products are used principally by physicians to assess, diagnose, and treat cardiovascular disease and are sold to physicians and hospitals throughout the world. With the acquisition of Medis in June 2004, the ICG segment also includes the Medis diagnostic and monitoring devices such as the Niccomo, Cardioscreen monitor and the Rheoscreen family of measurement devices. We sell Medis products internationally to physicians, hospitals, distributors and researchers.
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 twelve months ending November 30, 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 7.2 million ICG sensor sets to customers since introducing the BioZ ICG Monitor in 1998. We employ a workforce of 24 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. 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 restrict the number of hypertensive patients eligible for CMS reimbursement of ICG monitoring.
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 the reconsideration review process in response to a request by the Company 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 twelve months ended November 30, 2008 were $24,517,000, an increase of 12% from $21,850,000 during the twelve months ended November 30, 2007. The sales growth for fiscal 2008 was primarily driven by record sales from our Medis subsidiary, which accounted for $3,325,000 of sales, up from $2,102,000 during fiscal 2007. Total ICG device sales increased 32% to 994 units, up from a total of 752 units in fiscal 2007. Of the 994 ICG units sold, 372 were ICG Modules and 622 were stand-alone ICG monitors, including 388 BioZ Dx Systems, 36 BioZ Monitors, and 198 Medis ICG Monitors.
Net sales during fiscal 2008 by our domestic direct sales force, which targets physician offices and hospitals, increased 5% to $19.3 million, from $18.4 million in fiscal 2007. Sales headcount totaled 70 associates at November 30, 2008, including 30 U.S. territory managers and 24 clinical application specialists, up from 63 sales associates one year ago.
During 2008, international and new market sales increased by $2.0 million or 73% to $4.6 million, from $2.7 million in the same period last year, primarily due to the 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 in 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 increased 2% during fiscal 2008 to $6.8 million, representing 28% of consolidated net sales, compared with $6.7 million or 31% of consolidated net sales during fiscal 2007.
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 expansion of the ICG CERTIFIED program. 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 periodic 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 $0.7 million and $0.6 million for the twelve months ended November 30, 2008 and 2007, respectively.
Stock-Based Compensation Expense - Stock-based compensation expense for the year ended November 30, 2008 was $384,000, as compared to $381,000 for the year ended November 30, 2007. See Note 1 to the Consolidated Financial Statements for individual operating expense line item amounts.
Gross Margin - Gross margin was $17.5 million and $15.0 million for the years ended 2008 and 2007, respectively. The current year 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 2008 was 72%, up from 68% in 2007. The increased percentage during fiscal 2008 was primarily the result of 9% higher net average unit selling prices, lower sales return reserve requirements, lower manufacturing overhead costs and lower inventory reserve requirements.
Research and Development - Our investment in research and development for the year ended November 30, 2008 was $1,518,000, as compared to $1,706,000 during the year ended November 30, 2007, a decrease of 11%. The $188,000 decrease was principally 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. We anticipate that research and development expenses will increase by approximately 20% during our upcoming fiscal 2009 due to new product initiatives and their related development costs.
Selling and Marketing - Selling and marketing expenses increased $394,000 or 3% to $15,088,000 in 2008, from $14,694,000 in 2007. The increase in expenses was primarily due to a $425,000 increase in personnel and related expenses and $120,000 of depreciation on sales demonstration equipment. This was partially offset by a $295,000 reduction in marketing and clinical expenses.
General and Administrative - General and administrative expenses for the year ended November 30, 2008 was $2,839,000, a decrease of 10% or $321,000, from $3,160,000 in 2007. The decrease during 2008 was principally due to a $344,000 reduction in accounting related fees as a result of us no longer being an accelerated filer under SEC rules.
Amortization of Intangible Assets - Amortization of intangible assets in 2008 was $122,000, a decrease of $25,000 or 17%, from $147,000 in 2007. The decrease in 2008 was principally due to nearing the end of the amortized life of Medis-developed technology assets.
Other Income (Expense) - Interest income was $247,000 during 2008, down from $255,000 in 2007. The decrease of $12,000 was principally due to lower average interest rates earned during 2008 and fewer internally financed long-term receivables.
Interest expense for 2008 was $963,000, a decrease of $74,000 from $1,037,000 in 2007. The decrease was principally due to lower average debt balances during 2008. This was partially offset by a $70,000 increase in accretion under the effective interest method on our convertible notes.
Foreign currency gain during 2008 was $17,000 as compared to a foreign exchange loss of $85,000 in fiscal 2007. The $102,000 change was due to the strengthening of the US Dollar against the Euro, and related decreases in Euro denominated deferred acquisition costs.
Minority Interest in Income of Subsidiary - Minority interest in income of Medis in 2008 and 2007 was $180,000 and $78,000, respectively, and represents the 20% minority share interests retained by the founders. The increase during 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 Provision - For the twelve months ended November 30, 2008, we recorded a tax provision of $441,000, an increase of $120,000 over the $321,000 provision recorded for the twelve months ended November 30, 2007. 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 increase during fiscal 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 reduced by a lower income tax rate in 2008.
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.
Income (Loss) from Discontinued Operations - For the year ended November 30, 2008, we recorded income from discontinued operations of $127,000, as compared to a loss from discontinued operations of $10,614,000. The income reported during fiscal 2008 is due to the release of estimated previously accrued expenses related to the sale of our former Vermed subsidiary since we do not expect to incur any additional expenses associated with the disposition of this subsidiary. The net loss during fiscal 2007 was principally due to an $11,068,000 charge for impairment of intangible assets of the Vermed subsidiary that was sold in 2007.
Liquidity and Capital Resources
Net cash used in continuing operations for the twelve months ended November 30, 2008 was $1,463,000, down from $2,259,000 in the same period last year. Including discontinued operations, net cash used in operations was $1,071,000 during the twelve months ended November 30, 2007. From an operating cash flow perspective, the $3,219,000 net loss we incurred during fiscal 2008, included a number of non-cash charges, including: provision of $866,000 for doubtful accounts and sales returns, $469,000 for depreciation, $505,000 for accretion of the discount on our convertible notes and $384,000 for stock-based compensation expense, none of which affect cash flow. Besides the net losses, the most significant effect on operating cash between 2007 and 2008 was the receipt of a prepaid customer deposit in the fourth quarter of 2007 associated with a large sale to an Eastern European hospital purchaser that shipped in the first quarter of 2008. Because we have Euro denominated assets and liabilities associated with our Medis operations, exchange rate fluctuations will effect the period to period US dollar reported values of these items.
In the twelve months ended November 30, 2008, net cash used in investing activities from continuing operations was $72,000, down from net cash provided by investing activities from continuing operations of $1,462,000 during the twelve months ended November 30, 2007. Investing cash provided by continuing operations during fiscal 2007 was principally due to the maturity of $1,510,000 certificates of deposit. The investing cash use during fiscal 2008 was for purchases of property, plant and equipment totaling $72,000, compared with $48,000 during fiscal 2007. Most of the purchases in both periods relate to computer equipment and sales demonstration equipment. As we replace and upgrade our
existing computer hardware and software and add additional sales personnel, we expect to continue to invest in new computer and demonstration equipment in future periods, however, we believe that purchases of property, plant and equipment in future periods will not materially increase.
Net cash used in financing activities from continuing operations during fiscal 2008 was $14,000, down from a net cash use of $2,311,000 during fiscal 2007, as a result of repayment of our former bank debt in the third quarter of 2007 from the proceeds of the sale of Vermed.
On April 11, 2006, we issued $5.25 million of Convertible Notes to affiliates of our largest institutional shareholder. The Convertible Notes, originally due in 2009, are convertible into common stock at $8.05 per share. The Convertible Notes were determined to contain an embedded derivative liability because the conversion price of the debt could be adjusted if we issued common stock at a lower price. We evaluated the capital resource options available to the Company under various performance scenarios and determined that it could be possible, although unlikely, that it would not be within management's control to prevent the issuance of additional shares at a price that was sufficiently low so that the conversion adjustment would require us to deliver more shares than are authorized. Under the accounting rules, this required us to bifurcate the embedded conversion option and account for it as a derivative instrument liability. The proceeds received on issuance of the Convertible Notes were allocated to the fair value of the bifurcated embedded derivative instrument included in the Convertible Notes, with the remaining proceeds allocated to the notes payable, resulting in the Convertible Notes being recorded at a significant discount from their face amount
On November 29, 2006, we entered into an amendment with the holders of the Convertible Notes. The amendment extended the term of the Convertible Notes to April 2011, added a put option under which the holders could have elected in January 2009 to be repaid in April 2009, and eliminated the embedded derivative instrument by revising the anti-dilution language. As a result of this amendment, the requirement to classify the embedded conversion option as a derivative liability was eliminated and the derivative liability was reclassified to shareholders' equity. The holders of the Convertible Notes were required to notify us in writing no later than January 11, 2009, in order to exercise their put option to be repaid on April 11, 2009. The holders of the Convertible Notes did not make the election for early repayment and, as a result, the notes and any accrued but unpaid interest are scheduled to be repaid on April 11, 2011.
In 2004, the Company issued letters of credit relating to the acquisition of Medis to secure the deferred acquisition payments due to the minority shareholders of Medis to be paid annually over five years through 2009. The Company had outstanding letters of credit at November 30, 2008 of $193,000 (152,000), which includes imputed interest through April 2009. The deferred acquisition payment and related accrued interest is classified as a current liability in the consolidated balance sheet. The letters of credit due to expire in June 2009 are secured by a certificate of deposit of $250,000 which is included on the balance sheet under "Cash and cash equivalents - restricted."
At November 30, 2008, we have net operating loss carryforwards of approximately $52.5 million for federal income tax purposes that begin to expire in 2011. The Tax Reform Act of 1986 contains provisions that limit the amount of federal net operating loss carryforwards that can be used in any given year in the event of specified occurrences, including significant ownership changes. In 2004, we retained independent tax specialists to perform an analysis to determine the applicable annual limitation applied to the utilization of the net operating loss carryforwards due to ownership changes as defined in Internal Revenue Code (IRC) Section 382 that may have occurred. As a result of this study, and managements' consideration of subsequent share ownership activity, we do not believe that the ownership change limitations would impair our ability to use our net operating losses against our current forecasted taxable income.
In April 2007, we received a Nasdaq Deficiency Letter indicating that our common stock failed to comply with the minimum bid price requirement set forth in Nasdaq Marketplace Rule 4450(a)(5). The letter was issued in accordance with standard Nasdaq procedures because our common stock closed below $1.00 per share for 30 consecutive trading days. We were afforded 180 calendar days to regain compliance with the minimum bid requirement. Because our stock did not exceed the $1.00 minimum bid price for at least 10 consecutive business days within that 180 day period, we elected to transfer our common stock from the Nasdaq Global Market to the Nasdaq Capital Market in October 2007. At that time, we were granted a second 180 calendar days, or through mid-April 2008, to regain compliance while listed on the Nasdaq Capital Market. On May 8, 2008, our shareholders approved a reverse split of one-for-seven shares of our common stock and proportionate reduction in the number of authorized shares of our common and preferred stock. On May 9, 2008, our common stock began trading on a split-adjusted. On May 23, 2008, the Company received notification from Nasdaq that it had regained compliance with the listing requirements. Our stock has traded below the $1.00 minimum bid price since October 14, 2008. Because of recent volatility in the financial markets, Nasdaq temporarily suspended the continued listing requirements related to bid price and market value during the period of October 16, 2008 to April 19, 2009.
We believe that over the next 12 months we will return to positive operating cash flow and we further believe that our cash and cash equivalent balances will be sufficient to support our ongoing operating plans, fund our anticipated capital expenditures and to meet our working capital requirements. Over the longer term, we will be required to repay our Convertible Notes due April 11, 2011. While we believe that we are adequately capitalized, our long-term liquidity will depend to some extent on our ability to commercialize the BioZ and other products. Therefore, we may attempt to raise additional funds through public or private financing, bank loans, collaborative relationships, dispositions or other arrangements. In addition, we may seek ways to maximize shareholder value including appropriate acquisition, restructuring or divestiture opportunities. As we consider opportunities to acquire or make investments in other technologies, products and businesses, we may choose to finance such acquisitions or investments by incurring debt or issuing equity securities.
Off-Balance Sheet Arrangements
We are not a party to off-balance sheet arrangements other than operating leases, and have not engaged in trading activities involving non-exchange traded contracts, and are not a party to any transaction with persons or activities that derive benefits, except as disclosed herein, from their non-independent relationships with the Company.
Critical Accounting Policies
The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity's most . . .
|
|